Google parent Alphabet’s Q3 earnings surpass estimates; shares dip amidst slowing cloud growth

Googleparent Alphabetsurpassed expectations in its Q3 financial results for the quarter ended September 30, 2023, reporting stronger-than-expected performance both in terms of revenue and profit. Despite this, its shares declined as Google cloud revenue growth further slowed.

The company’s net profit in the quarter rose to $19.7 billion (or $1.55 per share) from $13.9 billion ($1.06 per share) in the year-ago period. Its third-quarter revenue surged by 11% to $76.7 billion from $69.1 billion in the same period of the previous fiscal year, driven by improved advertising revenue.

“I’m pleased with our financial results and our product momentum this quarter, with AI-driven innovations across Search, YouTube, Cloud, our Pixel devices and more,” Sundar Pichai, Chief Executive Officer of Alphabet and Google, said in a statement.

Google Cloud Platform, the company’s cloud-computing unit, competes with Microsoft Azure and Amazon Web Services. It witnessed a revenue growth of 22.5% compared with 28% in the previous quarter.

“GCP revenue growth remained strong across geographies, industries and products, although the Q3 year-on-year growth rate reflects the impact of customer optimization efforts,” Ruth Porat, Chief Financial Officer of Alphabet and Google, said during the third-quarter earnings call.

Since Q4 2022, there has been a decline in Google Cloud revenue growth. In the third quarter, revenue from cloud increased to $8.4 billion from $6.7 billion in the previous year. The cloud computing division registered a profit of $266 million, up from the $440 million loss in the previous year.

The majority of Alphabet’s revenue is derived from Google ads. Google’s advertising revenue, including Google Search, YouTube ads, and Google Network, was $59.6 billion in the third quarter, an increase from $54.5 billion in the same period last year. Its advertising revenue experienced a growth of 9.5% during the quarter.

Revenue from Google’s search, its largest business, rose 11.3% to $44 billion in Q3 “led again by growth in retail”. Meanwhile, YouTube’s ad sales in Q3 increased by 12.5% to $7.9 billion “driven by both brand advertising and direct response”.

“I'm really pleased with the growth and engagement on YouTube Shorts. We continue to work on closing the monetisation gap here,” Pichai said, adding that Shorts now average over 70 billion daily views and are watched by over 2 billion signed-in users every month.

Earlier, Pichai had mentioned the opportunities that artificial intelligence (AI) enables for consumers, its partners, and its business. During the third-quarter earnings call, he noted that the tech firm plans to improve its work with the Search Generative Experience—its experiment to bring Generative AI capabilities into Search.

“With Generative AI applied to Search, we can serve a wider range of information needs and answer new types of questions, including those that benefit from multiple perspectives,” Pichai remarked.

He said that ads will continue to play an important role in this new Search experience and the company will “experiment with new formats native to SGE that use Generative AI to create relevant high-quality ads customised to every step of the Search journey.”

Porat highlighted that the reported capital expenditure in Q3 amounted to $8 billion, primarily directed towards enhancing its technical infrastructure. The largest portion of this expenditure was allocated to servers, followed by data centres, indicating an expansion in investments in AI computing.

“We continue to invest meaningfully in the technical infrastructure needed to support the opportunities we see in AI across Alphabet and expect elevated levels of investment, increasing in the fourth quarter of 2023 and continuing to grow in 2024,” Porat added.

When discussing expenses in Q3 during the call, Porat stated that operating expenses were $22.1 billion, representing a 6% increase. This rise was primarily due to higher R&D expenses, stemming from compensation, and a surge in G&A expenses, which were impacted by charges related to legal matters.

As of September 30, 2023, Alphabet’s employee count was 182,381 down from 186,779 in 2022. Substantially all of the employees affected by the reduction of our workforce were no longer included in its headcount, the company said.

Regarding headcount, Porat noted, “We are maintaining a slower pace of headcount growth, reflecting product prioritisation and reallocation of talent to support our most important growth opportunities.”

Alphabet trimmed its workforce by more than 12,000 employees earlier this year as part of its strategy to reduce staff in response to a broader economic downturn. Just last month, the company also downsized its global recruiting team by hundreds of employees.

“We remain focused on durably reengineering our cost base to create investment capacity to support our growth priorities, most important of which is with AI,” Porat said.