Alphabet stock rises more than 7% as ad slowdown turns out to be less than feared

Key Points
  • The company put cost-cutting measures in place during the quarter.
  • Revenue growth slowed, but investors expected much worse.

In this article

Alphabet beats on revenue but misses EPS
Alphabet beats on revenue but misses EPS

Alphabet shares rose as much as 7% in extended trading on Tuesday after the company reported earnings for the first quarter and sounded a cautiously optimistic note that a steep drop-off in ad revenues in March was starting to moderate.

Here's how the company did:

  • Earnings: $9.87 per share, adjusted
  • Revenue: $41.16 billion
  • Cloud revenue: $2.78 billion
  • YouTube advertising revenue: $4.04 billion
  • Traffic acquisition costs: $7.45 billion

Analysts surveyed by Refinitiv had expected $10.33 in adjusted earnings per share on $40.29 billion in revenue. Analysts polled by FactSet had expected $7.51 billion in traffic acquisition costs in the quarter. However, comparing Alphabet's actual results with estimates isn't straightforward given the difficulty of predicting the impact of the coronavirus.

On the conference call with analysts and investors, CEO Sundar Pichai said that usage of search, YouTube, and other apps and services was significantly higher as people looked for information on the coronavirus pandemic. Pichai gave an example of increased engagement, saying coronavirus-related search activity in the US, at its peak, was four times greater than during the peak of the Super Bowl.

But ad revenues suffered even as engagement rose. "In March, we experienced a significant and sudden slowdown in ad revenue" due to the coronavirus pandemic, Pichai said. He said that the company delayed some ad launches as a result. 

During the call, CFO Ruth Porat sounded cautiously optimistic that the worst was behind. "The decline in our Search and other ads revenue was abrupt in March, and although we're seeing some early signs at this point that users are returning to more commercial behavior, it's not clear how durable or monetizable that will be."

YouTube ad revenue grew 33% from last year, Porat said. However, she noted that brand advertising saw a steep drop-off in March, while other forms of YouTube advertising did not.

Google's total advertising revenues rose to $33.76 billion from $30.59 billion the prior year:

Porat declined to give detailed guidance about the second quarter, only saying it will be "a difficult one."

"As we move beyond the crisis, and the global economy normalizes, this should be reflected in our advertising revenues," she added. "But it would be premature to comment on timing given all the variables here."

Travel companies like Expedia Group and Booking Holdings normally spend heavily on Google search ads, since so many travelers search for trips with terms like "flight to London" or "hotel in San Francisco." But Expedia recently said it normally spends $5 billion on ads, but that it probably "won't spend $1 billion" this year. Similarly, Booking could slash Google ad spending on Google from about $4 billion in 2019 to $1 billion to $2 billion this year, Mark Mahaney, an analyst at RBC Capital Markets, predicted.

Facebook shares also rose more than 3% after hours, as investors anticipated a similar ad spending pattern -- that is, not as dire as expected. Facebook, which generates substantially all of its revenue from advertising, reports earnings on Wednesday.

Expenses, buybacks, and other revenue

On the expense side, Porat also said that overall capex would see a "modest decrease" in 2020 as the company reduces global office space and slows the pace at which it buys office building. She also said the company has adjusted its headcount expectations down -- the company had previously expected more than 20% headcount growth this year, but said it would start to decelerate in the fourth quarter.

The company has begun to put some cost-cutting measures in place. Last week, CNBC reported that the company is cutting marketing budgets by as much as half while placing freezes on various parts across the company. It also told employees that it would be pulling back investments on from data centers and educational resources for workers.

Porat also noted that the company's share buybacks would continue as planned, which should help the stock price by boosting earnings per share. 

Google's "other revenue," which includes hardware like its Pixel phones and cloud products, came in at $4.44 billion, compared to $3.62 billion in the same quarter a year ago.

Revenue from "Other Bets," which includes Alphabet's self-driving car business Waymo as well as life sciences company Verily, came in at at $135 million compared to $170 million in the same quarter the year prior. The Other Bets showed an operating loss of $1.12 billion during the quarter.