Alphabet Disappointed On Sales As Ad Revenue Plunged After Pandemic Run-Up

Alphabet Inc (GOOGL.O) on Thursday reported fourth-quarter profit and sales that missed Wall Street expectations as Google’s advertising clients pulled out spending from a period of pandemic-led excess.

Executives of the search and advertising titan used a subdued tone on a call with investors, vowing an extended period of making cuts, especially on hiring, real estate costs, and experimental projects that can take years to be completed.

Shares of Alphabet dropped almost 5% in after-hours trading, after shedding about 40% of their value last year.

“We are committed to investing responsibly with great discipline and defining areas where we can operate more cost-effectively,” Chief Executive Sundar Pichai told analysts on a call to discuss the company’s results. That mirrored comments from Meta Platforms Inc (META.O) CEO Mark Zuckerberg the day before on cost efficiencies.

Shares of other tech firms Amazon.com Inc (AMZN.O) and Apple Inc (AAPL.O) also plunged after they reported disappointing results on Thursday, erasing gains after Facebook parent Meta on Wednesday boosted tech shares with news on cost cuts and a huge buyback.

Gone was some of the excitement of the pandemic when consumers flocked to the internet amid lockdowns and increased interest in e-commerce and contactless deliveries.

Alphabet’s chief financial officer, Ruth Porat, assured a more measured approach for 2023 and a focus on “delivering sustainable financial value,” not necessarily a characteristic of Silicon Valley companies. “We’re focused on revenue upside as well as durable changes to the expense base.”

Advertisers, who contribute most of Alphabet’s sales, have slashed their budgets as soaring inflation and interest rates sparked concern over consumer spending. Pichai cited advertisers’ more modest spending and the impact of foreign exchange rates overseas as drags on Alphabet’s overall results.

He said artificial intelligence (AI) software will be a key focus for the company and that it intends to make its LaMDA chatbot software widely available in the coming weeks.

Lid On Costs

Mountain View, California-based Alphabet decided to slash 12,000 jobs in January, amounting to about 6% of its overall workforce, and said it was doubling down on AI. Across the company, Alphabet will “meaningfully” lower its pace of hiring in 2023, said Porat.

Alphabet, long a leader in AI, is meeting competition from Microsoft Corp (MSFT.O), which is reportedly seeking to increase its stake in ChatGPT – a promising chatbot that answers questions with human-like responses.

“Despite being seen as one of the most insulated companies in the advertising space relative to peers, Alphabet’s poor quarter is the latest sign that worsening fundamentals and a tough macroeconomic environment are prompting advertisers to cut back on spending,” said Jesse Cohen, senior analyst at Investing.com.

Net income slumped to $13.62 billion, or $1.05 per share, from $20.64 billion, or $1.53 per share, a year ago. That was the steepest drop for Alphabet in four quarters.

Adjusted profit of $1.05 per share fell behind an expected $1.18 per share, according to Refinitiv.

Revenue from Google advertising, which includes Search and YouTube, plunged 3.6% to $59.04 billion. Total revenue jumped 1% to $76.05 billion, its weakest growth ever excluding a small drop in the second quarter of 2020. Analysts had forecast $76.53 billion.

Google is the world’s biggest digital ad platform by market share, making it completely vulnerable to fluctuations in online marketing spending. Its YouTube division has experienced a surge in rival platforms, specifically TikTok, whose endless scroll of short videos is pulling younger users away.

Alphabet’s Porat said the firm’s total capital expenses this year will match with last year. As more of its staff work remotely and it consolidates employees, Alphabet expects to cut back its real estate expenses, which Porat said would lead to a charge of about a half-billion dollars in this year’s first quarter.

Revenue from YouTube ads, one of Alphabet’s most consistent money-makers, plunged nearly 8% to $7.96 billion, well under the estimate of $8.25 billion, according to FactSet.

Cloud was a bright spot, however, with revenue increasing 32% to $7.32 billion, but at its slowest pace since the company started announcing the segment’s revenue numbers.

But there may be more pain in the future for Alphabet. In late January, the Justice Department and eight states sued Google over what they said were anticompetitive practices in its digital ad sales. The company is facing many lawsuits, which, if successful, could result in it being broken up.