Alphabet misses on earnings as YouTube shrinks; company will cut headcount growth by half in Q4

Alphabet shares dropped about 7% in extended trading on Tuesday after the company reported weaker-than-expected earnings and revenue for the third quarter and said it would significantly decrease headcount growth.

• Earnings per share (EPS): $1.06 vs. $1.25 expected, according to Refinitiv estimates.
• Revenue: $69.09 billion vs. $70.58 billion expected, according to Refinitiv estimates.
• YouTube advertising revenue: $7.07 billion vs $7.42 billion expected, according to StreetAccount estimates.
• Google Cloud revenue: $6.9 billion vs $6.69 billion expected, according to StreetAccount estimates
• Traffic acquisition costs (TAC): $11.83 vs $12.38 expected, according to StreetAccount estimates

Revenue growth slowed to 6% from 41% a year earlier as the company contends with a continued downdraft in online ad spending. Other than one period early in the pandemic, it’s the weakest period for growth since 2013.

YouTube ad revenue slid about 2% to $7.07 billion from $7.21 billion a year ago. Analysts were expecting an increase of about 3%. Alphabet reported overall advertising revenue of $54.48 billion during the quarter, up slightly from the prior year.

Philipp Schindler, chief business officer for Google, said the company saw a pullback in spend on search ads from certain areas such as insurance, loans, mortgage and cryptocurrencies.

The report marks an ominous start to Big Tech earnings week for investors focused on the digital ad market. Last week, Snap issued disappointing results and said it was unable to provide a forecast given the volatility in spending and concerns about the economy. Snap plummeted 28% on Friday following the numbers. Meta is scheduled to report results on Wednesday, and analysts are expecting a second straight quarter of declining revenue.

Alphabet’s stock fell below $97 after hours. Its lowest close for the year was $95.65 on Sept. 30. Prior to the after-hours drop, Alphabet shares are down 28% over the past year, slightly underperforming the Nasdaq.

Meta shares fell 4% in extended trading on Tuesday after rallying 6% during the day.

Alphabet’s top executives referenced the challenges the company faces at the top of Tuesday’s earnings release. CEO Sundar Pichai said in the statement that the company is “sharpening our focus on a clear set of product and business priorities,” while Ruth Porat, the finance chief, said “we’re working to realign resources to fuel our highest growth priorities.”

During the quarter, Google Cloud brought in $6.9 billion — more than analysts expected. That’s a notable increase from $5 billion the year prior. Losses in Google Cloud widened to $699 million from $644 million the year prior.

Pichai enacted some cost-cutting measures across the company, citing economic challenges, including a potential recession, soaring inflation, rising interest rates and tempered ad spending. In September, Pichai said he wanted to make the company 20% more efficient, which could include slashing jobs and product cuts.

Google also canceled the next generation of its Pixelbook laptop and cut funding to its Area 120 in-house incubator. And last month, Google said it would be shuttering its digital gaming service Stadia.

The company said it has a total full-time worker headcount of 186,779 — up from 150,028 last year. Pichai said on Tuesday’s call that the fourth-quarter headcount additions will be “significantly lower” than the third quarter as the company becomes “focused on moderating operating expense growth.”

“Our actions to slow the pace of hiring will become more apparent in 2023,” Pichai said, reiterating comments from the second-quarter call. “Talent is the most precious resource,” he said.

Porat said that in the fourth quarter, “headcount additions will slow to less than half the number added in Q3.”

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