Alphabet reported a net income increase from $13.91 billion to $19.69 billion — an increase of 41.5% — or diluted earnings of $1.55 per share for its third quarter of 2023 on Tuesday, beating Wall Street expectations. Revenue grew to $76.6 billion, a 11% year-over-year increase.
Analysts surveyed by Zacks Investment Research were expecting the Google and YouTube parent company to report earnings of $1.45 per share and revenue of $63.13 billion.
Ad revenue at YouTube grew from $7.07 billion to $7.95 billion. Meanwhile, the Google search and “other” segment reported $44.03 billion in revenue. The earnings report also notes that Alphabet took a $2.1 billion charge for severance costs for first nine months of 2023.
On the same day the company released its third quarter earnings, Alphabet shares dropped 5% after hours.
Alphabet’s focus on AI and increase in R&D
During Alphabet’s third quarter earnings call, CEO of Alphabet and Google Sundar Pichai emphasized the company’s continued focus on artificial intelligence. Google’s AI play has already been incorporated into search. Additionally, personal assistant offering, Google’s Assistant with Bard, will be available for Android and iOS in the coming months, and the company is also developing AI solutions for developers, businesses and other organizations. From the second to third quarters, the number of active generative AI projects the company is working on grew by seven times.
This quarter also saw a 6% increase in operating expenses, bringing the total up to $22.1 million. This rise reflected an increase in research and development spending as a result of increased compensation. Operating expenses also saw an increase in general and administrative expenses due to charges related to legal matters as well as sales and marketing expenses. The expenses for the latter were somewhat flat last year.
YouTube’s NFL Sunday Ticket and YouTube Shorts
Pichai also praised YouTube’s NFL Sunday Ticket and noted that it was “receiving excellent reviews” and “positive feedback.” A full quarter of NFL Sunday Ticket revenues as well as associated content acquisition costs will appear in the company’s fourth quarter. As it stands, the third quarter of this fiscal year only reflects a few weeks of this added YouTube option.
YouTube’s non-advertising revenue, which is labelled as “other revenues,” was largely driven by subscriber growth thanks to YouTube TV and YouTube Music. Altogether, it was $8.3 billion, reflecting a 21% growth. The premium options brought in $12.6 billion, up 7%. Google Services’ operating income was $23.9 billion, up 27%.
Similarly, YouTube Shorts has also seen growth. The TikTok and Reels competitor now averages over 70 billion daily views and are watched by over 2 billion signed in users every month.
Overall, fiscal year 2023 has been stronger than 2022. During each quarter last fiscal year, Alphabet missed Wall Street predictions for both revenue and EPS. That was largely due to a drop in online spending paired with decreased ad revenue from YouTube. Save for a period early in the COVID-19 pandemic when most companies were suffering, the third quarter of 2022 marked the weakest growth period for the company since 2013.
That was followed by the mass layoffs in last fiscal year’s fourth quarter. In January of 2023, Alphabet let go of 12,000 employees, citing “different economic reality” as the reason for termination. The company later announced that during its Q4 earnings call it added 3,455 people throughout the period.
This year has been a notably better financial year for the tech giant. In both Q1 and Q2, Alphabet beat its revenue and earnings predictions, crediting its growing revenue to rises in search and YouTube ads. In fact, its second quarter revenue grew 7% from $69.7 billion to $74.6 billion.
This isn’t to say this year has been without challenges. Last Thursday CNBC reported that 40 to 45 employees in Google News lost their jobs. Those layoffs took place as technology and media companies have become more scrutinized due to the coverage of the ongoing Israel-Hamas war.
Alphabet also has its competitors to consider. Google may have search largely cornered, and, according to Nielsen, YouTube may be the most-watched streamer, but the online advertising space is still a crowded one.
There’s also the matter of AI. As artificial intelligence reigns as one of the buzziest divisions in tech, Alphabet’s own AI play — Google AI — has to compete with big names in the space such as Amazon, Anthropic, Inflection, Meta, Microsoft and OpenAI.
Then there’s the ongoing Google lawsuit. The company is currently facing a major antitrust trial that accuses Google of making restrictive deals with smartphone makers and other tech companies to push out rivals in the search space. The case was brought by the Justice Department way back in 2020. Last Tuesday, the New York Times asked the court to open proceedings, which have so far taken place behind closed doors, to the public.
More to come…
