Alphabet (GOOGL) financial results were eagerly awaited by investors wishing to take the true pulse of the economy.
Are we already in a recession and if so what is the extent of the damage to businesses? These are the questions that investors hoped the parent company of Google would answer.
The response given by the Mountain View, Calif. based firm is not completely clear, but there are some reassuring elements, or at least, ones that do not completely plunge investors into a deep slump.
"The economy outlook [is] uncertain," CEO Sundar Pichai told analysts during the earnings call following the release of the results.
Net income fell 13.6% to $16 billion in the second quarter ended June 30, compared to the second quarter of 2021, the company announced in a press release on July 26.
Earnings Below Expectations... But
Quarterly revenue increased 12.6% to $69.7 billion year on year. This is below the $69.9 billion anticipated by Refinitiv analysts. Alphabet says unfavorable currency effects, particularly the dollar, trimmed its revenue by 3.7%
Earnings per share (EPS) of $1.21 is a miss, coming under the $1.28 expected by analysts.
In detail, Alphabet is almost below expectations everywhere: Youtube's advertising revenue rose only 4.8% over one year to $7.34 billion. Analysts were expecting $7.52 billion. In addition to a possible drop in budgets dedicated to online advertising, Youtube is competing for marketing dollars against TikTok and Instagram.
"The quarter on quarter deceleration in both YouTube and network advertising revenues primarily reflects pullbacks in spending by some advertisers," Chief Financial Officer Ruth Prorat explained during the call with analysts. "We do view that as rather idiosyncratic. Some of it is supply chain some of it is inventory. And so just working through that and then I would say, there were a couple of other factors that were relevant."
"So we're working through those but again, it goes really to continuing to invest in YouTube."
Overall, Google's ad revenue growth rate slowed to 11.6% to $56.3 billion. The cloud business, which is seen as a growth engine, recorded revenues of $6.3 billion, up 35.6% year-on-year, but lower than the $6.41 billion expected.
Google shares were up more than 7% as of time of writing .
Youtube Has New Opportunities
It must be said that investors feared the worst after the social network Snap (SNAP) said last week that "forward-looking visibility remains incredibly challenging."
Investors were worried that Youtube and Google's advertising revenue would be hurt by shrinking promotion and marketing budgets for companies bracing for tough times. Online advertising is seen as one of the departments that will be among the first affected once the economic slowdown takes hold.
In view of the results, Google and Youtube seem to be limiting the damage for the moment. Despite its caution, the company seems to be sending the message that it can navigate a potential recession without major harm.
"In YouTube and network, the pullbacks in spending by some advertisers in the second quarter reflects uncertainty about a number of factors that are challenging to disaggregate within other revenues in the third quarter. We expect an ongoing headwind from the fee changes and the slowdown and buyers spend that impacted results in the second quarter," Prorat said.
But Philipp Schindler, Senior Vice President and Chief Business Officer, was more optimistic:
"Despite the pullback from some advertisers, we really believe YouTube remains well positioned to benefit from the shift to digital video," the executive stated.
Youtube is testing different products, he explained, and the feedback seems to be positive.
"We're testing a number of different things across life commerce. We're excited about the opportunities here, especially to connect brands with creators. We're also seeing advertisers buy YouTube at both ends of the funnel," Schindler said.
"YouTube has seen significant growth in watch time and even as people have returned to in-person activities. Time spent on YouTube globally has continued to grow. And as I said before, early results [in new] monetization are also encouraging and we're excited about the opportunities here."
Slowing Hiring But Investing in Cloud
However, Google does not want to be caught off guard by a sudden downturn in the economy. It is therefore no surprise that the group insisted that it was slowing down hiring, which would allow it to reduce costs.
"Given the uncertain global economic outlook and the hiring progress achieved to date, as Sundar previously announced, we intend to slow the pace of hiring," Prorat told analysts. "We expect our actions on hiring to become more apparent in 2023."
The company said it will continue to invest in the cloud to seize "opportunities" even if the economic situation calls for caution.
"Customers are transforming their businesses utilizing GCP [Google Cloud Platform] secure infrastructure with data analytics and AI capabilities, uncovering real time insights and leveraging the collaborative tools of workspace," Prorat said. "They are in the early days of this transformation and we continue to invest in our products."
Google Cloud is far behind Amazon (AWS) and Microsoft (Azure), the two industry leaders.
