YouTube ad revenue falls short as Alphabet battles ad spend pullback

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Alphabet's revenue growth has slowed to 6% from 41% a year earlier. The tech giant posted revenue of US%69.09 billion and according to CNBC, this was lower than the expected US$70.58 billion. YouTube's ad revenue also underperformed, sliding 2% to US$7.0 billion for the third quarter of 2022 ended 30 September compared to US$7.2 billion the previous year. Google Network revenue also dipped 2% to US$7.87 billion from US$7.99 billion a year earlier.

On the other hand, Google Search saw a 4% increase to US$39.53 billion. Overall, total Google Services revenues were US$61.4 billion, up 2%. Alphabet had already noted pullback in ad spend by some advertisers in YouTube and Network during the second quarter, and SVP and chief business officer Philipp Schindler said during the recent earnings call that these pullbacks increased in the third quarter. More specifically, there was pullback in spend by some advertisers in certain areas and search ads.

"In challenging times like these, advertisers are carefully evaluating the effectiveness of their budgets. Search tends to do relatively well in such an environment, given its strong measurability and focus on delivering ROI. It’s also well suited to quickly adjust to changes in consumer behaviour," he explained.

According to CNBC, the company's shares slid by approximately 7% in extended trading yesterday after the results were announced. The earnings were also weaker than expected, CNBC added.

Nonetheless, Schindler said while there was a further pullback in spend by some advertisers across both brand and direct response, YouTube still remains in "a really good position to continue to benefit from the streaming boom". He explained that there is plenty of room to make YouTube more shoppable, more actionable from video action campaigns to product feeds, app campaigns, and live commerce features.

Product feeds are coming to Discovery ads soon and recently expanded to Shorts. According to Schindler, the company is already seeing results and on average, video action campaigns with product feeds saw an over 70% increase in conversions on Shorts versus those without. Shorts currently has 1.5 billion monthly users and 30 billion daily views.

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Separately, Alphabet also expects ongoing headwinds from the slowdown in consumer spending on Google Play due to several factors, including lower levels of user engagement in gaming that impacted results in the second and third quarters. CFO Ruth Porat said that among other factors, this shift in user behaviour was also a headwind to advertising revenues, with lower revenues from app promo spend on YouTube, Network and Play ads in Search and other.

Meanwhile, Google Cloud revenue jumped from US$4.99 billion to US$6.86 billion. CEO Sundar Pichai said it is sharpening its focus on a clear set of product and business priorities. "Product announcements we’ve made in just the past month alone have shown that very clearly, including significant improvements to both Search and Cloud, powered by AI, and new ways to monetise YouTube Shorts. We are focused on both investing responsibly for the long term and being responsive to the economic environment," he added.

Aside from Shorts, Alphabet also plans to continue investing in connected TV. With eyeballs moving away from linear TV, Schindler said YouTube is the best platform to help advertisers achieve its CTV ambitions. Quoting Nielsen, Schindler said that during the 2021-2022 US broadcast seasons, YouTube reached more viewers during primetime on CTV than any linear TV network.

He also cited the example of Instacart which tapped into CTV to maximise its TV screen strategy for its The World is Your Cart brand campaign featuring Lizzo. According to Schindler, it drove breakout searches for its product and above-average brand lift across awareness, consideration and purchase intent. The brand also managed to engage a significant increase in audience on top of TV with 66% lower CPMs, he added.

Alphabet is also cutting headcount growth, with CEO Pichai stating during the earnings call that headcount additions will be "significant lower than the third quarter". As Alphabet plans for the next year, it will continue making important trade-offs where needed and are focused on moderating operating expense growth, Alphabet's chief said.

The tech giant added 12,765 employees in Q3 2022, including more than 2,600 of those joining Google Cloud as part of its acquisition of Mandiant. In Q4, these additions are expected to slow to less than half the number added in Q3. Within this slower headcount growth, next year, Pichai said Alphabet will continue hiring for critical roles, particularly focused on top engineering and technical talent.

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