Alphabet Q1 profits miss the mark despite revenue growth
Google’s parent company Alphabet filed its first-quarter earnings today. Results were mixed; while revenues fell closely in line with analysts’ estimates, the company missed the mark on profitability.
Alphabet’s first-quarter earnings included a few surprises / The Drum
Alphabet’s leadership team expressed positivity in light of the reports. “We’re pleased with our strong results in the first quarter, which reflect the benefit of investments we’ve made over many years. We remain committed to investing to continue to build helpful technologies and supportive long-term growth notwithstanding the uncertainty in the global outlook,” said Ruth Porat, chief financial officer at Google and Alphabet, on an earnings call on Tuesday afternoon.
Alphabet, whose portfolio of companies include Google, YouTube, Fitbit, Waze and Nest, saw Q1 sales spike 23% year-on-year, reaching $68.01bn – a bit below average projections of $68.1, representing the corporation’s first miss since prior to the Covid-19 pandemic.
Alphabet shares dropped 4.3% in after-hours trading this evening following the news.
What do the results show?
Overall revenues grew 23% year-on-year, hitting $68.01bn, which the company attributed primarily to strong performance in Google Search and Google Cloud. Alphabet’s overall revenue growth rate was below that of 2021, when Q1 year-on-year revenues saw a 35% increase.
Google’s ad business performed better than expected, with ad revenues jumping 22% to $54.66bn, over expectations of $54.12bn.
Meanwhile, YouTube’s performance left a little to be desired, with ad revenues up 14.4%, indicating a slowing growth trend (in the same period last year, year-on-year YouTube ad revenues grew 49%). In Q1, YouTube’s ad revenue reached a total of $6.87bn – over half a billion below estimates of $7.4bn.
Operating income rose to $20.09bn and the company’s operating margin was 30%. Net income was $16.44bn, down from $17.93 a year ago in part due to additional expenses.
In fact, operating expenses were up 24%, which the corporation attributed to a hiring influx; Porat said: “Headcount growth was the primary driver of expense across all three categories: research and development, sales and marketing and [general and administrative].” The company added 7,400 new hires during the quarter, the largest portion of whom were assigned to technical roles. She noted that sales and marketing also led to an increase in advertising expenditures.
Quarterly profit reached $16.436bn, equating to $24.62 per share – $1.14 below analysts’ expectations of $25.76 per share.
Porat acknowledged that many of the shortcomings in quarterly performance were due at least in part to pandemic-related economic shifts, “uncertainty in the global outlook” and the corporation’s decision to suspend the majority of its commercial activities in Russia.
Today, the company’s board authorized the repurchase of up to an additional $70bn in Class A and Class C shares (following the repurchasing of 52bn Class A and Class C shares over the last 12 months) “in a manner that’s in the best interest of the company and its stockholders,” said Porat.
Which sectors performed the best?
The Google Play Services segment performed strongly, seeing a 20% year-on-year lift in revenues, reaching $61.5bn. Plus, Google Services operating income was up 17%, reaching $22.9bn. Alphabet attributed this strong performance to high growth rates in the retail and travel areas, as activity picks up post-Covid.
Google Search and Google Cloud performed especially well. Cloud revenues were up 44%; Search and other ad revenues were up 24%. Leadership pointed out recent developments to Google Search that are likely helping to drive its success, including new augmented reality (AR) search tools.
Network advertising revenues of $8.2bn were up 20%, driven largely by Google’s AdSense and AdMob offerings.
Though YouTube’s overall ad revenue growth slowed compared to the same period last year, the company saw especially strong growth in the platform’s new short-form content offering, YouTube Shorts. Engagement is growing rapidly and the company is testing out new ad formats. Additionally, the video-sharing site saw “substantial growth” in non-advertising revenues, driven primarily by subscriber growth in YouTube Music, YouTube TV and YouTube Premium.
What’s next for Alphabet?
Alphabet’s chief executive Sundar Pichai summed up the corporation’s topline priorities neatly, saying: “We’ll keep investing in great products and services, and creating opportunities for partners and local communities around the world.”
Porat added: “We continue to make considered investments in Capex, R&D and talent to support long-term value creation for all stakeholders.”
The company stressed that it will be investing in a few areas in particular to drive continued growth through 2022. Chief among them is short-form content. Inspired by the success of YouTube Shorts – the platform’s TikTok challenger product – Alphabet plans to dedicate more resources toward short-form content. As it stands, YouTube Shorts is averaging more than 30bn daily views – a rate four times higher than it was last year at this time. The company has added new editing capabilities for creators and is testing ads on Shorts with Google video action campaigns and products such as App Install. “As we’ve always done with products, we focus on building a great user experience first, and we will work to build monetization over time,” said Pichai.
The company also said it’s seeing more opportunities for innovation on television screens. Pichai pointed out that on average, consumers are watching more than 700m hours of YouTube content on their TVs daily. “In the year ahead, we will give YouTube’s connected TV viewers new smartphone control navigation and interactivity features allowing people to comment and share content they are watching on television directly from their devices.”
Porat also stressed that Alphabet will “continue to invest aggressively in Cloud,” citing “the sizable market opportunity” at hand.
Aside from product investment, Alphabet noted that it will invest in expanding its global footprint even further. “This year, we plan to invest approximately $9.5bn in our US offices and data centers, creating at least 12,000 new Google jobs in the US in places like New York and Atlanta. To enable our long-term growth, we are investing in areas like Cloud AI, YouTube search and beyond,” said Pichai.
Outside of the US, Alphabet is investing major dollars in India’s digital ecosystem and plans to continue expanding its partnerships in the region. Partners including Sony and Crunchyroll are already proving valuable to the tech giant and are helping to capture more users in Asia.
Alphabet acknowledged the impact that its withdrawal from Russia and fluctuating foreign exchange rates have had and are likely to continue to have on financial results heading into Q2.
Finally, Pichai stressed that Alphabet is continuing to monitor the conflict in Ukraine. “We remain deeply concerned about the war in Ukraine and the humanitarian crisis unfolding in the region,” he told investors. “While I was in Warsaw, Poland last month, I met with many leaders across Central and Eastern Europe to reaffirm our commitment to the region. We are finding ways for our products and platforms to be helpful, including enhanced features on Search to help refugees find resources. Across all these efforts, I feel inspired by the ways that our teams at Google work to help people in moments big and small.”