At the end of last month, Alphabet Inc (NASDAQ: GOOGL) (NASDAQ: GOOG) made news when it announced that it will let go of 12,000 employees. The news comes after many other tech companies slashed employee headcount as the industry saw a slowdown after 2021’s pandemic-driven pull-forward growth.
Given that as a backdrop, investors might be interested to know just how Alphabet has performed in the latest financial quarter and year ended 31 December 2022. Here are some key highlights that investors should know from the tech giant’s 2022 earnings release.
(Fun fact: Alphabet said that during the World Cup Final on 18 December 2022, Google Search saw its “highest query per second volume of all time”.)
Overall Growth Have Slowed Down At Alphabet
Alphabet reports its results in three main buckets: Google Services, Google Cloud, and Other Bets.
Google Services contains products and services such as its advertising platform, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube.
While this segment makes most of its money by delivering advertisements on its digital channels, sales of apps and in-app purchases, hardware sales, and fees received from subscription-based products (such as YouTube Premium and YouTube TV), also contribute to this business.
Google Cloud is about infrastructure and platform services, collaboration tools, and other services for enterprise customers. This division makes money through the fees received for Google Cloud Platform (GCP) services, Google Workspace communication and collaboration tools, and other enterprise services.
Last but not the least, Other Bets is a combination of multiple operating segments and money from this small segment is generated mainly from selling health technology and internet services.
In the fourth quarter of 2022, Alphabet saw its total revenue rise 1% year-on-year (or up 7% in constant currency terms) to US$76.0 billion. Google Search continued to be the largest contributor to Alphabet’s revenue growth on a constant-currency basis.
However, YouTube advertising revenue fell 8% to US$8 billion while network advertising revenue tumbled 9% to US$8.5 billion.
Other revenues grew 8% to US$8.8 billion, showing significant subscriber growth in YouTube Music Premium and YouTube TV, and strong growth in hardware revenues, mainly from its Pixel smartphones. Alphabet said that YouTube Music and Premium has surpassed 80 million subscribers, including trials.
As for Google Cloud, its revenue surged 32% year-on-year to US$7.3 billion for the quarter, mainly due to strong growth in GCP.
Source: Alphabet Fiscal Year 2022 Results Announcement
For the whole of 2022, Alphabet’s revenue grew 10% year-on-year to US$282.8 billion. The growth tapered down from 41% in 2021.
The tech giant said that its year-on-year revenue growth was affected by a number of challenges, such as:
- Inability to do better given the outsized recovery in 2021 from the digital tailwinds brought about by the pandemic;
- Stronger foreign exchange headwinds; and
- Tougher economic climate that impacted many of its customers.
Despite reporting higher revenue, Alphabet’s operating income for 2022 fell 5% year-on-year to US$78.7 billion, mainly due to higher cost of revenues and research and development expenses. With that, the group’s operating margin declined from 31% last year to 26% in the latest period.
Alphabet’s net profit for 2022 tumbled too, decreasing by 21% year-on-year to S$60.0 billion.
Source: Alphabet Fiscal Year 2022 Results Announcement
One respite that the tech giant’s balance sheet remains rock-solid.
As of 31 December 2022, Alphabet had US$113.8 billion in total cash, cash equivalents, and marketable securities. In comparison, its long-term debt stood at just US$14.7 billion, giving Alphabet a net cash position of US$99.1 billion. With a strong balance sheet, it is well-positioned to ride through any tough economic conditions.
Alphabet also repurchased a total of US$59.3 billion of its Class A and Class C shares in 2022, up from US$50.3 billion a year back.
Investing In Artificial Intelligence For The Company’s Future
With OpenAI’s ChatGPT taking the world by storm end of last year, many would be curious as to how Alphabet is taking to this threat, with many calling it a doomsday scenario for Google Search due to the immense popularity of the chatbot backed by Microsoft Corp (NASDAQ: MSFT).
In the company’s earnings call, Sundar Pichai, Alphabet’s chief executive, said:
“In the coming weeks and months, we’ll make these language models available, starting with LaMDA so that people can engage directly with them… These models are particularly amazing for composing, constructing, and summarizing. They will become even more useful for people as they provide up-to-date more factual information.”
LaMDA (or Language Model for Dialogue Applications) is a conversation technology developed by Google back in 2017. It will be interesting to see what Alphabet will release to counter the threat from ChatGPT.
Alphabet also uses AI in other parts of its business, including ads. For example, Google Ads Smart Bidding, which makes use of AI to predict future ad conversions and their value, helps companies stay agile and responsive to quick shifts in demand.
How Employment Downsizing Affects Alphabet Financially In The Short Term
Alphabet touched on the unfortunate decision to cut down its workforce and how it will affect the company financially.
Due to the reduction in employee count, it expects to see employee severance and related charges of US$1.9 billion to US$2.3 billion, with the majority of it to be recognised in the first quarter of 2023.
On top of that, the tech company is also optimising its global office space. Due to that, in the current quarter, it could incur around US$0.5 billion in exit costs relating to office space reductions.
Summarising Alphabet’s 2022 financial results and looking ahead, Pichai mentioned the following:
“Our long-term investments in deep computer science make us extremely well-positioned as AI reaches an inflection point, and I’m excited by the AI-driven leaps we’re about to unveil in Search and beyond. There’s also great momentum in Cloud, YouTube subscriptions, and our Pixel devices. We’re on an important journey to re-engineer our cost structure in a durable way and to build financially sustainable, vibrant, growing businesses across Alphabet.”
Image by Denys Vitali from Pixabay
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