Rahul Sachitanand
Apr 29, 2020

Ad revenue crumples, but YouTube shines in Q1 for Google's parent company, Alphabet

At-home consumers bolster YouTube, Google Cloud, but CFO warns Q2 will be difficult for the advertising business.

Alphabet CEO Sundar Pichai
Alphabet CEO Sundar Pichai

The first quarter of 2020 was one of contrasts for Alphabet, the holding company for Google and YouTube. While the firm's numbers were dented by sweeping cuts to marketing budgets worldwide due to COVID-19, it also benefited from hundreds of millions of people working and playing from home, with YouTube and Google Cloud's businesses bolstered by this new and unexpected user additions. 

“Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues,” Alphabet CFO Ruth Porat said in the results announcement. “We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities.”

The rise and dramatic decline in Q1 was visible in the results of Alphabet. For Google, $33.8 billion (all figures USD) of its quarterly revenue of $41.16 billion came from advertising and growth was likely to be muted given the battered state of marketing budgets. However, Alphabet's numbers were buoyed by businesses such as Google Cloud and YouTube, which balanced out some of these losses. YouTube ad revenue increased 33.4%, to $4.04 billion from $3.03 billion a year ago, while Google Cloud sales was up 52%, to $2.78 billion from $1.83 billion.

Google, which accounts for the largest share of Alphabet's revenues, has already made changes to cope with the crippling effects of COVID-19. The company is reportedly slashing its marketing budget by half, according to some reports and Sundar Pichai, Alphabet's CEO said on the call that other cuts would also be made. "We are focusing and recalibrating our investments in areas such as data centres and machines and non-business areas such as marketing and travel," he told analysts in a post-results call. 

Overall, Alphabet and Google (which accounts for four-fifths of the holding company's revenue)  posted results and commentary which were reflective of the current business sentiment. Revenue growth was 13% to $41.2 billion in Q1 of 2020 compared to 17% in the corresponding quarter last year. Alphabet's income was $6.8 billion during the quarter.

Away from the minutiae of these numbers, analysts and marketers will be keenly watching how Alphabet and specifically Google fares in Q2 of the year, with many forecasting a flat period, something the company has never posted. Pichai and the other management at Alphabet declined to provide any specific forecasts for the upcoming three months--when marketing budget cuts from its clients will likely start to pinch--and be reflected in results. 

CFO Porat admitted on the post-results call that while the firm was seeing some very early signs of recovery in its advertising business, "it is not clear how durable or monetisable this will be." And, in a sign of looming troubles, she warned the marketing and advertising community of storms ahead. " As of today we anticipate that the second quarter will be difficult for the advertising business ...as the global economy normalises, this should reflect in our advertising revenue, but it will be premature to comment on timing, given all the variables here."

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