We're getting a sort of a reversal on a lot of the Um excitement Yesterday in Cloud uh, yesterday when I covered Microsoft's earnings, one of the big things I uh talked about was this idea that I'm nervous about Cloud I was I was initially optimistic by the Microsoft results. prior to them providing their forecasts right, their forecasters were tanked uh the market. but I was initially concerned about Microsoft Uh Well, the software sector thinking that I would prefer to be in the chip sector mostly because you have higher free cash flows and in my opinion, you have higher pricing power longer term Uh, just given the the Uh, the capex requirements in Uh in essentially manufacturing and Chip design, then uh than in compared to software I believe software is substantially more competitive and I think this is very simply exemplified by Taiwan Semiconductors, which has a 92 percent uh, a grasp on the advanced microchip Market that is massive. This is a massive grasp that they have now, of course.

Uh, the software sector is is also getting a lot of negative attention. not just now because of the negativity coming out of the earnings call from Microsoft which apparently was also suffering technical difficulties. which doesn't help. But also there there are substantial downgrades that we're seeing from Wall Street for example, prior, this is prior and then I want to cover what happened with Microsoft.

Prior to the Microsoft report application, we we had uh Wall Street reports suggesting that application software companies likely face Revenue downgrades ahead of Q4 earnings calls several percentage points of growth. Expectations may be shaved off going into 2023. Analysts think that average revenue growth rates could come in below 15, while the current consensus for software is 17 to 18 now I Want you to keep that in mind that the consensus is 17 to 18 software growth because we're about to go through the Microsoft earnings report and uh, well, we're going to go through the earnings call and while Azure Microsoft Azure actually beating expectations uh, for the last quarter, their forecast was not not so great. in fact.

spoiler alert their forecasts were for Azure was flat for the next quarter, and forecasts from Wall Street were that future Cloud growth would be somewhere between 17 to 18. in aggregate. you've got uh consensus estimates here. Uh, that? I'll go ahead and show up on screen.

Now these are consensus estimates here and you can see: Revenue growth consensus estimates calendar period here: Bill.com Expecting to have grown double in 2022, but only growing by about 36 to 30 percent in 23 24. Now that's not like actually terrible. that's actually still pretty dang good into it. Expected to only grow about eight percent in 2023, followed by 13.

Uh, we've got ADP over here. Seven and seven. Paycom 2322 GoDaddy Six, nine Shopify coming down to 2022 Squarespace 11 and 14 Wix 9 14. Average consensus here: 17 to 18 percent.

Uh, just based on on sort of this, uh, this group here we do notice obviously that uh Microsoft is is not in this uh, this list here. but uh, uh, you know, coming in with essentially flat expectations for growth on Azure not great and that comes despite uh, expectations that the server industry will actually do well downgrades uh, coming due to obviously, uh, slower commercial seat adoptions uh, or expectations for that slower consumer growth, limited pricing leverage. That's actually interesting because you're going to see that in the Microsoft earnings call. In just a moment, you're going to see limited pricing leverage which I like to call PP So you're going to see limited PP Why are you going to see limited PP Well, because you're going to see Microsoft Executives Talk about optimizing growth.

Uh, and that's not them optimizing growth. it's their customers optimizing and they think we're actually going to go through about a one-year period of optimization. Now, they believe that once you optimize and after you optimize, then you will be able to get back to doing more work. However, they think we're going to go through a a one-year period of optimization, lengthier sales cycles, and slower approval time frames are potentially likely to stall user expansion and limit pricing.

A Power suggests a Bloomberg The net percentage of business owners expecting the economy to improve is close to all-time lows at negative 51 percent, and this is likely to weigh on discretionary tax spending. Keep in mind, yesterday we were looking at Mike Wilson's Morgan Stanley report. uh or Mike Wilson's uh, flood report I should say from Morgan Stanley Uh and uh. we we talked about uh, exactly business confidence and how potentially low that business confidence is right now and how I actually think when business confidence is low, it's one of the best times to potentially cannibalize your competition, Work harder and do your best to keep growing and not Contracting very important.

