Google cements its advertising dominance with strong Q3 results

The news: Google parent Alphabet Inc.'s Q3 financial results provide a positive outlook for the company, marking its strongest advertising revenue growth in five quarters.

The results: Overall revenues were $76.7 billion in Q3 2023, up 11% year over year (YoY) from $69.1 billion. That represented an acceleration from the 6% revenue growth reported for Q3 2022.

  • Operating income increased from $17.1 billion in Q3 2022 to $21.3 billion in Q3 2023, with operating margin expanding from 25% to 28%.
  • Third-quarter net income rose to $19.7 billion from $13.9 billion the prior year.
  • Google Search and Other: This segment remains the primary revenue driver, rising from $39.54 billion a year earlier to $44.03 billion. Collectively, advertising revenues rose from $54.5 billion to $59.65 billion—the highest total in that category in nine quarters.
  • The company improved its results with 2.3% fewer employees than a year ago (186,779 to 182,381). During the earnings call, CFO Ruth Porat said headcount growth is being restrained to prioritize key products and reallocate talent.

Yes, but: There was sizable growth in Google Cloud revenues, which jumped from $6.87 billion to $8.41 billion YoY, showing the company's growing foothold in that market.

  • Though that 22.5% growth rate sounds impressive, six quarters ago it was 43.8%—a slowdown that investors notice.
  • Consequently, Alphabet shares slumped 8% in early Wednesday trading as a result of the Cloud slowdown despite advertising's strong growth.

The role of AI: Executives told analysts that the company’s investments in AI are helping advertisers.

  • Performance Max, an AI-powered goal-based campaign type, is providing excellent ROI for advertisers, with users achieving an average of over 18% more conversions.
  • Nearly 80% of advertisers are using at least one AI-powered search ad product.
  • AI tools such as Dreamscreen and YouTube Create are revolutionizing content creation, Alphabet chief Sundar Pichai said.
  • The company also called out Spotlight Moments, launched last week, which uses AI to identify trending content for brand sponsorship.

Area to watch: YouTube ad revenues increased to $7.95 billion, above the $7.8 billion analysts expected.

  • Pichai highlighted that Shorts, YouTube’s TikTok-style format, now boasts a staggering 70 billion daily views, a significant increase from around 50 billion daily views at the start of the year.

Our take: Alphabet showed robust performance in Q3 2023 with notable growth in key financial metrics—which will give it the war chest to innovate at a time when tech is moving quickly.

  • Pichai’s comments about AI-driven innovations and Porat's mention of the "fundamental strength" of the business reinforce the company's strong market position, signaling promising prospects for the current quarter.

First Published on Oct 25, 2023

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