Tech Brew Ride Home - Wed. 07/28 – Earnings Bonanza

Episode Date: July 28, 2021

Apple reports earnings but warns of component shortages. Microsoft set profit records but noted shortage materially affected some divisions. Alphabet had good earnings too, but the real story there is YouTube. About the staff walkout at Activision Blizzard. Is Apple asking leakers to snitch on their sources? And an interesting raise to do next generation search on iOS. Sponsors: UpStart.com/techmeme Oracle.com/goto/ride Links: Apple’s iPhone hot streak is going to run into the global chip shortage (CNBC) Xbox hardware sales spike 172% as Microsoft reports $3.7B in quarterly gaming revenue (GeekWire) YouTube Q2 Ad Revenue Hits Record $7 Billion as Alphabet Trounces Estimates (Variety) Taiwan Greenlights TSMC's 2nm Fab: Coming Online in 2024 ~ 2025 (Tom's Hardware) Activision CEO Apologizes After Employees Threaten to Walk Out (Bloomberg) Apple Tells Leaker to Snitch on Sources or It Will Report Them to the Police (Motherboard) Brain Technologies raises $50M+ for the launch of Natural, a natural language search engine and 'super app' (TechCrunch) Learn more about your ad choices. Visit megaphone.fm/adchoices

From origin to legend. I need to become a symbol. I need to become the hero. Someone's got to step up. Build the legacy. Let's get to work. You want to get nuts? Let's get nuts.

I'm allergic to nuts. Lego Batman, legacy of the dark night. This is my favorite part. Available May 22nd on PlayStation 5, Xbox Series XS, and PC. Rated E10 for ages 10 and up. Welcome to the tech meme right. for Wednesday, July 28th, 2021. I'm Brian McCullough today. Apple reports earnings but warns of component shortages. Microsoft set profit records, but also noted shortages materially affected some of its

divisions. Alphabet had good earnings too, but the real story there is YouTube about the staff walkout at Activision Blizzard. Is Apple asking leakers to snitch on their sources and an interesting raise to do next generation search on iOS? Here's what you missed today in the world of tech. Well, it's earnings deluge time. Let's start with Apple. Q3 revenue there was up 36% year over year. Net income of $21.7 billion was up from $11.2 billion year over year, so nearly doubling. Services sales of $17.4 billion were up from $13.2 billion a year ago. Apple's Greater China sales in Q3 were up 58%. Sales in the Americas grew 33%. paid services subscribers grew to 700 million, up 150 million year over year. Mac and iPad sales

broke quarterly records in Q3 with Mac revenue of $8.2 billion, and iPad revenue of $7.4 billion. They were up 16 and 12% year over year, respectively. Revenue for the wearables home and accessories category, which includes the Apple Watch, was $8.8 billion, up 36% year over year. nearly 75% of watch buyers were new watch buyers, according to Apple. But one big word of warning, Apple said that supply constraints due to legacy node chip production will be worse in Q4 than in Q3 and thus will likely affect sales of the iPhone and iPad, quoting CNBC. Apple CEO Tim Cook said the shortages aren't in the high-powered processors that Apple has manufactured for its devices, but in what's called legacy nodes or chips that do every day

functions like driving displays or decoding audio and can be manufactured using older equipment. The majority of constraints we're seeing are of the variety that I think others are seeing that I would classify as industry shortage. Apple CEO Tim Cook said on a call with analysts, in the case of other component shortages, he attributed it to demand outstripping Apple's own forecasts, quote, we do have some shortages in addition to that that are where the demand has been so great and so beyond our own expectation that it's difficult to get the entire set of parts within the lead times that we try to get those, end quote. In its earnings, Microsoft also had to admit that global chip shortages had depressed Microsoft's Q4 surface revenue,

which was down 20% year over year, and Windows OEM revenue, which was down 3% year over year. But overall, things were rosier. Microsoft reported Q4 revenue up 21% year over year to $46.2 billion, net income up 47% year-over-year to $16.5 billion. Commercial cloud revenue was up 36% year-over-year. Microsoft surpassed $60 billion in annual profit for the first time ever. It had never even hit $50 billion in profit in a year before. And LinkedIn posted Q4 revenue of around $3 billion, passing the $10 billion mark in annual revenue for the first time since Microsoft's acquisition of that company.

And by the way, Q4 ad revenue at LinkedIn was up 97% to more than $1 billion. Interesting wrinkle for Microsoft, though. Overall gaming revenues rose to $3.7 billion up 11% year-over-year, with hardware revenue up 172%, but Xbox content and services were down 4% year-over-year. What's going on there? Quoting Geekwire. Microsoft notes in its report that last year's big numbers were driven in large part by stay-at-home scenarios where entertainment-starved customers in social quarantine turn to video games

to fill some of the gap. Now that at least some parts of the world have relaxed restrictions, home-based activities like video games are slowing down. 2021 has also been a slow overall year for new video game releases. While Microsoft's first-party titles are on an upswing with next month's Psychonauts 2, marking the beginning of a slow but steady release of content, many developers have struggled with production delays due to last year's work-from-home edicts. As a result, several of the big third-party games that were expected in 2021 have been pushed back to later in the year, if not 2022. Since much of Microsoft's profit margin on the Xbox depends on software sales, a weak release calendar impacts the company's content and services, gaming revenue, end quote. And the song remains the same at Alphabet, which reported Q2 revenue of $61.8 billion up 62% year-over-year.

