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Letters spell the word “Alphabet” as they are seen on a computer screen with a Google search page in this photo illustration taken on August 11, 2015. Photo: Reuters

Google parent Alphabet hit by advertising slump as sales miss estimates, but cloud losses narrow

  • Alphabet had $57.27 billion in third quarter sales, less than expected, as a slowdown in online advertising spreads from social media to search
  • One bright spot is Google’s cloud service, which trails Amazon and Microsoft, with losses less than expected at US$699 million
After reporting earnings and revenue that missed expectations, Google parent Alphabet Inc said on Tuesday it would slow hiring and control expenses, signalling that it was girding for tough times ahead as the economy falters.

Google’s advertising juggernaut, which had largely dodged the digital-ad slowdown that hit rivals earlier this year, is no longer immune. Alphabet said third-quarter sales, excluding payments to distribution partners, were US$57.27 billion. That compared with the average analyst projection for US$58.18 billion.

Net income was US$1.06 per share, less than Wall Street’s estimates for US$1.25 per share. Shares fell more than 6 per cent in post-market trading.

As spiralling inflation crimps growth in digital advertising, Google and competitors such as Meta Platforms Inc’s Facebook and Snap Inc’s Snapchat are fighting for smaller budgets. Last week, Snap reported its slowest quarterly sales growth ever, which sent its stock plunging and dragged down Alphabet’s shares too. Google’s search business, which is more insulated from economic swings than social media ads, has begun to show signs of weakness.

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Alphabet chief executive officer Sundar Pichai said the company was “focused on moderating operating expense growth”. Chief financial officer Ruth Porat, meanwhile, said she expected headcount additions to fall by more than half in the fourth quarter compared with the previous period.

“As we plan for 2023, we’ll continue to make important trade-offs where needed,” Pichai said. “Throughout Google’s history, periods of dedicated focus have enabled us to emerge strongly.”

Shares fell as low as US$96.71, after closing at US$104.48 in New York.

There were disappointing results across Alphabet’s sprawling portfolio. Search and other related businesses, the company’s financial engine, generated third-quarter sales of US$39.54 billion, compared with analyst estimates of US$40.87 billion. Philipp Schindler, Google’s chief business officer, said some advertisers have begun to trim spending.

Google’s YouTube missed the mark by an even wider margin, reporting ad sales of US$7.07 billion, compared with analysts’ average estimate of US$7.47 billion.

YouTube, which also fell short of expectations in the second quarter, is locked in a fierce battle for advertising budgets and users’ attention with ByteDance Ltd’s TikTok. YouTube released a short-form video platform called Shorts to counter the popularity of TikTok, but analysts say the company still has ground to make up.

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“Google needs to salvage stronger growth from YouTube to keep its head above the water,” said Evelyn Mitchell, an analyst with Insider Intelligence. “Being wholly reliant on how search performs, that’s not a good place to be.”

One bright spot was Google’s closely watched cloud offering, which lost US$699 million, better than analysts’ projections for a loss of US$814.25 million. The unit has yet to turn a profit, and Google is a distant third in the cloud market, trailing Inc and Microsoft Corp. Yet the cloud business is nonetheless viewed as one of the company’s best bets for growth as the core search business matures.

Alphabet’s Other Bets – a collection of nascent companies that includes self-driving car company Waymo and life sciences unit Verily – saw US$209 million in revenue on losses of US$1.61 billion. In September, Verily, which has experimented with diabetes-detecting contact lenses and launched Covid-19 testing programmes, said it raised US$1 billion in new investments led by its parent company.

While Google has taken steps to control costs during the economic downturn, it will take time for the company to see the benefits, said Tejas Dessai, a research analyst at Global X ETFs.

“It’s a big company – it will take some time to trim fat,” he said.