Alphabet’s profits plummet 34% as ads slow

Alphabet, Google’s parent company, has settled into a period of stalled growth as economic uncertainty ripples through Silicon Valley. The days of the pandemic boom are over, when the internet giant’s profits and number of employees soared.

On Thursday, the company posted its fourth consecutive decline in profits as it grapples with a slowdown in digital advertising. Net income fell 34% to $13.6 billion, below Wall Street expectations of $15.3 billion, according to data compiled by FactSet.

The internet giant also generated $76 billion in sales in the final three months of 2022, down 1% from a year earlier and in line with analyst estimates.

Google has seen years of meteoric growth as consumers spent more time and money online during the coronavirus pandemic, lifting the advertising market on which the company depends. These advantages began to fade last year, when rising interest rates and inflation prompted advertisers to limit their spending.

“We are on an important journey to rethink our cost structure in a sustainable way and to build financially sustainable, dynamic and growing businesses across Alphabet,” Sundar Pichai, the company’s chief executive, said in a statement.

On an earnings call, Pichai said the company was undertaking various efforts to rein in spending, including improving the financial performance of its Pixel line of phones and other gadgets, trying to make its loss-making cloud division profitable and increasing activity at its YouTube video platform.

Alphabet shares fell 3% in after-hours trading.

One of its most notable recent moves to cut costs has focused on its workforce. After hiring 30,000 employees in the first nine months of last year, Alphabet said last month it would cut 12,000 workers, or 6% of employees. The company said Thursday it expects to incur $1.9 billion to $2.3 billion in severance and related charges, most of which would be accrued in the current quarter.

Alphabet also plans to spend $500 million to remove unnecessary real estate this quarter, as part of the expense-cutting effort. It said it would also better manage supplier spend and deploy more artificial intelligence to automate certain tasks and increase productivity.

Alphabet said it now has 190,234 employees, up from 186,779 in October. Workers in the United States who have been affected by the company’s layoffs will remain officially employed until March, and the departure process could take longer for workers based in other countries.

The ad pull coincided with other undesirable developments for Alphabet. ChatGPT, an artificial intelligence chatbot built by OpenAI, debuted to much fanfare in November, hinting that it could disrupt Google’s search engine dominance. Mr Pichai declared a “code red” in response, reassigning teams to prioritize AI projects.

Mr Pichai said that in the coming months, Google will allow users to access a version of its search engine that incorporates chatbot functionality, which was reported earlier by The New York Times. He said the company would also integrate more AI into apps such as Gmail and Docs, and its cloud unit would sell the underlying technology to other companies.

Revenue from Google’s search engine, its biggest business, fell more than 1% to $42.6 billion in the fourth quarter, below analysts’ estimates of $43.3 billion.

Google recently had to defend itself against the government. Last month, the Justice Department sued the company for the second time in three years, most recently claiming that Google had abused its monopoly position in ad technology. The Department of Justice wants to force Google to divest part of its suite of ad technology products, which includes software to buy and sell ads, a marketplace to transact and a service to present ads on the Internet.

This division generated $8.5 billion in the last quarter, down 9% from a year earlier. Analysts had forecast sales of $8.8 billion.

YouTube ad sales fell nearly 8% to $7.96 billion, below the $8.2 billion expected by analysts. In October, the company reported a drop in sales on YouTube, signaling that it was more vulnerable to fluctuations in digital advertising than Google.

Sales of Google Cloud, the division that offers software and technology services to other companies, rose 32% to $7.3 billion. Analysts had estimated $7.4 billion. Google invested billions over the years to help the unit grow, but it continued to lose money. It posted a loss of $480 million in the fourth quarter.