CEO Sundar Pichai spells out Alphabet's positives, but COVID-19 damage to ad revenues is only going to get worse

Stuart Lauchlan Profile picture for user slauchlan April 29, 2020
Summary:
Reasons to be cheerful from Alphabet CEO Pichai, but the ad revenue pressure is only going to get worse...

google

It was a case of good news, bad news for Google parent Alphabet as it announced its Q1 numbers yesterday. The good news - the internet services side of the business is on the up in the current crisis. The bad news - ad spend is on the slide, although ad revenue was still up 10% year-on-year but with much tougher times expected over the next few months. Overall Q1 revenue was $33.7 billion with profit of $6.84 billion.

In the post earnings analyst conference call, CEO Sundar Pichai was careful to emphasise the uncertainties in which the firm is operating. Praising the work of the likes of healthcare workers and first responders through teachers and scientists to grocery store clerks and delivery drivers, he commented:   

These people fill us with hope and show us the power of human resilience. We’ll need that energy and resolve in the months and years ahead. Today, there is still a great deal of uncertainty regarding the path to recovery. But there are some things we can understand better with the patterns we are seeing. For example, it’s clear from data that people are being more cautious and are seeking authoritative advice and guidance to protect their family’s health and safety.

This is, he added, the first major pandemic to take place in a digital world and that has implications for how society responds as it attempts to return to normal economic activity:

Many parts of the economy are also able to continue with some semblance of normalcy. Thanks to advances in remote work, online shopping, delivery options, home entertainment and telemedicine. At the same time, newer technologies like AI, Bluetooth exposure notifications and 3D printing are being used to help fight the disease head on.

But nothing is going to be ‘normal’ in the old sense of the word again, he cautioned:

It’s now clear that once the emergency is past, the world will not look the same. Some social norms will change and many businesses are speaking to us, looking to reinvent their operations. We have seen that the most pressing concern of small and large businesses right now is business continuity, solving for issues like employee safety, dramatic falls or surges in demand, supply chains and managing a remote workforce.

Ultimately, we’ll see a long-term acceleration of movement from businesses to digital services, including increased online work, education, medicine, shopping and entertainment. These changes will be significant and lasting.

Rising to the challenge

For its part, he argued that Alphabet had risen to the challenge of COVID-19 on a number of fronts:

First, we’ve been working with healthcare providers, researchers, authorities and communities to help combat the virus. Our Community Mobility Reports help authorities see in aggregate how social distancing requirements are working. Verily [formerly Google Life Sciences] has tested thousands of people in California and has partnered with Rite Aid to bring free testing to 8 additional states. Google Cloud is forming deep partnerships, such as with leading healthcare provider, HCA Healthcare to understand data around ICU bed availability, ventilator supplies and test results.

Second, we are working hard to provide accurate and authoritative information to people using our services. In Search, we have launched a number of features, such as up-to-date answers from health authorities and remote medical care options…We have seen a significant raise in search activity. To put it into perspective, in the U.S. coronavirus related search activity at its peak was 4 times greater than during the peak of the Super Bowl.

Third, we are playing a role in supporting businesses and workers that are hurting because of the downturn. In March, we made a commitment, upwards of $800 million to support small businesses and crisis response efforts through a combination of grants, small business loans and ad credits.

On YouTube, there’s been work done to  remove content that violates policy - such as false ‘cure’ claims for COVID-19 - and boosting content from news organizations and experts. Pindar said COVID-19 info panels have had 20 billion impressions to date:

We are overall seeing strong momentum on YouTube. People are turning to YouTube. Our watch-time has increased across the board. People are also looking for our authoritative news content. Viewership on YouTube has increased significantly compared to last year or two. So in many ways through the pandemic, people are using YouTube. And the trends are global across North America, EMEA and Asia Pacific as well.

Pichai also pointed to a doubling in the number of people using Google Classroom since the start of March - 100 million users in total -  and an uptick in demand for the Meet video-conferencing platform which adding around 3 million new users per day to take the daily user total to over 100 million. That’s likely to get another boost now it’s being made available free of charge to anyone with any email account, not just a G-Mail account.

And Google Cloud and G-Suite are also performing well, he added:

In retail, we have helped Loblaw, one of Canada’s largest food retailers, and Wayfair, scale to support exponential traffic increases. We are helping communication companies adapt to new behavior patterns. Vodafone is using Google Cloud platform to help that analyze network traffic flows to keep everyone connected, and we are helping Unity Technologies keep real time online games stay up and running…We now have more than 6 million paying G Suite customers. G Suite is helping Netflix and German manufacturer, Kaeser Compressors, transition quickly to remote work.

But...

All of which is positive stuff, but it’s the decline in ad revenues that rings alarm bells, with what happens next down to macro-developments. Pichai explained:

In March, we experienced a significant and sudden slowdown in ad revenues. The timing of the slowdown correlated to the locations and sectors impacted by the virus and related shutdown orders…Overall, recovery in ad spend will depend on a return to economic activity.

But there are reasons to be optimistic, he insisted:

There are two key aspects of our business that give us confidence about the future. First, as we saw after 2008, one of the strongest features of Search is that it can be adjusted quickly, so it’s relatively easier to turn off and then back on, and marketers see it as highly cost effective and ROI based. Second, our business is more diversified than it was in 2008. For example, cloud. In the public sector, we are helping governments deliver critical health and social services. We are supporting the state of New York, new online unemployment application system as it deals with a significant increase in demand.

My take

The ad revenue decline is a problem for Alphabet that hasn’t really taken hold yet. The firm’s share price rose on the back of the earnings announcement as Wall Street decided things weren’t as bad as investors had feared. But they might yet be…As CFO Ruth Porat predicted yesterday, the second quarters will be “a difficult one”. The reality is that while Pindar makes a fair point about how much more diversified Alphabet’s product offerings are today, ad revenues accounted for 82.4% of total revenues in Q1. The CEO did a good job talking up the positives yesterday and aligning the firm empathically with the current crisis. That's going to be a lot tougher a challenge in a few months time.

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