Alphabet weathers first quarter after the novel coronavirus, but the worst is yet to come

Alphabet

Google is preparing for an even harder hit over the next three month

Google parent company Alphabet managed to weather the storm caused by COVID-19 in its first quarterly earnings that take into account the society-altering shifts of the global pandemic.

But this past quarter included barely two months of time since many countries instituted shelter-in-place orders that have all but eliminated global travel and other industries that spend big on web advertising. That means the worst is yet to come for Alphabet’s business, and CEO Sundar Pichai and finance chief Ruth Porat appear to be trying to prepare the company accordingly.

“Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues. We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities,” Porat said in a statement on Tuesday. Later on its earnings call, Porat revealed that for the first two months of the quarter, Google revenues were on pact to beat expectations but fell sharply by March, when the pandemic started accelerating worldwide. Porat added that use of Google products has risen, but interest has shifted away from commercial topics, like travel and new products, and toward COVID-related content.

In the first fiscal quarter of 2020, Alphabet earned $6.8 billion in profit on sales of $41.2 billion. While revenue is up 13 percent, net income increased only 1.5 percent. That indicates that a combination of Alphabet’s high spending and costs — including a sizable jump in its traffic acquisition costs — and the downturn in the global web advertising market has already cut into its profits. Analysts expect this to continue, and for the damage to Google’s ad business to intensify, over the next three months

“We anticipate that the second quarter will be a difficult one for our advertising business,” Porat confirmed on the earnings call.

Google Cloud and YouTube revenues, which Alphabet began disclosing for the first time back in February after the US Securities and Exchange Commission demanded more transparency, were both bright spots for the company. YouTube revenue jumped 33 percent to $4 billion for the quarter, while Google’s cloud computing division saw a jump of more than 55 percent to $2.8 billion.

A growing part of Google Cloud is G Suite, the productivity suite Google sells to businesses that competes with Microsoft’s Office 365. It includes Google Meet, a newly rebranded Zoom competitor that Pichai told listeners on an earnings call Tuesday afternoon was growing at a pace of 3 million new users a day, up from 2 million a day late last month. Under Google’s “other revenues” section, which includes YouTube subscription revenues for its music and pay-TV services and Pixel and other hardware sales, the company saw a 22 percent jump to $4.4 billion.

Alphabet faces some significant challenges ahead. The company continued hiring this past quarter, adding nearly 5,000 new employees. It also saw traffic acquisition costs, referred to as TAC and composed in part of the money Google pays to partners to make its search engine the default option in competing mobile and web browsers, rise more than 15 percent.

In addition to that, Alphabet’s Other Bets category — which includes its experimental X lab, Waymo self-driving subsidiary, and a number of other peripheral divisions like its Verily life sciences unit — continues to hemorrhage cash, costing the company $1.1 billion this past quarter. Stock-based compensation, which Google uses to partially pay many of its engineers and other high-earning employees’ salaries, rose 14 percent to $3.2 billion.

But Alphabet is already adjusting how much money it spends. The company has already publicly announced a slowdown on hiring for 2020, and CNBC reported last week that Google is drastically cutting its marketing spend and planning potential hiring freezes.

Earlier this month, Google made a significant change to the Google Shopping section of its search engine by making it free for any small business to list product inventory on the platform. Google hopes it might open the platform up to many more small businesses, especially those hit hard by COVID-19, and allow them to sell products online, some for the first time. That could, in theory, translate to more ad spend, as Google Shopping still allows businesses and advertising to pay for higher placement in search results.

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