Uh, okay, so let's go jump into that Microsoft Earnings call. So Microsoft earnings call right here so let's take a look. I'm just going to read the in my opinion, the most Salient pieces. That doesn't mean I hate everything here just doing my best here.

Uh, so we've got the CEO here suggesting as I meet with customers and partners. A few things are increasingly clear. Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend. That's a red flag, right? Optimizing spend is basically a euphemism for uh, people ain't spending as much money with Microsoft step Pro We saw new highs for game pass on gaming with game streaming hours and monthly active devices at records surpassing 200 or 120 million devices during the quarter.

That's fantastic. And thanks to lower energy costs, they uh, they were actually able to uh, increase their Uh margins on Microsoft cloud better than expected by two percentage points a year over year. However, excluding the impact of an accounting estimate for useful lives whoopsies. Microsoft Cloud Hold on one second here.

Microsoft Cloud Gross margin percentage decrease roughly one percentage Point Driven primarily by a sales mix to Azure So apparently a little bit of a lower pricing structure there. If you introduce a lower mix, you end up with a lower, a lower margin. Uh, keep that in mind I Think a lot of folks get confused by that I'll just explain that really quickly. So let's say that you run a dollar store.

and I Love this. Dollar Store Example: I Think it's the easiest to understand you're the owner of a dollar store. When you sell the little water guns squirt guns for a buck, it only costs you 10 cents per squirt gun to buy. So you're looking at 90 cents of gross profits a dollar Revenue Cost of goods sold 10 cents 90 cents A gross profit, right? That's on little squirt guns at the dollar store, let's say.

But now let's say it's a recession and people are coming in going sorry Charlie Yeah, bite your finger. We're not buying you a squirt gun this time. Instead, said, we have to spend the dollar that we have on toothpaste and the toothpaste margins are a lot worse Because when you go shopping for toothpaste, you actually have to spend 80 cents to acquire that toothpaste. Well, now your growth Profit: Gross profit is a buck minus 80 cents or 20 cents substantially less.

And so that's an example where somebody could still spend a dollar on your goods and services on your gas, so to speak. Uh, that's an accounting phrase. Uh, but your your margin went to crap. Instead of having 80 cents a gross profit, you only have 20 cents.

A gross profit Terrible to your margins got destroyed because people shifted to a product that has lower margins for you. Unfortunately, it sounds like compared to Microsoft cloud, Azure uh provides a lower margin. It's quite interesting. Okay, uh.

However, they are excited about Azure With constant currency growth in the mid 30 percent, that's Looking Backward Just wait for the forecast. All right. ready for that? Here we go. So Microsoft tells us in our Commercial Business We expect business trends that we saw at the end of December to continue into January February and March While customers are more cautious in their spend, we also have the opportunity to improve our execution given our strong position in global growth markets in commercial bookings with a declining expiration base or expiring base and a strong prior year of comparable sales.

Essentially for Azure contracts, we expect growth to be womp womp womp relatively flat year over year. We expect consistent execution across our core annuity, sales motions, blah blah blah. Basically, hey, we think the company is still going to do great and we're super excited about our company. But unfortunately, the Slowdown we saw in December is going to continue in January and uh and then everybody else is at fault.

We're still performing and firing on all cylinders, but everybody's just spending less money. And unfortunately, that means instead of being excited about 30 growth for Microsoft Azure, we're actually going to be flat and given that Bloomberg is pricing in 18 to 20 percent, uh, or Wall Street potentially is pricing in 18 to 20ish percent. Maybe it was 17 to 18. Anyway, growth for cloud and we're going to be growing at a grand total of zero.

Maybe we'll even be negative. things just ain't that great right now. Okay, that's like my like super basic explanation of what Microsoft said. And so if you're wondering why, uh, in the pre-market you are seeing software companies sell down C3ai down about 2.75 you've actually got trade Desk down 2.5 percent, Crowd strike down 2.5 Microsoft down 2.4 Uh I mean almost the entire software as a Services business has has rotated down on these Microsoft earnings.

