Google’s multibillion-dollar ad machine is slowing as the coronavirus pandemic continues to take a financial toll. And the worst is yet to come.
Alphabet, Google’s parent, reported $41.2 billion in revenue, up 13% from the same quarter last year and beating analysts’ expectations of $40.3 billion. While the news is better than expected, revenue is still slowing compared to the same quarter last year when it increased 17%.
Profits increased 3% year over year.
But a bigger hit to Alphabet’s business is expected to come in the current quarter, when the effects of the coronavirus is expected to be much more apparent. Alphabet’s chief financial officer, Ruth Porat, said the company’s ads business was growing in January and February, but following the government shutdowns in March, ads sales experienced an “abrupt drop.”
“The second quarter will be a difficult one for our ad business.” Porat said without elaborating.
The company said the big indicators of a move to normalcy will be how quickly people return to spending money, in general, which correlates with companies buying more ads. Porat also said there are “very early signs of recovery in commercial search behavior,” but she was unable to say what that impact may be. She also said it was “premature” to comment about how long any recovery would take.
Alphabet’s stock rose nearly 8% following the earnings announcement, to $1,232.59 per share.
“They beat the low end of expectations and also performed better than feared from an investor standpoint,” said Jason Helfstein, an analyst at investment banking firm Oppenheimer.
Alphabet’s slowdown comes as advertisers, particularly airlines and hotels, slash their marketing budgets as the coronavirus cuts into their businesses. The tech giant is the top revenue generating company for digital ads, taking nearly 32% in market share in 2019. But the virus has quickly put a halt on digital ad spending, which is directly impacting advertising bellwethers like Alphabet.
Last week, CEO Sundar Pichai sent a note to employees saying that Google would slow hiring for the rest of the year. During the earnings call, Pichai said he would continue to hire in “strategic areas.” Google has already hired more than 4,000 people since the fourth quarter, ending the first quarter with 123,000 employees.
Alphabet also mentioned that it planned to slow some investments including in data centers and office space, which investors will applaud, said Dave Heger, an analyst at Edward Jones.
Michael Levine, an analyst at investment research firm Pivotal Research Group, agrees.
“It just feels like they’re’ looking at stuff with a different degree of discipline than the prior regime,” he said. “The cost discipline is very encouraging.”
Alphabet also reported increases in revenue in its cloud data center division and YouTube ads, though it’s difficult to compare whether that business has slowed or grown compared to previous years. The company only began disclosing YouTube results in the fourth quarter of last year. In the first quarter, YouTube ads generated $4 billion in revenue, up 33% from the fourth quarter. Meanwhile, cloud division sales soared 52% from the previous quarter, raking in $2.8 billion in revenue.
Alphabet also saw increased use of several of its products. Those include search, which many people have turned to for coronavirus-related information; YouTube, which is attracting millions of views for live streams; and Google Classroom, a web service for educators that has doubled in use since the beginning of March. Google is also seeing a rise in sales of its Chromebooks laptops and the use of its video conferencing service Meet, which is now adding nearly 3 million new users daily.
“We’re taking a long view and continuing to invest in long-term priorities but are being thoughtful in the short-term,” Pichai said.
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