Alphabet earnings: A rocky road ahead
The big number: With the pandemic shutting down industries around the world, the writing has been on the wall that Google was likely going to take a hit in its advertising revenue — far and away its biggest business — as far fewer people are advertising right now. Even still, Alphabet managed to beat revenue expectations by nearly $1 billion. Google's advertising revenue was up over 10% to $33.7 billion over the $30.6 billion it posted in the same period last year. Alphabet's CFO Ruth Porat suggested on the call with analysts that much of the advertising revenue for the quarter came before the West went into lockdown near the end of March, when attentions turned to "less commercial" interests — presumably all of us Googling COVID-19 symptoms.
People are talking: "Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues," Porat said in a statement. "We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities."
Opportunities: Alphabet isn't entirely about advertising. There have been a few other promising, if relatively small, areas of growth in recent quarters, including Google's hardware division and its cloud services businesses. It started breaking out its Google Cloud revenue at the end of 2019, and it posted $2.78 billion in revenue for the quarter, a massive 52% jump over the $1.825 billion it posted in the quarter a year earlier. As more companies consider the value of flexible, cloud-based architectures, it's likely this business will continue to contribute to Alphabet's bottom line. CEO Sundar Pichai said the company would be "recalibrating" its investment focus in data centers given the pandemic.
Google's whole "other revenues" line, which includes sales of Pixel phones, Nest smart devices and other hardware products, as well as cloud, also jumped over last year, contributing $4.44 billion — though if you take out the revenue from cloud services, the segment actually shrunk by about 8%. It seems like fewer people want new phones or smart-home products when they're stuck at home, and Pichai said that fewer devices had been activated in the quarter.
Threats: Google is likely going to be seen as the canary in the coal mine for the advertising industry during the pandemic; its main competitor, Facebook, reports Wednesday. For now, it seems that Google managed to weather the start of the pandemic with revenue that came in before things really went south. The company recently cut its own marketing budgets, with Pichai hinting at hiring freezes on the call as well. Advertising revenue is Alphabet's cash cow — what will it do if no one wants to buy ads?
"There's still a great deal of uncertainty about the path to recovery," Pichai said on the company's call with investors. "Q1 was clearly the tale of two quarters."The power struggle: Beyond the softness in the advertising industry, Alphabet has another millstone around its neck: everything other than Google. All of its other companies — which it groups together in its earnings as "Other Bets," and includes things like Waymo, Loon, Verily, X and Wing — may one day produce technology that'll revolutionize the world like Google has, but for now, are primarily a massive cash pit for Alphabet. Other Bets generated $135 million in revenue for the quarter (a 20% drop over a year ago), at a loss of $1.12 billion for the quarter. That's about 30% more than it lost in the same quarter a year ago. If Google is facing lean times ahead in its advertising business, how much money is Alphabet going to continue to want to throw into its Other Bets?
Mike Murphy ( @mcwm) is the director of special projects at Protocol, focusing on the industries being rapidly upended by technology and the companies disrupting incumbents. Previously, Mike was the technology editor at Quartz, where he frequently wrote on robotics, artificial intelligence, and consumer electronics.