Google’s Pandemic-Spending Bonanza Hits a Wall

Google parent Alphabet’s fourth-quarter profit fell by more than a third as the broader ad market contracted over ongoing recession concerns, the company said Thursday. 

Alphabet reported net income of $13.6 billion, or $1.05 per share, on revenue of $76 billion for the fourth quarter of 2022. Analysts, on average, expected the company to post earnings of $1.19 per share, according to Yahoo Finance. The Google parent company’s profit fell 34% compared to last year’s results.

Alphabet said it’ll take a restructuring charge between $1.9 billion and $2.3 billion in the first quarter of 2023 after January job cuts hitting 12,000 workers.

Google’s massive search business, fueled by ads that appear next to search results, remains core, but it’s only a part of the company’s ad business. Overall, Google’s fourth quarter ad revenue dropped 2% from $69.4 billion in 2021 to $67.8 billion.

No part of Google’s ad business was untouched. Search ads dropped from $43.3 billion to $42.6 billion, YouTube ads dropped from $8.6 billion to $8 billion, and Google-placed ads on other websites dropped from $9.3 billion to $8.4 billion.

The company is clearly concerned about the economic climate. “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,” Chief Financial Officer Ruth Porat said in a statement.

Employee pay is a major factor in expenses. Alphabet employment increased from 156,500 in the fourth quarter of 2021 to 190,234 in 2022.

Although Google has thrived financially for years from search and other ads, it faces new competitive challenges. TikTok has drawn video creators and a big audience that might otherwise have stuck with YouTube, and the ChatGPT AI chatbot has shown there are new ways we can search for information online. In response, Google has elevated Shorts on YouTube, integrated more short-form videos into search results, and reportedly is working on its own ChatGPT-like technology.

Google also faces a hostile Justice Department that’s sued over Google’s dominance in online advertising.

Google itself has been taking increased austerity measures, cutting back on spending and reportedly putting its moonshot projects under more profit scrutiny. The company cut 15% of its workforce from its life sciences arm, Verily, in January. Chief Executive Sundar Pichai also asked employees to help him on his so-called “simplicity sprint” during an all-hands meeting last July. He aimed to crowdsource ideas from staff to help streamline Google’s processes. 

With economic and inflation concerns, Big Tech has cut jobs. In addition to Google’s cuts, Microsoft said it’s laying off 10,000 workers, Amazon cut 18,000 jobs, and Netflix and Facebook-parent Meta went through layoffs last in 2022.

Even with these layoffs, many Big Tech companies are bigger than they were pre-pandemic. Apple seems to be the only Big Tech player that’s avoided layoffs, although CEO Tim Cook did take a 40% pay cut.

Google’s stock fell 3% in after-hours trading to $104.27. Google executed a 20-for-1 stock split last year.

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