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Comment by umeshunni | Hacker News Reader

> In January 2023, we completed an assessment of the useful lives of our servers and network equipment and adjusted the estimated useful life of our servers from four years to six years and the estimated useful life of certain network equipment from five years to six years. This change in accounting estimate was effective beginning in fiscal year 2023, and the effect was a reduction in depreciation expense of $966 million and $2.0 billion and an increase in net income of $752 million and $1.5 billion

Interesting accounting magic

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It is not an accounting trick, it means they'll actually hold on to those servers longer than originally planned, meaning they'll buy fewer servers to replace them over the long term. That's actual savings.

The accounting "magic" is that they can claim the savings today, but that's just normal amortization.

And this will increase their server failure rate, but probably not enough to move the needle in terms of the random failure buffers they account for.

It does mean they’ll hold onto them, it doesn’t mean they won’t buy more.

The server demand doesn't depend on how many servers you have. If your demand is D, you have X servers, and you need to decommission Y due to age, you'll have to buy D - X + Y. If Y gets smaller, you buy fewer.

You build brand new data centres with the latest technology. When a new technology rolls out, new builds always get it, and you start upgrading your newest data centre first. Sometimes you never make it to your oldest data centre.

Data centres fill up. They fill up with important "production" software and associated data housed in the same DC for locality, which never moves and mustn't be shut down. After a while the data centre is full and everyone needs to put their new software in the newly built empty data centre.

Over time a data centre gets technology upgrades later or not at all (say, a new-new networking fabric is invented and starts rolling out before the new networking fabric finishes rolling out). There's a slow decay in terms of service. New data centres have on-site offices of engineers who keep everything running at maximum efficiency, older data centres have a single security guard who receives a daily printout of which machines to press the reset button on while doing their rounds. Eventually an old data centre is turned off all at once.

If they're keeping older servers around longer, they may be delaying turning off the least valuable computers, continuing planning upgrades to 'new' even after 'new-new' is ready and rolling out, or slowing down the invention of new tech. As I understand it, "decommission X many machines due to age" isn't really the model.

They also took a large one off hit from the layoffs over the last 6 months. I think the layoff hit was less than the gain on the equipment recategorization but it does sort of even out a bit.

To be fair 4 years for a server seems like very little.

Until a few years ago each CPU generation brought so much performance improvement that you would actually save money by replacing the server, because it would cut down your operational expenses (power, rack space, cooling, ...) per unit of compute. This is not so true anymore.

Cloud really does make most computing power fungible.

This replacement schedule is what's creating the fungibility of the cloud.

3 years used to be the industry standard. Electricity costs are way larger than the cost of replacing servers

If you run a lot of Windows servers, it’s sometimes cheaper to run old stuff longer as they are raising prices on a per core basis.

I was stuck supporting one of these environments, and made a business case to overbuy the hardware a few years ago when they did a “free” socket to core migration. They’re still running those things, as the maintenance on the servers is less than paying for more cores.

Is that $2.0b for network equipment by increasing it's depreciation period by 20%? Meanwhile increasing the deprecation period of servers by 50% only nets $1.0b?

I had the impression that servers were vastly more expensive than network equipment. I wonder what the breakdown is for network equipment.

so This is how they managed to pretend clout didnt make a multi hundred $million loss this quarter for the first time ever.

That's like being told inflation is down because you can eat less

Interesting accounting magic indeed. It seems like tricks like this make it remarkably easy to game stock price. Are there any controls on this?

It's not accounting magic at all.

A $1000 server with a 4 year life span is expensed at $250 a year.

A $1000 server with a 6 year life span is expensed at $167 a year.

You convert your server lifespan from the former to the latter you get $83, or 33%, savings a year.

If you (intend to) keep your servers for 6 years and do not make this adjustment, then you're doing a false accounting, not the other way around.

The controls are that if 4 years from now they decide that the servers need replacing after all and take a write-down then shareholders have a very solid case to sue the company.

How does suing a company work? Is it functionally just like a forced dividend, or is it more complicated than that?

The latter. It is functionally closer to a speculative investment. Litigation is expensive and notoriously uncertain.

It's like any other class action lawsuit. Nothing to do with a dividend.

But if it's the stock holders that are suing the company, and they are receiving compensation from the lawsuit based on the size of their holdings, it's a cash payment from the company to the holders, which is exactly what a dividend is.

Not all stock holders will be part of the lawsuit, and some non stock holders (say people who have already sold) can be part of the lawsuit. There can also be people who claim second and third degree damages without actually holding any stock. And there is no rule that compensation has to be in proportion to anyone's holdings. All of this will be up to the court to decide.

That's very unlikely. In each case the change would be backed by an analysis which justified the change, nefarious intent would be pretty difficult to prove.

Is it not possible to go back in 4 years and explain in 4 years that the market is more competitive than expected?

No, because they're balanced over time. It's when you don't make the charges that this becomes stock manipulation.

Not writing down investments is how Enron committed it's mark-to-market fraud.

Not an accountant but I assume that standards such as GAAP and IFRS cover this?

Hmm, if those servers are handling less traffic then their 'useful life' will be extended.

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