This is why, although most of the market is red here in pre-market including the solar companies uh such as uh and phase, uh, Sun Power and Sunrun all down about four to four and a half percent solar Edge only down about three percent I Do expect that to continue. so if you are exposed to solar stocks I do expect that sort of pain to continue. However, I expect there to be some opportunities to really increase your share of ownership in solar companies once we get to more pain in the real estate sector in Azure our per user business should continue to benefit from the Microsoft 365 sweet momentum. though we expect continued moderation in the growth rate given the size of our installed base.

In other words, thank you Law of Large Numbers. Law of Large Numbers means once you have so many people on your platform, it's really hard to continue growing and ultimately you just hope to keep things stable. Oh no, but what do we have here? As I noted earlier, we exited the last quarter of 2022. with Azure growth in the mid 30s, we expect Q3 growth to potentially decelerate four to five points in constant currency.

So that is Uh, you know to be reiterated by over here about this potential uh, growth that is flat year over year. So in other words, uh, uh, this is actually a little bit confusing and constantly I don't know. Expect Q3 growth to say this I wonder if this is this could be overall? uh I wonder if this right here must be overall growth or sweet growth since they did say Azure they expect to be somewhere flat. but either way I mean you could see the information here and try to make your own deduction.

Um, in our on-premise server business, we expect Revenue to decline in the low signal digits. Uh, that is a revenue decline I Said that correctly. Revenue Decline Low single digits. That's a decline of again, maybe three four percent as demand for our hybrid Solutions will be more than offset by the unfavorable.

Foreign Exchange Impact Search and advertising excluding total acquisition costs should be in the high single digits roughly seven points faster. Now, this is actually good, right? We like to hear that advertising spend is up and you are seeing companies like Carnival Cruise Lines for example, boost their spending substantially just to try to fill up ships. That's what they're really trying to fill up right now is they're trying to make sure that if they are sailing which they are, they are sailing with the highest amount of potential paying customers. Tech has a percentage of GDP is likely to be higher going forward.

However, this is. uh, this is a this is a subtle way of saying hey, look, you know, even if we go into a recession, uh, we think people are going to spend less money on other things relative to Tech. In other words, if the rest of the world Falls I'm just going to make an extreme example here: 10 and spend Tech might only fall five percent and spend just as an example, right? That's roughly what they're making an argument there of. and one of the things we're looking back to or some savings.

Uh, for workloads and that's okay. This is the optimization cycle that I was talking about where at first you optimize, you take about a year to optimize and then you can start thinking about new projects. This is really the CEO of trying to. This is really the CEO trying to paint this Vision that hey look man in life, we optimize and and sometimes you go through about a year of optimizing and then you're back at making money again.

So don't worry, the future is bright for Microsoft I Don't think it's going to take two years I Think it'll take one year of pain. So in other words, a little bit of, um, you know, trying to exemplify what's going on uh Microsoft is doing so. Uh, however, still painting the picture of pain. So if you're wondering why we're having some software issues, this could potentially be why now.

I I Want you to also think logically for a moment about software. Okay, so let's let's understand this for a moment. Let me give you an example. Let's say you have a team of interns and you want everyone to make uh I don't know to add to edit tick tocks.

Okay, and what you're going to do is you're going to buy everyone uh, an Adobe Cloud subscription so that they that way they could use Premiere right? You want everyone on Premiere editing your your tick tocks right? Let's just say as an example and then let's say you go into a recession and you're a normal company with I don't know, a thousand interns, right? Well, in boom time, you're like everybody gets an Adobe Cloud subscription. Let's go a thousand Cloud seeds. Well, in a recession, most businesses say okay, well we're actually not going to hire uh, new people, we're actually going to lay off and we're going to be stuck with uh, let's just say 900 people instead of a thousand. Well, immediately, what you've done for Adobe is you've actually not provided Cloud growth.

