Google-parent Alphabet reported a steep decline in profit and nearly flat revenue growth for the final three months of last year, as the company confronted increased competition in the digital ad market and a pullback in advertiser spending due to economic uncertainty.
Alphabet posted $13.6 billion in profits for the final three months of 2022, a decline of about a third compared to the year prior and below what Wall Street analysts had expected.
Revenue from the quarter came in at just over $76 billion, nearly in line with analysts’ expectations but a sharp slowdown in growth from the same period in the prior year, when sales grew 32%.
Shares of Alphabet dropped around 4% in after-hours trading Thursday immediately following the report.
The report comes after Google last month said it would lay off 12,000 employees in an effort to refocus on the company’s core business.
“We have significant work underway to improve all aspects of our cost structure, in support of our investments in our highest growth priorities to deliver long-term, profitable growth,” CFO Ruth Porat said in a statement alongside the earnings report.
Sales from Google’s core advertising business declined 3.5% year-over-year during the key December quarter, in another sign of a toughening digital ad market. But revenue from the company’s cloud business — an increasingly important source of revenue — grew 32% from the prior year to $7.3 billion.
“The search giant underperformed our expectations across almost all business units, most importantly its core ad search segment,” Investing.com Senior Analyst Jesse Cohen said in an investor note following the report.
On a call with analysts following the report, Alphabet executives emphasized the company’s plan to “reengineer its cost structure” and to prioritize “efficiency” and growth in its core growth areas. In addition to the January layoffs, the company plans to reduce its real estate footprint in the first quarter and “meaningfully slowing pace of hiring in 2023,” Porat said.
Google did not provide specific guidance for the first three months of 2023, although Porat offered some insight as to what the company is expecting.
In its advertising business, she said that the company is using artificial intelligence to improve its offerings, including return-on-investment and ad targeting, as well as improving monetization of YouTube Shorts videos. For Google Play, Porat said the company “remains optimistic about longer term prospects for mobile apps and gaming” but is cautious about “current trends.”
The outlook for hardware and Google Cloud appears somewhat sunnier. Porat said the company continues to invest in those areas for future growth.