Alphabet, the parent company of Google, reported its fourth quarter 2023 earnings on Monday, January 30th. The results were mixed – while overall profits beat expectations, advertising revenue fell short of estimates.
Key Numbers
- Revenue: $76.05 billion vs $76.53 billion expected
- Earnings Per Share (EPS): $1.05 vs $0.99 expected
- Advertising Revenue: $59.04 billion vs $60.98 billion expected
- Google Cloud Revenue: $7.32 billion vs $7.43 billion expected
- YouTube Ad Revenue: $7.96 billion vs $8.25 billion expected
- Operating Income: $13.62 billion
- Net Income: $13.62 billion
| Financial Metric | Q4 2023 | Change YoY |
|---|---|---|
| Revenue | $76.05 billion | +10% |
| Net Income | $13.62 billion | -34% |
| EPS | $1.05 | -34% |
While overall revenue and profits beat expectations, advertising revenue – which makes up the bulk of Alphabet’s business – missed forecasts. This rare miss put pressure on the stock, sending shares down over 4% in after-hours trading.
Driving Factors
Alphabet cited a few reasons for the advertising revenue shortfall:
- Difficult year-over-year comparisons – the prior year period saw elevated consumer online activity
- Foreign exchange rate headwinds – the strong dollar negatively impacted international ad revenue
- Challenging economic environment – advertisers pulled back spending amidst inflation and recession fears
CFO Ruth Porat warned that these headwinds are likely to persist into early 2023 as well.
On the positive side, Porat highlighted strength in Google’s cloud business, which grew revenues by 32% to $7.32 billion. YouTube’s advertising and subscription revenues also showed resilience, hitting nearly $8 billion.
Layoffs and AI Spending
Alphabet recently laid off 12,000 employees – its largest ever round of job cuts. Management says this move will enhance productivity and AI focus across the company.
During the earnings call, CEO Sundar Pichai stated that Alphabet is directing savings from the layoffs towards new AI efforts. This includes internal AI applications as well as AI-based products.
“We are directing our very significant investments and compute towards AI across our businesses. I’m excited by the AI-driven leaps we’re about to unveil in Search and CloudPlatforms.” – Sundar Pichai, CEO
The company disclosed that it spent $2.1 billion on restructuring and related charges in Q4, which captures costs from the layoffs. Pichai believes this investment will pay off via greater AI innovation and customer benefits down the road.
Outlook and Guidance
For the first quarter of 2024, Alphabet forecast the following:
- Total revenues of $70-$73 billion vs $78.02 billion expected
- Continued slowdown in advertising spend from consumers and businesses
- Margin compression from rising costs in areas like compute power needed for AI systems
The disappointing Q1 guidance suggests advertising headwinds will extend into early 2024. But Alphabet’s management struck an optimistic tone on profitability improvements later in the year as cost cuts kick in.
Analyst Commentary and Stock Reaction
Here’s what some top analysts had to say about Alphabet’s mixed print:
“It was disappointing to see advertising revenue miss forecasts. But strong performances from Cloud, YouTube, and Search show Alphabet’s ability to drive growth outside of ads.” – Mark Mahaney, Evercore ISI
“Layoffs signal a prudent approach to cost discipline that should boost margins over time. And AI investments position the company incredibly well for the future.” – Brian Nowak, Morgan Stanley
Despite profits beating estimates, Alphabet’s stock sunk over 4% after-hours on the advertising revenue miss. The stock has been under pressure in recent months, falling nearly 30% over the past year.
Many investors hoped advertising would show signs of stabilizing this quarter. But continued weakness, plus the downbeat Q1 guidance, led to an immediate negative reaction.
The Road Ahead
While advertising demand remains in question for early 2024, Google Cloud’s growth trajectory and AI innovation efforts were bright spots this quarter. Over the long-term, Alphabet appears well positioned to benefit from secular tailwinds in digital advertising, e-commerce, and cloud computing.
But the advertising environment faces uncertainty in the coming months. All eyes will be on recovery signs heading into the back half of 2024. In the meantime, trimmed headcounts could support profitability should broader economic sluggishness persist.
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