Alphabet earnings hit by ‘significant slowdown’ in ad sales, but revenue boosts stock

Earnings come in lower than diminished expectations, but sales growth tops projections despite COVID-19 effects

Google parent company Alphabet Inc. reported fiscal first-quarter results on Tuesday.


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Google’s profits were damaged even more than expected as the COVID-19 pandemic caused “a significant slowdown in ad revenues,” parent company Alphabet Inc. revealed in a quarterly earnings report Tuesday.

Alphabet
GOOGL,
-3.01%

GOOG,
-3.30%

reported first-quarter earnings of $6.84 billion, or $9.87 a share, compared with $6.66 billion, or $9.50 a share, in the year-ago period, though the 2019 results took a hit from a large fine levied by the European Commission. Revenue after removing traffic-acquisition costs grew to $33.7 billion from $29.48 billion in the year-ago period.

Analysts surveyed by FactSet had estimated $10.71 a share on ex-TAC revenue of $33.32 billion on average, though projections had taken a hit ahead of the report. As of the end of January, average analyst expectations were for earnings of $12.34 a share on ex-TAC sales of $35.33 billion.

The first-quarter results, announced after the market’s close Tuesday, initially sent Alphabet shares up more than 3% in after-hours trading. They climbed to a 7% gain during an analyst conference call when Google executives outlined spending cuts.

A downturn in advertising was expected as the coronavirus pandemic plunges the global economy into a tailspin. Travel and entertainment ads in particular have dried up, driving down a rich source of revenue for Google and reportedly forcing the company to slash its marketing budget by as much as half in the second half of the year. Earlier this month, Alphabet Chief Executive Sundar Pichai told employees the company would reduce spending the rest of the year, starting with hiring.

Alphabet in the Age of COVID-19: Google braved one recession, and is more diversified

“Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues,” Alphabet Chief Financial Officer Ruth Porat said in Tuesday’s announcement. “We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities.”

Though $33.8 billion of Google’s total quarterly revenue of $41.16 billion came from advertising, a reflection of its continued reliance on a battered market, there is a silver lining. Sales from Google Cloud and YouTube continued to surge, underscoring versatility in the company’s overall product line — YouTube ad revenue increased 33.4%, to $4.04 billion from $3.03 billion a year ago, while Google Cloud sales grew 52%, to $2.78 billion from $1.83 billion.

During the call with analysts late Tuesday, Pichai described Q1 as a “tale of two quarters”: a strong start that quickly tailed off because of COVID-19. He said the transparent, cost-effective nature of search offers promise in pivoting to adapt to the economic crisis, and Google is more diversified now with cloud services than it was during the Great Recession in 2008-’09.

“At the inception of the crisis, the increase in user interest was for information about COVID-19 and related non-commercial topics,” Porat said in the call. “Although we have seen some very early signs of recovery in commercial Search behavior by users, it is not clear how durable or monetizable this behavior will be.”

Porat added that Google’s non-advertising business remained strong throughout the quarter, especially the performance of Google Cloud, YouTube, and Google Play. “We anticipate the second quarter will be a difficult one for our advertising business,” she said, and will closely hew to macroeconomic performance.

Steep declines in transportation and entertainment ads are expected to plunge digital display ad spending in the U.S. between 5.5% and 18% in the first half of 2020, or about $8 billion to $13 billion less, according to eMarketer analyst Nicole Perrin. In early March, before the coronavirus pandemic began its stranglehold on the economy, she expected a 19% increase for the year.

See also: Google, Facebook stocks take a beating after analysts cut outlooks on internet advertising

Shares of Alphabet and Facebook Inc.
FB,
-2.44%

were battered last week as part of a broad technology-sector selloff after Wall Street analysts at Raymond James and Deutsche Bank warned about further weakness in online advertising sales.

Snap Inc.
SNAP,
-2.95%

offered a snapshot of the current economic landscape: Its revenue, largely dependent on advertising, decelerated to 11% in the week leading up to its first-quarter results on April 21. Previously, it was up 58% in January and February, before slowing to 25% in March, and 15% so far in April.

See also: Snap stock posts best day in two years but ‘jaw-dropping’ slowdown is warning sign for Facebook and Google

Facebook, second only to Google in digital ad revenue, reports fiscal first-quarter results on Wednesday.

The blunt force of COVID-19 will slow hiring at Google in the third quarter, and deepen in the fourth quarter, according to Porat. Pichai indicated a fundamental shift to digital operations as a residue of the pandemic.

Alphabet stock is up 2.8% in the past 12 months, while the S&P 500 index
SPX,
-0.52%

has declined 2.8%.

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