Google parent Alphabet Inc’s financial results for the first quarter of 2023 beat Wall Street expectations, with revenue rising 2.6% to $69.79 billion from 68.01 billion in the year-ago period. The figures also beat market estimates of $68.95 billion, according to Refinitiv data. Earnings per share of $1.17 also beat estimates of $1.07.
The company has also announced a $70 billion share repurchase program, in continuation of last year's announcement in April. It will take into account the stock price of both Class A and Class C shares for the buyback. Class A shares are those that come along with voting rights, while Class C shares have no such rights. Alphabet was the second higher repurchaser of its own stock in 2022, only next to Apple.
Google's advertising malaise persisted during the quarter, and it is also grappling with advances in artificial intelligence technology, particularly by Microsoft-backed OpenAI’s ChatGPT, which threaten to undercut its search engine dominance.
Here are the three key takeaways from Alphabet’s earnings
Financial highlights
The tech giant’s net income dropped 9% to $15.05 billion in the quarter under review from $16.44 billion in the year-ago period. Operating income, too, fell over 13% to $17.41 billion in Q1 2023 from $20.09 billion in Q1 2022.
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Google also registered a profit in its cloud-computing business, which competes with Amazon and Microsoft. The unit recorded operating income of $191 million in the quarter, following a $706 million loss a year ago.
“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI,” Sundar Pichai, chief executive of Alphabet and Google, said in an earnings release.
"We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation,” he added.
Ad revenue dips; ChatGPT threat weighs
An ongoing slump in advertising revenues due to a cutback in marketing spends amid global macroeconomic headwinds has continued to hurt Google’s growth. There was also stiff competition from platforms like TikTok, which is hugely popular, especially among a younger audience.
Despite beating market estimates of $6.6 billion, Google’s advertisem*nt sales at YouTube — one of the major income avenues for the tech giant apart from Search ads — fell 2.6% to $6.69 billion in the first quarter. YouTube revenue was down 7.8% in the fourth quarter of 2022 following a 1.9% dip the quarter before that.
“Resilience in Search and momentum in Cloud resulted in Q1 consolidated revenues of $69.8 billion, up 3% year over year, or up 6% in constant currency," Ruth Porat, CFO of Alphabet and Google, said. "We remain committed to delivering long-term growth and creating capacity to invest in our most compelling growth areas by re-engineering our cost base.”
In February, YouTube chief executive officer Susan Wojcicki stepped down from her role after serving at the helm of Alphabet’s video streaming platform for the last nine years. Wojcicki was replaced by Indian American Neal Mohan, who was the chief product officer at YouTube.
Google is also facing competition from OpenAI’s ChatGPT — a generative AI chatbot launched last November — which has intensified the overall race in the tech industry. Further, ChatGPT being integrated into Microsoft’s search engine Bing could pose a serious threat to Google in the time to come.
As a counter, Google is working on its AI product Bard to offset the competition.
“Our investments and breakthroughs in AI over the last decade have positioned us well,” Pichai told analysts in a post-earnings call. “In March, we introduced our experimental conversational AI service called Bard. We have since added our PaLM model to make it even more powerful and Bard can now help people with programming and software development tasks, including code generation, and lots more to come.”
He added, “Last week, I announced that we are bringing the Brain Team in Google Research and DeepMind into one unit. Combining all this talent into one focused team, backed by the pooled computational resources of Google, will help accelerate our progress and develop the most capable AI systems safely and responsibly.”
Cost-cutting and layoffs
A cut in online marketing budgets along with recession fears, caused several big tech firms like Google and Meta to fire employees.
In January, Google parent Alphabet announced plans to lay off about 12,000 jobs or 6% of its global workforce. In an email to employees, Pichai said he took “full responsibility for the decisions that led us here.”
Pichai also said the company had undertaken a “rigorous review across product areas and functions” to ensure that people and roles are aligned with the company’s highest priorities.
Consequently, the firm recorded employee severance and related charges of $2 billion in the quarter under review.
The company said the results reflect $2.6 billion in charges related to reductions in its workforce and office space. It also factors in a $988 million reduction in depreciation expense from the change in estimated useful life of their servers and certain network equipment and a shift in the timing of their annual employee stock-based compensation awards which resulting in 'relatively less' stock-based compensation expense recognized in the first quarter compared to the remaining quarters of the year.
