Google’s revenue growth during the past quarter decelerated to its slowest pace in two years as advertisers reined in their spending amid intensifying fears of an economic recession. The regression reported by Alphabet, Google’s parent company, on Tuesday is the latest indication that the tailwinds propelling big technology companies during the pandemic have shifted. The array of new challenges confronting the industry has already caused the tech-driven Nasdaq composite index to fall by 26% this year.
In Alphabet’s case, revenue totaled $69.7 billion from April to June, a 13% increase from the same period last year. That would be impressive growth for most non-tech companies. However, it was Alphabet’s slowest growth rate since the April-June quarter of 2020, when the company experienced its first, and so far only, year-over-year revenue decline. The reason: advertisers withdrew while most consumers were quarantined at home during the pandemic’s early stages.
The slower spending was most noticeable on YouTube, where major advertisers have increasingly turned to promote their brands with short commercials. YouTube’s ad revenue increased by 5% year on year in the second quarter, the slowest rate of year on year growth since Alphabet began disclosing the video site’s financial results in late 2019.
Alphabet’s chief financial officer, Ruth Porat, attributed some of YouTube’s meagre growth to “truly extraordinary” ad spending around the same time last year, as vaccines encouraged more consumers to resume their pre-pandemic lifestyles and spending habits.
Despite the slowdown, Alphabet is still very profitable. The Mountain View, California-based company earned $16 billion, or $1.21 per share, in the second quarter, a 14 percent decrease from the previous year. As is customary, the majority of that money came from Google’s dominant search engine and a wide range of other popular services, such as its maps, Gmail, Chrome browser, YouTube video site, and Android software for smartphones.
Even though revenue and earnings were slightly lower than expected, the results were not as bad as investors had feared. After the numbers were released, Alphabet’s stock price rose more than 5% in extended trading. The rally gained traction after Alphabet CEO Sundar Pichai and other top executives assured analysts on a late Tuesday conference call that the company intended to be more frugal with its spending in the coming months — a commitment that is likely to boost profits even if revenue growth remains weak.
“Personally, I find moments like this clarifying,” Pichai explained during the call. “It gives us a chance to look at everything we do through a critical lens.”
The second-quarter results reflect greater caution among digital advertisers as the Federal Reserve considers more aggressive action — higher interest rates — to reduce the highest inflation in more than 40 years, a mission that threatens to drag the economy into a recession. The next rate hike is scheduled for Wednesday.
“We use the term ‘uncertainty’ because that is the best way to characterize what we are seeing,” Porat said during a conference call with analysts late Tuesday. She also acknowledged Google has been affected by “pullbacks” among an unspecified number of advertisers.
Ad budget cuts have far-reaching consequences beyond Google. It squeezed social platform Snap so hard that earnings fell below management warnings of poor business results, creating such a bleak outlook that executives refused to make predictions for the current quarter.
Meta, Facebook’s corporate parent, has also warned of tougher times ahead. Meta CEO Mark Zuckerberg is expected to elaborate on his thoughts on the current state of digital advertising when the company releases its second-quarter results on Wednesday.
Apart from the current economic uncertainty, both Snap and Facebook have been harmed by privacy safeguards imposed by Apple last year to prevent social media services and a wide range of other apps from tracking people’s interests and locations on iPhones in order to sell ads without their permission. That safeguard hasn’t had as much of an impact on Google because its search engine can learn so much about people from their queries.
Although the company is better positioned than most to navigate the economic turbulence that appears to be looming ahead, “it’s clear Google has its work cut out for it in the back half of the year,” said Insider Intelligence analyst Evelyn Mitchell.
Google has already begun bracing for a possible recession by announcing plans to slow hiring and then going even further by imposing a two-week moratorium on extending job offers to candidates.
However, prior to that pause, Alphabet significantly increased its payroll during the quarter. It added more than 10,000 employees from the end of March to the end of June, compared to an increase of about 7,400 workers in the first three months of the year. The company had approximately 174,000 employees worldwide at the end of the quarter. – According to Porat, the downturn in Google hiring will most likely not show up in the company’s quarterly numbers until next year, due in part to the job offers already in the pipeline and the expectation that the company will complete its $5.4 billion acquisition of cybersecurity specialist Mandiant and its roughly 2,300 employees later this year.