operating income of $19.36 billion, up 31% year-over-year, and Google Cloud operating losses were down to $591 million. The real story at Alphabet, though, continues to be YouTube, which reported $7 billion in Q2 ad revenue, up 84% year-over year, from a mere $3.81 billion. This means that YouTube is now at a $28 billion run rate annually, which means that it will probably surpass Netflix in revenue by the end of the year. As our friend Simon Owens tweeted, quote, it wasn't that long ago when Google refused to break out YouTube's revenue numbers, probably because they weren't all that impressive. The company acquired YouTube back in 2006. It probably took a lot of patience to let it grow into the revenue juggernaut it is today, end quote. And quoting variety, the revenue gains by

Google and YouTube in the most recent quarter come after the company experienced a sales slowdown in Q2 of 2020 as advertisers pulled back on spending in the earlier day. of the COVID pandemic. Google's revenue growth in Q2 benefited from lapping the effects of COVID last year, Alphabet CFO Ruth Porritt, said on the earnings calls. That benefit, she added, will diminish through the balance of the year as we begin to lap stronger performance in the second half of 2020, end quote. Note that the ad revenue reported for YouTube excludes fees for subscription-based products such as YouTube premium and YouTube TV, end quote. I'm going to let Jeremy C. Owens, from Twitter, sum up the overall narrative for these three tech giants, quote,

math time, Google, Apple, and Microsoft collectively produced 56.73 billion in profits on sales of $189.5 billion in a quarter. That is typically pretty sleepy for tech, jaw-dropping, end quote. TSM has received final approval for a two-nanometer chip plant in Taiwan. Sources say construction will begin in 2022, and equipment will be installed in 2023. Quoting Tom's hardware, based on the company's roadmap, its N2 fabrication process will be ready for mass production in late 2024 or sometime in 2025, which is when the fab will be ready. As demand for TSM's N2 node increases, TSM will construct, equip, and ramp up additional phases of its facility in Hinchu. actual production capacity of the whole fab is unknown, but typically TSM strives to build its so-called

gigafabs facilities with a production capacity of over 100,000 wafers starts per month to meet demand for its N2 node. TSMC is considering building an additional leading-edge production facility at another site. TSMC's N2 will be the Foundry's first manufacturing process to use gate all-around or GAA transistors in their nanosheet or nanowire implementation along with other innovations. TSM did not disclose any details about the technology at its most recent technology symposium, which is an indicator that the technology is either still in pathfinding mode or several versions of the node are being evaluated. TSM recently started construction on its N5-capable or five nanometer fab in Arizona. While this facility will not use the company's most advanced node when it goes online in 2024,

it will be TSM's first overseas fab in years that will produce chips using an advanced fabrication process. TSM is also considering building fabs in Japan and Europe to meet the demand of local customers, but those facilities will mostly focus on specialty technologies. Previously, all of TSM's advanced facilities were only built in Taiwan, whereas fabs in the U.S. and China use considerably older nodes. This obviously helped to ensure the geopolitical importance of Taiwan, but while TSM is somewhat altering its fab strategy, its leading-edge facilities will still be built in Taiwan,

and authorities there are willing to help the world's largest contract maker of Semicom. conductors, end quote. All right, this is another one of those stories that I passed on doing several times in a row, so now I need to catch you up on it. Exactly a week ago, the California Department of Fair Employment and Housing sued video game giant Activision Blizzard for sexual harassment of and discrimination against its female staff. Last Friday, signs of, shall we say, turmoil inside the company surfaced when Blizzard's president called the sexual harassment lawsuit, quote, extremely troubling in an internal memo, while a VP at the company said that the lawsuit presents a, quote, distorted and untrue, unquote, view of the company. Then on Monday, about a thousand

current and former Activision Blizzard employees said in a letter to leadership that the company's response to its recent lawsuit was insulting. And now, today, apparently, Activision Blizzard staff are staging a walkout, demanding fair treatment for underrepresented staff and ending arbitration clauses in staff contracts, quoting Bloomberg. Activision Blizzard chief executive officer Bobby Kotik responded to the threat of an employee walkout with an all-staff email Tuesday, apologizing and calling the company's recent actions, quote, tone-deaf. In Kotik's message, the CEO said the company had hired law firm Wilmer Hale to conduct a review of its policies and promise, quote, swift action to ensure a safe

environment and to stamp out harassment. Katik also promised that the company would take step including personnel changes, encouraging diversity in hiring, and removing inappropriate in-game content. The controversy at Activision Blizzard started last week after California's Department of Fair Employment and Housing sued the publisher behind games like Call of Duty and World of Warcraft, detailing disturbing incidents of sexual harassment and assault and a culture in which women faced unequal pay and retaliation. Activision called the allegations false and distorted in a statement last week, and Fran Townsend, Executive Vice President for Corporate Affairs sent a letter to staff echoing that claim. Infuriated Activision employees have spoken out on social media and more than