You actually just provided Cloud contraction. Because by by laying off people in a recessionary time, what happens? Well, you just cut 10 of your Workforce Well, you just took away 10 seats from Adobe. But not only that, you might also say hey, do we really need 900 seats? Or how about like 300 of y'all just borrow the other dude's login or computer when you need it since 300 of y'all are focused on I don't know, playing basketball more instead or basically doing something else at the company. Let's just in addition to laying off people, let's also optimize how many people we're paying for cloud seats for.

So now all of a sudden we're going to take that down to 600.. So all of a sudden you have a 40 drop in in seats that are being offered to Cloud uh, subscription services and so what do you have? Well, you have a disaster all right. So so this this is a situation where it's basically if you're growing at zero. So basically if if you're a cloud provider and you could keep like Revenue stable during a recession, you're actually doing good.

So as much as Microsoft is sort of this, this negative Canary in the coal mine for software services companies, zero percent growth in a recessionary environment is actually good when it comes to Cloud Especially in an environment where we're seeing as many Tech layoffs as we are seeing. So that's something pretty important to pay attention to. Uh, my take now. uh, how could this affect the chips? Market It's actually a great question.

Shane Huff here in our chat asked that question, how will Microsoft affect chips like Taiwan semiconductors and AMD yeah so first it's worth noting them open. AI uses uh Microsoft uh, cloud services and most of the cloud services provided by Microsoft use hard Hardware like Nvidia chips mostly in video chips but also AMD chips and obviously a reduction in the expansion in cloud makes us Wonder like hey, isn't it possible if if Cloud spend is going to go down, that chip spent could go down absolutely and I think a lot of that we have already seen. We've already seen a lot of that pain. Uh now there were some pieces which I thought was actually very interesting.

There were some pieces that I was reading about yesterday. Let me see if I can find it here. There were some pieces about how we could potentially actually see an acceleration uh in uh, Microsoft or sorry in chip spent as the demand for a higher quality servers accelerates the refresh cycle for chip spend. So keep that in mind as as these Cloud companies want to get back to growth, they have to figure out.

Okay, well, how do we potentially, uh, differentiate ourselves from our competitors? Well, unfortunately, the way you differentiate yourself from your competitors is you try to prove that your product is a better product or a faster product or a more capable product. And unfortunately, you do that by refreshing the chipsets that you have in your server industry or your server division. So uh, well, obviously we expect the chip sector to slow down. There is at least some enthusiasm that as Cloud slows down, companies that suffer from those Cloud slowdowns are going to be very incentivized to try to get back to growth as quickly as possible, potentially double down on their investments into chips to make that a potential reality.

That's just an idea. Uh, you know I think ultimately everything slows down when we go into a recession. Hardware Uh, certainly being one of those sectors that that is expected to slow down. Uh, and a lot of that fortunately seems to have been priced in already.

Obviously no guarantees on that, but um, that's uh, that's quite interesting. In fact I have a piece here. Let me see. I'll read this out because I think the question is very good.

This isn't exactly the one that I was looking for, but this one could be interesting. Talks about Taiwan semiconductors and Samsung sales Taiwan semiconductors and Samsung and other foundries could expect revenue of their Advanced packing business key to producing chiplet based semiconductors to double by 2025 and become a major growth structure. Chiplets structures are likely to become increasingly popular in laptops following the introduction of Amd's first Shiplet-based laptop semiconductor. That's quite interesting I Think this has to do with the five nanometer chipsets I'm actually not super familiar with chip chiplets and I can't find that piece right now, but I'm gonna try to Google it really quick.

uh server chips? uh, shorter, shorter refresh cycle. That's what you kind of want to look for is that potential server refresh cycle? I will do one more hike. Uh, look here. but uh, I'm generally a big fan of being the pickaxe seller versus uh, investing in the gold now.

uh, that can come with risks obviously as well because it does still rely on the gold performing very well.