Shares in Google parent company Alphabet were up almost eight per cent in after-hours trading last night after the tech giant reported its first-quarter earnings.
The closely-watched report was the first in a string of major US tech results set to be published this week, and give a key indication of how the coronavirus crisis will impact Silicon Valley.
1. Ad sales steady, but the worst is yet to come
Overall, Alphabet posted revenue of $41.2bn (£33bn) in the first quarter — up 13 per cent year on year and ahead of analysts’ expectations.
The tech giant said use of its search engine and Youtube had risen dramatically over the three-month period as people turned to its services for information and entertainment during the coronavirus lockdown.
Despite this, the firm has suffered a slowdown in search ad revenue as brands slash marketing budgets during the economic downturn.
Alphabet said revenue declined by a mid-teens percentage in late March compared to the same period, while the slowdown did not worsen this month.
While the figures make grim reading for Silicon Valley executives, they came in ahead of expectations, with some analysts fearing an ad sales decline of as much as 20 per cent.
So, the overall outcome was not as bad as expected, sending shares up in pre-market trading.
But that does not mean Google is off the hook. Chief financial officer Ruth Porat warned the second quarter “will be a difficult one” as the crisis continues.
The hit on ad sales is not likely to recover immediately, while higher costs and investment will eat into profit. For the first quarter Alphabet posted net income of $6.8bn, up only marginally on the $6.7bn posted in the same period last year.
“We already knew traditional newspaper and TV advertisers had seen revenues evaporate, and while Google has fared better than many it looks like tough times could be coming for the world’s largest search engine,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
“The slowdown in advertising revenue in March is likely to continue and get worse in the second quarter of the year. And with advertising accounting for 82.4 per cent of core revenues this quarter that’s potentially a real issue.”
2. Turning the focus to small businesses
Alphabet’s advertising business largely moves with the wider economic sentiment, and so during an economic downturn it’s inevitable that revenue will slip.
However, Google will likely turn its attention to small businesses which, unlike their larger rivals, will struggle to maintain advertising spend during the crisis.
This could be a major issue for the search platform, which derives a large proportion of its revenue from small and medium-sized businesses.
Google has already issued ad credits worth $340m to small businesses, which can be used towards future ad spend until the end of the year.
However, analysts believe the company may have to ramp up its measures to retain ad spend.
“Given the importance of small business advertisers to Google and the struggles they are facing, moving forward we may see Google take more aggressive action to keep these advertisers advertising,” said Jim Cridlin, global head of innovation and partnerships at WPP agency Mindshare.
“Small businesses make up a significant chunk of Google’s ad business and these types of businesses, unlike larger more established advertisers, generally don’t have the cash to continue advertising when revenue has dried up; the second quarter could be very ugly for Google.”
3. Bright spots: Google Cloud and Youtube
While search advertising dominates the conversation, it wasn’t all bad news for Alphabet.
The lockdown has prompted a huge surge in demand for Youtube as people use the platform to access home schooling, workouts, cooking tutorials and more.
This translated to a 33.5 per cent rise in revenue for the video service at just over $4bn — slightly faster than in the previous quarter.
However, finance chief Porat warned that the growth rate had slowed to the “high single digits” by late March and continued to decline in April for ads that were not meant to immediately spark a consumer purchase.
Google Cloud also enjoyed a positive quarter, with revenue rising more than 50 per cent to $2.8bn.
This was boosted by the recent launch of Google Meet — a new video calling service to rival Zoom. It is now adding 3m users per day.
Plans to rapidly expand Google’s cloud business will be held back, however, with boss Sundar Pichai announcing that hiring would be scaled back for the rest of the year due to the pandemic.
4. Contact-tracing trials
While the coronavirus crisis has wreaked havoc for most parts of Alphabet’s business, it could provide one opportunity.
As countries begin to ease lockdown measures, contact-tracing apps — which inform users if they have come close to someone infected with Covid-19 — could play a key role.
This presents a huge opportunity for Google’s Android operating system, and the firm has been working with Apple to develop a tracing platform using Bluetooth technologies.
Their plan has met some resistance from the NHS, which is developing its own app, but will likely be used in other countries.
“Thanks to its strength with Android, Alphabet looks set to have a huge role in the tracking and tracing needed through the rest of the year, as countries try to go back to normal after the pandemic,” said Martin Garner, chief operating officer at CCS Insight.
“This will force the company to work closely with governments, although recently it has had more of an adversarial relationship with them. It will be interesting to hear more from the company about how it sees this playing out.”
5. Other Bets
In recent years Alphabet has pumped money into its so-called Other Bets division, which focuses on experimental areas such as cloud computing and artificial intelligence.
The division, which includes self-driving car venture Waymo and life sciences firm Verily, posted revenue of $135m in the first quarter, down from $170m last year.
It is also haemorrhaging money, posting a loss of $1.1bn in the three-month period.
While these figures may be eye-watering in the short term, Google’s experimental ventures may prove key for its long term success — especially as regulation tightens on online advertising.
Moreover, as the coronavirus crisis spurs accelerates the uptake of technology, it could pave the way for increased demand.
“Over the long term this could be the moment the world truly turns digital, and that would bode well for Google’s sprawling portfolio of ‘other bets’ and miscellaneous online services,” said Hargreaves Lansdown analyst Hyett.
However, Hyett said the ventures were risky, while it would take a “sea change” to unseat advertising from its dominant position within the group.