Google results avoid disaster, with search ads topping Wall Street targets

In The Spotlight

Samsung's newest Galaxy S smartphones a test of brand power in weak market

IT spending forecast to grow at slower rate this year

Microsoft makes Azure OpenAI Service generally available

PC demand dropped to its ‘lowest level in years’ in 2022

Google parent Alphabet has posted quarterly sales close to Wall Street targets, sending shares up on relief that the world's biggest seller of online advertising had avoided the deep disappointment of rivals including Snap.

Sales from Google's search ad business actually topped expectations, while revenue from YouTube ads, cloud computing and Alphabet's "other bets" unit all came in lower than anticipated, according to data from FactSet and Refinitiv.

"Despite the underwhelming quarter, expectations were so low that investors blew a sigh of relief," said Jesse Cohen, senior analyst at Investing.com.

Alphabet reported second-quarter revenue of US$69.69 billion, 13 per cent higher than the year-ago period, and nearly in line with the average expectation of US$69.88 billion among investment researchers tracked by Refinitiv.

The company also barely missed sales expectations in the first quarter.

It last missed estimates in consecutive quarters in 2015.

Rising wages as well as rising prices of fuel and other items have forced some ad buyers this year to pare marketing, including even ads on internet services such as Google that served as an essential link to consumers during pandemic lockdowns.

Last week, Snap and Twitter posted disappointing quarterly results, heightening concerns about the slowdown in ad spending.

Snap shares plunged 25 per cent following its results.

Big US multinationals including Alphabet also are increasingly bringing in less cash when converting foreign revenue because of the strong American dollar.

Alphabet said the currency affected sales growth by 3.7 per cent, and that sales would have been close to US$72 billion if not for currency swings.

About 55 per cent of the company's sales come from outside the United States.

The currency impact will be even greater in the third quarter, Alphabet chief financial officer Ruth Porat told US media.

Google's ad business accounted for 81 per cent of the quarterly revenue, with search ads generating US$40.69 billion in sales, beating FactSet estimates of US$40.15 billion.

"Google is relatively well positioned to weather the rough waters that lie ahead," Insider Intelligence analyst Evelyn Mitchell said.

In recent years, ad spending cuts have hurt social media companies more than Google.

It brings in revenue through a greater variety of functions in the ad market, and search ads can be easier for customers to generate since they often include just text.

Clients sometimes prioritise search ads given that they can drive better returns because the marketing is typically directed at people actively searching for related items.

Sales from Google Cloud of US$6.3 billion missed analysts' target of US$6.4 billion and YouTube ads also fell short, coming in at US$7.3 billion against estimates of US$7.5 billion, according to FactSet data.

Overall profit was US$16 billion, or US$1.21 per share, compared with the average estimate of US$1.29 per share.

Alphabet's profit tends to be unpredictable due to sporadic gains or losses - at least on paper - in the stakes it holds in many startups.

Investors look more closely at ratios of costs to sales.

With investors accustomed to gross profit margins as high as 60 per cent, Google, like many of its peers, recently began slowing hiring in some units to better manage expenses.

But at the same time, Alphabet is moving forward with expanding its cloud computing footprint, building out new offices and bringing its Google Fiber internet service to new communities.

Other factors are motivating concerns about a potential sales slowdown.

Amid scrutiny from antitrust regulators on five continents, Google is taking a smaller cut from sales of apps developed by outside software makers.

Google suspended sales in Russia due to the war in Ukraine, and YouTube's ad revenue has fluctuated as its options for advertisers grow and wane in popularity.

Still, within the US$602 billion global online ad industry, Google is expected to maintain market share of 29 per cent, or the biggest share for the 12th straight year, according to Insider Intelligence.

Earlier this month, Google lost out on a major new sales partner when Netflix said it had chosen Microsoft's ad technology to help with its first foray into placing ads on its streaming video service.

Alphabet shares have fallen over 27 per cent so far this year, more than the overall S&P 500 index. Alphabet split its stock 20-for-1 on July 15, briefly helping boost shares before the results from Snap and Twitter sent them falling.