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Microsoft, Google, Meta and Amazon added almost $10bn to their profits in the past two years by extending the estimated working life of their servers, an accounting change that will help soften the blow of future costs such as developing generative artificial intelligence.
The Big Tech companies, which all reported strong quarterly growth in earnings this week, have in recent years been reviewing how they accounted for the predicted working life of their technical equipment, at the same time as they came under pressure to cut costs and began to reallocate resources towards AI products.
It resulted in a $6bn boost to income at Google and Microsoft alone last year. Other groups, such as Amazon, have extended the estimated lifespan of their assets even further this month, which will mean more profits this year.
As part of their financial accounting, companies estimate how long assets will last in order to work out how quickly to depreciate them, impacting how much they charge against profits each year.
Extending the estimated life of the assets reduces the depreciation charges, in this case adding about $10bn to the companies’ collective reported earnings.
If the estimates are right and the companies are able to get more use out of their servers, it would also reduce the amount they spend in future, giving them more mileage on the huge capital spending expected on AI.
At the same time companies are anticipating supply chain issues because of a shortage of semiconductors — the chips crucial to central processing units that power servers and computers. The companies have warned investors they will make major investments in their technical infrastructure this year as they develop cutting-edge generative AI systems.
Big Tech companies were “stuck between investors turning increasingly to margins, profitability and capital returns, and the need to aggressively invest in cloud and AI,” said Youssef Squali from Truist Securities.
When “money is flowing and margins are no issue”, stretching the lifespan of servers was not a “top priority”, he said. Now, companies were increasing capex while trying to “safeguard against margin dilution”. Such accounting changes were “probably something that will continue”, he added.
Google’s parent company Alphabet reduced depreciation costs by extending the working life of its servers and network equipment from four and five years respectively to six years, saving $3.9bn in 2023 and boosting net income by $3bn for the year, according to its accounts.
Microsoft similarly decided its servers would last for six years, not four, which increased its net income by $3bn last year. It said last week that “advances in technology” and “increased efficiencies” in how its operates its equipment allowed it to extend its estimated life.
Meta, the parent company of Facebook, Instagram and WhatsApp, reduced depreciation expenses by $860mn in 2022, which added $693mn to net income that year. Meta’s depreciation expenses increased in 2023, however, and this week it warned they would increase by a larger amount in 2024.
Meanwhile, Amazon improved its income by $2.8bn in 2022 thanks to a reduction in depreciation costs of $3.6bn as it extended the life of its servers from four to five years.
This week, Amazon said it had further extended the life of its servers, which it predicted would boost operating income by $3.1bn in 2024, generating additional profits of $900mn in the first quarter alone.
The rewards from the depreciation costs, however, are far outweighed by each companies’ expected capital expenditure this year, as they invest large sums to build new data centre architecture and improve their technical infrastructure to expand AI services, such as cloud computing software and generative AI chatbots.
Scott Kessler, an investment researcher at Third Bridge, said the depreciation savings should be considered in the context of the hundreds of billions in revenues the groups made, noting that several billion dollars for a Big Tech company was “essentially a rounding error”.
Meta revised up its predicted capital expenditure for 2024 this week to $30bn to $37bn, $2bn more than expected. Microsoft and Google also warned of rising technical costs this year to develop AI.
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