2,000 staff signed an open letter calling the company's responses, quote, abhorrent and insulting. Now they're planning a strike. The walkout is being organized by a group of employees at the subsidiary Blizzard Entertainment, where the majority of the lawsuits allegations were focused. In a statement to Bloomberg, the workers said their goal was to, quote, improve conditions for employees at the company, especially women, and in particular women of color and transgender women, non-binary, people and other marginalized groups, end quote. Every now and then, Apple tends to crack down on the whole ecosystem of leaks and leakers that tend to revolve around everything that company does. They're taking a slightly new angle, though, in a new crackdown, and I thought it was worth pointing out. Apple

has sent a cease-and-assist letter to at least one Chinese citizen who advertised stolen prototypes of old iPhone models on social media, quoting motherboard. In 2020, In 2019, a motherboard investigation revealed the shadowy market for stolen Apple prototypes. The little-known market is allegedly fueled by mysterious Chinese Apple or Foxcon employees who sneak the hardware out of factories like Longhua in Shenzhen. Resellers then acquire the devices and sell them to collectors or to hackers looking for an edge in finding flaws and developing exploits for the iPhone. At the time, Apple did not respond to request for comment, and it was unclear how much the

company knew about this gray market or what it was doing, or planning to do about it. This cease and desist letter shows how Apple is going after resellers and how it's trying to clamp down on the gray market they're a part of. The letter was sent by Fangda Partners, Apple's law firm in China on June 18th. In the letter, Apple asked the seller to stop acquiring, advertising, and selling leaked Apple devices and requested a list of anyone who provided them with the leaked devices. In other words, Apple wants the reseller to say, who gave them the devices? Finally, the company requested the seller to sign a document promising to comply with the request within 14 days of receiving the letter, end quote.

So I'm mentioning this because this is the fountainhead of the whole Apple leaks ecosystem that eventually trickles down to us by eventually reaching the reputable Apple blogs and YouTube leakers and the like. So I wonder if going to the source of the leaking is going to disrupt all of that. Finally today, a hell of an interesting raise to tell you about. Brain Technologies has raised more than $50 million to launch. Natural, a natural language search engine app for iOS in the U.S. It has some interesting backers, including Lorraine Powell Jobs' Emerson Collective, and an unnamed solo investor who kicked in $1.5 million back in 2016.

Brain Technologies has been in stealth mode all of this time, but now that it's launched, please, please, please do not call it a voice assistant, quoting TechCrunch. Jerry U, the young founder and CEO of Brain, a repeat entrepreneur and robotics enthusiast. whose last company, a grocery delivery service in China called Ben Lai, is still going strong, said in an interview that he does not like to call Natural a personal assistant app, not because of the shortcomings of so many of these in the past, but because of the voice association many have with the concept. Quote, we don't position ourselves as a voice assistant because we don't think the future is voice only,

he said. It should be the right combination of voice and native app experience, end quote. Instead, he describes what Natural is as the world's first, quote, Generative computer interface, the logical progression in digital information search. That progression, in his view, started with the web, progressed to search engines and then apps before landing where he sees it today. Natural brings all these together in some degree. Currently, you speak or type any kind of question or command into the app, which then provides a solution that might be in the form of links to other apps you might have. For example, I'd like sushi tonight. We'll bring back options in theory for ordering sushi

and possibly your most favorite dishes from a selection of restaurants by way of food ordering apps that you use or places to go eat it, as well as options for making that sushi yourself and buying the ingredients online to do so, as well as a method. Similarly, travel searches return results that dip into multiple silos from, say, airlines and airline aggregators that are easily editable, and you can buy directly from those results if you already have payment details on your device. While Google provides this to some degree, you eventually have to navigate to sites to buy tickets, which might end up significant, more expensive when you actually visit said sites. The more you use the app, the theory is that it will learn more about what you might want from your questions. AI that anticipates what we are

trying to say or do is something that has been attempted before, of course. But the difference here, you said, is that in Brain's approach, which is based on the concept of one-shot learning, which he describes as a kind of general purpose AI, quote, a tool that learns to use other tools, end quote. The alternative is a more labor-intensive approach that AI-based systems are typically built on today, largely based around keywords. AIs from Google or Amazon are based on thousands of people and human coding to connect services, he said. This approach treats natural language processing as a classification problem, end quote. In contrast, the breakthrough system he and his team have devised, he said, quote, has learned more than four million functions on its own. Ironically, the end result of a

successful AI like this is not to make us feel more technologically powerful, but to get us away from our devices and spending time fussing on them and into the world, end quote. So I guess we've got a new app to test out tonight. A few weeks ago when I was up in Northern Michigan, I was nominally on vacation, as you'll recall, so we skipped doing our usual Wednesday Twitter space that week. And it turns out that this week, Chris is on vacation. So we're going to take a week off. Once again, summertime, y'all. Talk to you tomorrow.