Alphabet - 1Q 2020 Results

Looking ahead, the Covid-19 outbreak will continue to have a negative impact on advertising revenues. Looking past the pandemic, Alphabet may emerge stronger as smaller, weaker competitors lacking Alphabet’s dry powder of over $100bn in cash and securities, exit the market.

Alphabet reported its first-quarter results on 28 April. While advertising revenue growth slowed significantly, it still held up much better than feared, causing the share to rally strongly. Looking ahead, the Covid-19 outbreak will continue to have a negative impact on advertising revenues. Looking past the pandemic, Alphabet may emerge stronger as smaller, weaker competitors lacking Alphabet’s dry powder of over $100bn in cash and securities, exit the market.

Revenue at Alphabet, Google’s parent, has risen in every quarter of its history. This quarter was no different despite a sharp slowdown in advertising revenue growth – its slowest growth since 2020 - as companies reduce spending on advertising during the Covid-19 pandemic. The group reported total revenue of $41.2bn for the first quarter, up 15% in constant currency (cc) from last year, and comfortably ahead of consensus at $40.8bn. As per CFO Ruth Porat, performance was strong during the first two months of the quarter, but then in March the company experienced a significant slowdown in ad revenues.

Google Search and other revenues were $24.5bn, up 8.6% from a year ago. YouTube revenue was $4.0bn, up 33.5%. Google Cloud revenues were $2.8bn, up 52.2%. Google’s “Other” segment, which includes its hardware sales and non-advertising revenue from YouTube, reported revenue of $4.4bn, up 22.5%.

Adjusted, or non-GAAP, profits were $9.87 a share, slightly below consensus at $10.33 a share. This was mainly related to a widened loss on its non-core "Other Bets." The Other Bets operating loss was $1.1bn, compared to a loss of $868 million a year ago. Alphabet’s “Other Bets,” refers to its more long-term businesses (“bets”) like its self-driving car unit Waymo and health-tech division Verily. This division is expected to remain loss-making for the foreseeable future.

• Despite a significant slowdown, advertising revenue held up better than expected. Management also said that they are seeing "very early signs of recovery in commercial search behaviour” and there hasn’t been any further deterioration in the trends experienced at the end of the quarter. This indicates that the decline may have reached a bottom.
• Revenue growth at Play Store, Google Cloud and YouTube was strong, speaking to CEO Sundar Pichai ‘s statement that people are relying on Google's services more than ever.
• Management said they are sharpening their focus on executing more efficiently, while continuing to invest in long-term opportunities. It confirmed its recently announced plan to slow hiring, is reducing some non-essential marketing and business travel and trying to find other ways to reduce spend in the short term.

• We will be watching whether Alphabet is able to reduce its operating expenses as outlined above.
• This result was for the period ending 31 March 2020, hence there will be more bad news relating to the Covid-19 outbreak, which will continue to have a negative impact on advertising revenues. Google’s online-advertising business earns a large portion of its revenue (around 50%) from travel and small- to medium-sized business, which have been hit hard by the pandemic. As a result, advertising revenue so far in Q2 is down mid-teens and visibility for the rest of the year remains low. Revenue growth for the full year will therefore be much lower than previous years (consensus at around 5% growth currently).
• Looking past the pandemic, Alphabet may emerge stronger as smaller, weaker competitors lacking Alphabet’s dry powder of over $100bn in cash and securities, exit the market. This also puts the company in a (justifiable) position whereby it can continue repurchasing shares.