Even Alphabet, the parent company of Google and one of the internet’s most entrenched businesses, was not immune to the punishing blows of the global economy and a sharp slowdown in the online advertising that is essential to the company’s profits.
Alphabet on Tuesday reported a net profit of $13.9 billion in the third quarter, down 27 percent from a year earlier, while revenue climbed 6 percent to $69.1 billion. The earnings fell short of analysts’ estimates of $16.9 billion in profit on $71 billion in revenue, according to data compiled by FactSet.
Since Alphabet last released financial results in July, the global economy has worsened, with rising inflation and interest rates as well as slowing growth prompting fears that even tech giants like Google’s parent, insulated by their popular products and piles of cash, would feel some financial pain.
Those worries were realized in Tuesday’s results, which signaled that the online ad market was slowing as advertisers slashed budgets. Alphabet executives said on a call with analysts that they had seen less ad spending for insurance, loans, mortgages and crypto, as well as fewer gaming ads. That coincided with a decline in gaming since the height of the pandemic. The strong dollar also crimped the company’s performance in the most recent quarter.
The company’s search ad sales grew 4 percent to $39.5 billion. Analysts had expected revenue of $41 billion. Ruth Porat, the company’s chief financial officer, said that the modest growth was because of difficult comparisons to an unusually strong quarter a year earlier — a trend she said would continue in the fourth quarter.
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Ad sales at YouTube, which is owned by Google, declined 1.9 percent to $7 billion, below analysts’ predictions of $7.4 billion. Facing increasing competition from TikTok, YouTube in September placed ads in its quick-video competitor, Shorts, in an effort to bolster revenue.
“The growth in our advertising revenues was also impacted by lapping last year’s elevated growth levels and the challenging macro climate,” Sundar Pichai, Alphabet’s chief executive, told analysts. He added that the company would be “responsive to the economic environment.”
Ms. Porat said Alphabet would “realign resources to fuel our highest growth priorities.”
Alphabet’s stock declined more than 6 percent in post-market trading.
The underwhelming results from Google’s search engine surprised some analysts, including Nikhil Lai at Forrester, who was “less surprised by the weakness of YouTube” because it is harder to gauge a return on investment on the video platform, making it “vulnerable to being cut by marketers who prioritize short-term savings.”
Amid the economic turbulence, Mr. Pichai has sought to make the company leaner and more productive. Under his “Simplicity Sprint” plan, which he introduced in July, Mr. Pichai has pursued cost cutting and said he would like the company’s groups to be 20 percent more productive.
Google in September shuttered Stadia, an ambitious service that streamed video games online, and cut funding and jobs at its in-house tech incubator, Area 120. It has also canceled unnecessary business travel but has not yet conducted mass layoffs.
Alphabet says it now has 186,779 employees, an increase of more than 12,000 from the figure it reported in July. The company has said it would slow its hiring — a move in line with peers like Meta and Amazon — to be better prepared for economic uncertainty. Ms. Porat said the company would add fewer than half as many employees in the fourth quarter as it did in the third. She added that Alphabet would continue hiring in 2023 for “critical” roles, particularly top engineering and technical talent.
Google’s cloud computing unit generated $6.9 billion in revenue, a 38 percent jump. The unit lost $699 million in the third quarter, compared with $644 million a year earlier.