[Asia Economy Reporters Jeong Hyunjin and Park Byeonghee] Alphabet, Google's parent company, and Microsoft (MS) both announced earnings on the 25th (local time) that fell short of market expectations, causing their stock prices to plunge sharply. Concerns are growing that big tech companies will also face a harsh winter due to the economic recession. With Meta, Facebook's parent company, set to report earnings on the 26th and Apple and Amazon on the 27th, Bloomberg News described this as a "Bad Omen."
◆ Alphabet's 3Q 'Earnings Miss'... Smallest Growth Since 2013
According to CNBC and others, Alphabet announced that its third-quarter revenue this year was $69.09 billion (approximately 99.006 trillion KRW), a 6% increase compared to the same period last year. The market had expected Alphabet's third-quarter revenue to be $70.58 billion. Earnings per share also fell short of market expectations, coming in at $1.06 versus the anticipated $1.25.
CNBC reported that the revenue growth rate was 41% just a year ago but sharply declined in this year's third quarter, marking the smallest growth since 2013, excluding the early pandemic period. During the early COVID-19 outbreak in Q2 2020, Alphabet recorded a -2% revenue growth rate.
The shortfall in Alphabet's third-quarter earnings compared to market expectations was largely due to a hit in advertising revenue. As concerns about recession and soaring inflation, especially in the U.S., continued this year, companies have been cutting advertising and marketing expenses. Consequently, the advertising market's growth has slowed, making it difficult for big tech companies, including Google, to secure advertisers.
In particular, YouTube's advertising revenue for the third quarter was $7.07 billion, a 2% decrease compared to the same period last year. The market had expected YouTube's ad revenue to increase by 3% year-over-year to $7.42 billion, but instead, revenue declined compared to a year ago. CNBC noted that this is the first time since Google began disclosing YouTube's ad revenue in 2019 that year-over-year revenue has decreased.
The Wall Street Journal (WSJ) analyzed that YouTube relies more heavily on brand advertising compared to Google's other businesses, making it more vulnerable to corporate ad budget cuts. Bloomberg News added that YouTube is fiercely competing with the Chinese social network TikTok and has launched the short video service "Shorts," but the market still sees a need for improvements.
Alphabet's total advertising revenue, including YouTube, increased slightly by 2.5% year-over-year to $54.48 billion, driven by modest growth in Google search ads. Google explained that there was a decline in search ad spending in certain specific sectors such as insurance, loans, and cryptocurrencies.
Evelyn Mitchell, an analyst at Insider Intelligence, told Bloomberg, "Google's stumble is a bad omen for the overall digital advertising market," adding, "Google needs to revive YouTube's growth to move forward in this difficult situation. Relying entirely on the search segment is not desirable."
The slowdown in advertising market growth has been ongoing since the first half of this year. Recently, social networking service (SNS) Snap disclosed that its third-quarter revenue was $1.13 billion, a 6% increase year-over-year, but its net loss expanded by 400% to $360 million. This single-digit revenue growth rate was the first since its 2017 IPO. The deterioration in performance is attributed to difficulties in targeted advertising due to Apple's privacy policies.
Meta, another big tech company heavily dependent on advertising, is scheduled to announce earnings on the 26th. Meta recorded its first-ever revenue decline in Q2 due to reduced advertising revenue. With growing shareholder pressure to cut investments related to the metaverse, chosen as a future growth engine, a further decline in advertising revenue in Q3 could inevitably cause significant damage.
◆ Google CEO: "Focusing on Controlling Operating Cost Increases"
Google's cloud division, excluding advertising, posted $6.9 billion in revenue in Q3, exceeding market expectations of $6.69 billion. This represents a 37.6% increase compared to Q3 last year. However, Google Cloud recorded an operating loss again this year, with the loss widening from $644 million in Q3 last year to $699 million in Q3 this year.
Sundar Pichai, Alphabet's CEO, has repeatedly announced cost-cutting measures amid concerns about recession, rising inflation, interest rate hikes, and slowing ad spending. On this day, he stated, "The company is focusing on clearly setting priorities for products and businesses." Ruth Porat, Alphabet's CFO, said, "We are reallocating resources to ignite our highest growth priorities."
During the earnings conference call, CEO Pichai said, "We will focus on controlling the increase in operating costs," adding that the number of new hires in Q4 (October to December) will be significantly lower than in Q3. He said, "(The number of new hires in Q4) will be less than half of the number of employees added in Q3," and added, "Our actions to reduce hiring will become more definite next year."
◆ MS Cloud Business Growth Slows... Q4 Outlook Falls Short of Market Expectations
Microsoft, which released earnings on the same day as Google, announced that its fiscal year 2023 Q1 (July to September) revenue increased 11% year-over-year to $50.12 billion. Earnings per share were $2.35. Both revenue and EPS exceeded market expectations of $49.61 billion and $2.30, respectively. However, Bloomberg reported that Microsoft's revenue growth rate was the slowest in the past five years.
Microsoft's core cloud business performance fell short of expectations due to the impact of a strong dollar and other factors. Microsoft said that Azure, its cloud computing service, posted a 35% revenue growth rate, down from 40% in Q2. Wall Street analysts had expected a growth rate around 36%. Total cloud business revenue, including Azure, increased 20% year-over-year to $20.33 billion, slightly below the $20.36 billion analyst consensus compiled by StreetAccount.
Based on this, Microsoft forecasted fiscal year 2023 Q2 (October to December) revenue between $52.35 billion and $53.35 billion, far below the market expectation of $56.05 billion. Dan Morgan, senior manager at Synovus Trust, said, "The tone has definitely changed. A big shift has started in surveys related to software spending. There is a consensus of 'Hey, the economy is slowing, and we need to look at costs.'"
Satya Nadella, Microsoft CEO, emphasized that cyclical trends are affecting the consumer business and said, "We are focusing on supporting customers to do more work at lower costs while investing in long-term growth drivers and managing cost structures."
After Alphabet and Microsoft announced earnings that fell short of market expectations, their stock prices plummeted. Alphabet's stock price dropped nearly 7% in after-hours trading following the earnings release. Alphabet's stock has fallen 28% this year. Microsoft's stock also fell about 7% in after-hours trading compared to the closing price.
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