Alphabet Inc - Earnings Review Q3’22

Our financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud. Ruth Porat, CFO

Revenue by segment

Source: StockOpine analysis, Alphabet 10Q filings

Total revenue of $69.1B, up 6% year-over-year (11% on constant currency basis). The growth in revenue was driven by Google Cloud and Google Search. The negative impact of foreign exchange is expected to continue in Q4’2022.

Google Search and other up 4%. The main factors causing the deceleration of revenue growth rates compared to Q3’2021 was the outsized growth seen last year and the pullback in advertiser spend noticed in some categories like financial services (crypto, insurance, mortgage, etc.).

YouTube and Network down 2% due to the pullback seen in advertising spend. The Company continues to invest and sees a great opportunity in connected TV.

On average, global viewers are watching 700 million-plus hours of YouTube content on TV daily. Phillipp Schindler

YouTube shorts engagement remains strong with 1.5 billion users every month and 30 billion daily views (same number disclosed in Q2’2022).

Google other revenues up 2% due to subscriber growth in YouTube, growth in hardware revenues primarily from Pixel sales, offset by a decline in revenues of Google Play due to lower buyer spend and the changes in fee structure announced in 2021.

Google cloud momentum continues with revenues up 38%. Google cloud operating loss of -$699M compared to -$644M in prior year and -$858M in Q2’2022. Google continues to invest heavily in Google Cloud. Google Workspace is now used by more than 8 million businesses and organizations worldwide.

Source: Stratosphere.io

Profitability

Operating expenses (including cost of revenue) grew more than revenue, i.e. 18%, due to headcount growth of 24%, increased cost associated with data centres and an increase in marketing activities.

Operating income was $17.1B, down 18.5% and operating margin was 25% compared to 32% in Q3’2021.

Our Q4 headcount additions will be significantly lower than Q3. And as we plan for 2023, we’ll continue to make important trade-offs where needed and are focused on moderating operating expense growth. Sundar Pichai, CEO

Cash flow and share repurchases

Free cash flow for the quarter was $16.1B (23% FCF margin), down 14% compared to prior year.  Cash & cash equivalents, and marketable securities amount to $116B as of 30 September 2022, whereas debt totaled $15B.

During the quarter the Company repurchased $15.4B worth of ordinary shares. This compares to $15.2B repurchased in Q2’2022 and $12.6B repurchased in Q3’2021. As of 30 September 2022, $43.5B worth of stock remains available for share repurchases.

Concluding Remarks

Google cloud is growing strong while the uncertain economic conditions affect advertiser spend impacting YouTube, Google Search and Network revenues. Although it is possible that advertiser spend will further decelerate in 2023, we remain confident in Alphabet over the long term as it owns two of the most used platforms in the world (Search and YouTube) which can be of the main beneficiaries once the economic conditions improve. In addition, we believe that there is room for profitability improvement as Google Cloud approaches profitability and management becomes more cost cautious in 2023.

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