Alphabet’s digital advertising business shows signs of resilience

Receive free Alphabet Inc updates

We’ll send you a myFT Daily Digest email rounding up the latest Alphabet Inc news every morning.

A strong performance by Google parent Alphabet’s digital advertisements business helped it exceed analysts’ expectations for quarterly earnings on Tuesday, sending the shares higher.

The search and advertising giant reported revenues in the second quarter had climbed 7 per cent to $74.6bn, ahead of estimates for $72.8bn, according to Refinitiv.

The results reflected signs of resilience in its digital advertising business, following a difficult year that resulted in significant lay-offs in January.

Revenue from Google ads, YouTube ads and Google Cloud all beat forecasts. Alphabet’s net profit of $18.4bn was well ahead of the $16.9bn expected by Wall Street.

Operating margins rose 1 percentage point to 29 per cent from a year ago and were up 4 percentage points from the previous quarter.

Finance chief Ruth Porat, who Alphabet announced would be stepping into a new role as president and chief investment officer, attributed margin growth to accelerating Search ad revenue, adding that the “vast majority” of costs related to cutting the workforce by 12,000 were taken in the first quarter.

“There’s exciting momentum across our products and the company, which drove strong results this quarter,” said chief executive Sundar Pichai.

He said that the company’s “continued leadership in AI and our excellence in engineering and innovation are driving the next evolution of Search, and improving all our services”.

The growth in margins comes despite concerns over the cost of building infrastructure for artificial intelligence. Google is widely perceived to be playing catch-up to rivals, led by Microsoft, in novel uses of “generative AI”, including intelligent chat bots.

Porat said investments into technical infrastructure were likely to be “elevated” the rest of this year and into next, “to support the opportunities we see in AI across Alphabet, including investments in GPUs [graphics processing units] and proprietary TPUs [tensor processing units], as well as data centre capacity”.

Pichai and the other executives on the earnings call referenced AI repeatedly — at least 80 times — saying they had “integrated AI throughout our portfolio” to enhance Google Search, protect clients with better cyber security, improve cloud operations, develop large language models and introduce products such as Duet AI for Google Workspace, a collaborative video tool.

Shares in Alphabet jumped more than 6 per cent in post-market trading.

The company’s stock has already climbed 37 per cent this year, giving it a market valuation of more than $1.55tn. However, it remains nearly a fifth below all-time highs in November 2021, before growth for digital ads slowed across much of the sector.

Google ad revenues in the quarter rose 3.3 per cent to $58.1bn, versus forecasts of $57.5bn. YouTube ad revenue rose 4.4 per cent to $7.7bn, against forecasts for $7.4bn. And Google Cloud revenue jumped 27 per cent $8bn, ahead of forecasts of $7.8bn.

The Google Cloud division, which turned its first-ever operating profit in the March quarter, posted another profit of $395mn. A year ago it recorded a $590mn loss.

Regarding Porat’s appointment as chief investment officer, a newly created role, Pichai thanked her for her “invaluable” contributions since 2015 and said she would continue to serve as CFO until a successor is found.

Porat will oversee investments around the world as well as in the company’s “Other Bets” portfolio, which includes the driverless car group Waymo. The Other Bets portfolio had a loss of $813mn in the quarter, versus a $1.34bn loss a year earlier.