Earnings Roundup: How Major Data Center Players Fared in 1Q23

This year's first-quarter earnings were a mixed bag in the data center industry, with some major players meeting their expected results and some missing the forecasts. This uneven showing is largely a result of geopolitical tensions, supply chain issues, larger macroeconomic conditions, and a need for greater understanding about the impacts of digital infrastructure. 

"We saw overall growth in the industry, but some missed their forecasts," explained Bill Kleyman, program chair at AFCOM and Data Center World. "I have no doubt that there is growth in our industry; however, leaders who are bringing up critical infrastructure are running into challenges."

On the other hand, companies are becoming hyper-focused on improving their business in light of the trickle-down impacts of the above mentioned issues (i.e., cost of living, impending recession, supply chain, etc.) to maximize their profits and make shrewd business decisions. From a macro level, organizations are being strategic about their spending under the premise that these issues are only temporary.

"Q1 earnings were as good as we could expect and generally mixed along the lines of criticality to the business. We expected to see a drop-off by web-scale company consumption of public cloud. We also saw a deceleration in growth by enterprise consumption of public cloud," said Tim M. Crawford, CIO strategic advisor at AVOA.

Related:5 Ways AI Could Reshape Data Centers

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Here's a wrap-up of earnings from a select group of publicly traded hyperscalers, vendors, and colos as well as predictions for the next quarter.

Many Hyperscalers Reported Continued Weakness, Citing Optimization

At the end of the fourth quarter of 2022, hyperscalers exhibited a deceleration in revenue as customers used the period to optimize cloud usage and resources. The optimization continued year-round, influencing the performance of major hyperscalers, except for Meta, which had a fairly strong quarter, possibly due to its extreme efforts to create a leaner organization.

For instance, Microsoft (MSFT) produced $52.9 billion in revenue and a net income of $18.3 billion during its last quarter. The revenue for the software maker was up 7% ($3.5 billion), and net income increased by 9%. However, the operating expenses increased $996 million (or 7%), driven by the Nuance and Xandr acquisitions, which commenced in March 2022, as well as investments in cloud engineering and LinkedIn.

These trends will continue into the next quarter, predicts Microsoft Executive Vice President and Chief Financial Officer Amy Hood. In a recent earnings call Hood said: "Overall, our outlook has many of the trends we saw in Q3 continue through Q4. In our largest quarter of the year, we expect customer demand for our differentiated solutions, including our AI platform, and consistent execution across the Microsoft Cloud to drive another quarter of healthy revenue growth."

Related:Colocation Data Center vs. Private Data Center: Which Is Right for You?

Although Google parent Alphabet's (GOOG) financial results for the first quarter of 2023 beat Wall Street expectations, with revenue rising 2.6% to $69.79 billion from $68.01 billion in the year-ago period, the outlook still looks uncertain, according to Chief Financial Officer Ruth Porat.

"In Q1, we continued to see slower growth of consumption as customers optimized GCP costs, reflecting the macro backdrop, which remains uncertain. In terms of operating performance, we remain focused on driving long-term profitable growth in cloud while continuing to invest given the substantial opportunity," Porat said.

Since the beginning of the year, Alphabet has laid off 12,000 workers, or nearly 12% of its workforce, and as a result in the first quarter of 2023, the company recorded employee severance and related charges of $2 billion.

Amazon (AMZN) Web Services reported a 9% increase in segment sales to $127.4 billion in the first quarter, compared with $116.4 billion in the first quarter of last year, despite the company as a whole paying out $4.8 billion in operating income increases. Further, the AWS revenue growth has been about 5% lower as customers have continued optimization efforts. On the bright side, AWS said it would open a region of data centers in Malaysia.

Meta (META), Facebook's parent company, seems to be improving its economic stature, on the heels of desizing and reduction in force. In fact, CEO Mark Zuckerberg wants Meta to become a "scrappier place," which surprisingly had a positive impact, allowing it to generate a first-quarter revenue of $28.10 billion, exceeding its expectations of $27.66 billion. The company's shares were also up 9% in afterhours trading following its earnings report, generating support for its vision to support the metaverse and ongoing business restructuring. 

Colos Continue to Grow

As previously mentioned, the current macroeconomic condition is driving much of the shift toward clear value opportunities. According to Crawford, "Companies are laser-focused on those efforts that will have the greatest impact on their business, customers, and stakeholders, and the refocus by businesses translates into deceleration in growth for the hyperscalers and colocation providers."

The forecast for the second quarter is mostly positive for major colocation vendors, according to Kleyman. "Practically all of the major colocation vendors are expecting growth in Q2," he said. "We'll have to see if this growth matches up to expectations of the market. There's no question as to demand; however, supply of critical infrastructure remains challenging."

These observations seem to be consistent with the current earnings results. For instance, in the first quarter of 2023, Equinix (EQIX) reported a 7% increase in revenue over the previous quarter. Over the last four quarters, the company has surpassed consensus FFO estimates four times. In line with its growth initiatives, Equinix further invested in the expansion of its global platform, which encompasses 248 data centers across 71 metros in 32 countries.

Digital Realty (DLR) reported a revenue of $1.34 billion for the first quarter, compared with the consensus estimate of $1.41 billion, and reported $0.19 earnings per share (EPS) for the quarter, despite missing the consensus estimate of $1.65 by $1.46. Digital transformation continues to drive steady demand, with total bookings and a continued focus on sustainability growth for all stakeholders.

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Chip Vendors Continue to Struggle in Light of Market Shifts

The global chip shortage that began back in 2021 dragged into Q1, as demonstrated by the quarterly losses by major chip vendors across the market.

Intel (INTC) reported the largest quarterly loss in company history, coming in at a revenue of $11.7 billion, which was down 36% year over year. Given the macroeconomic conditions previously discussed, this is not surprising, though the company is remaining optimistic about the second quarter and focusing on streamlining costs through layoffs.

"While we remain cautious on the macroeconomic outlook, we are focused on what we can control as we deliver on IDM 2.0: driving consistent execution across process and product roadmaps and advancing our foundry business to best position us to capitalize on the $1 trillion market opportunity ahead," said Pat Gelsinger, Intel's CEO.

Samsung (005930.KS) continued to suffer economic loss, after its semiconductor business reportedly lost a record $3.4 billion driven by a weak demand for tech devices in Q1. There's a global downturn in semiconductor prices and cuts in production, causing the stock to plummet. Yet, there remains optimism for Q2 thanks to Samsung's launch of its latest smartphones, called the S23 series, which will continue to give the company's mobile division a profit boost.

Nvidia (NVDA) reported revenue of $7.19 billion in Q1, down 13% from a year ago and up 19% from the previous quarter. It seems like the rise of artificial intelligence will impact the trajectory of Nvidia's processes moving forward. In fact, Nvidia's CEO Jensen Huang even stated: "The computer industry is going through two simultaneous transitions — accelerated computing and generative AI … a trillion dollars of installed global data center infrastructure will transition from general-purpose to accelerated computing as companies race to apply generative AI into every product, service, and business process."

Vertiv Holdings (VRT), a global provider of critical digital infrastructure and continuity solutions, reported first-quarter net sales of $1,521 million and operating profit of $130 million, which exceeded analysts' estimates. The company is off to a strong start in 2023 and will need to maintain the stock value to keep investors happy.