Alphabet, Frozen Ad Market Leads to 3Q 'Earnings Miss'... Stock Down 7% (Comprehensive)

YouTube Ad Revenue Sees First Year-on-Year Decline Since 2019 Disclosure

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Alphabet, Google's parent company, recorded earnings below market expectations in the third quarter of this year (July to September) as the advertising market froze due to rising inflation and recession concerns. YouTube's revenue declined year-over-year for the first time since it began disclosing its performance in 2019. Following the disappointing earnings announcement, Google's stock price plummeted nearly 7%.

According to CNBC and other outlets on the 25th (local time), Alphabet announced in its earnings report that its third-quarter revenue this year was $69.09 billion (approximately 99.006 trillion KRW), a 6% increase compared to the same period last year. The market had forecasted Alphabet's third-quarter revenue to be $70.58 billion. Earnings per share were $1.06, falling short of the market expectation of $1.25.

CNBC reported that the revenue growth rate, which was 41% just a year ago, significantly decreased in the third quarter of this year, marking the smallest growth since 2013 except for the early pandemic period. In the second quarter of 2020, during the initial phase of the COVID-19 crisis, Alphabet recorded a -2% revenue growth rate.

Alphabet's earnings fell short of market expectations largely due to the impact on advertising revenue. Since the beginning of this year, recession fears and soaring inflation, especially in the U.S., have led companies to cut advertising and marketing expenses. As a result, the growth of the advertising market has slowed, making it difficult for big tech companies including Google to secure advertisers.

In particular, YouTube's advertising revenue in the third quarter was $7.07 billion, a 2% decrease compared to the same period last year. The market had expected YouTube's advertising revenue for the third quarter to increase by 3% year-over-year to $7.42 billion, but revenue actually declined compared to a year ago. CNBC reported that this is the first time since Google began disclosing YouTube's advertising revenue in 2019 that year-over-year revenue has decreased.

[Image source=Reuters Yonhap News]

The Wall Street Journal (WSJ) analyzed that YouTube relies more heavily on brand advertising compared to Google's other businesses, making it more affected by companies cutting advertising budgets. Bloomberg News also reported that YouTube is fiercely competing with the Chinese social media platform TikTok and has launched the short video service 'Shorts,' but the market still sees a need for improvements.

Alphabet's total advertising revenue, including YouTube, increased by 2.5% year-over-year to $54.48 billion, as Google Search ads slightly grew. Google explained that search ad spending decreased in certain specific sectors such as insurance, loans, and cryptocurrency.

Evelyn Mitchell, an analyst at Insider Intelligence, told Bloomberg, "Google stumbling is a bad sign for the overall digital advertising market," adding, "Google needs to restore YouTube's growth to move forward in this difficult situation. Relying entirely on the search segment is not desirable."

Outside of advertising, Google's cloud division recorded $6.9 billion in revenue in the third quarter, exceeding market expectations of $6.69 billion. This represents a 37.6% increase compared to the third quarter of last year. However, like last year, Google Cloud posted an operating loss this year as well, with the loss expanding from $644 million in Q3 last year to $699 million in Q3 this year.

Sundar Pichai, Alphabet's CEO, has already mentioned recession concerns, rising inflation, interest rate hikes, and slowing advertising spending, announcing cost-cutting measures multiple times. On this day, he stated, "The company is focusing on clearly setting priorities for products and businesses." Ruth Porat, Alphabet's CFO, said, "We are reallocating resources to ignite our highest growth priorities."

In the earnings conference call, CEO Pichai said, "We will focus on curbing the increase in operating costs," and that the scale of new hires in the fourth quarter (October to December) will be significantly smaller than in the third quarter. He added, "(The number of new hires in Q4) will be less than half of the number of employees added in Q3," and "Our actions to reduce hiring will become more definite next year."

Following the earnings announcement, Alphabet's stock price fell nearly 7% in after-hours trading. Alphabet's stock has dropped 28% so far this year.

This content was produced with the assistance of AI translation services.