Google parent Alphabet reports 27% drop in third-quarter profit

It was the company's second consecutive quarter of double-digit decline in net profit as it missed analysts' expectations

Google's services business — which includes advertisements, Android and YouTube — accounted for nearly 90% of Alphabet's total sales in the third quarter. Reuters

Alphabet, the world's largest provider of search and video advertisements, reported a 27 per cent drop in third-quarter net profit on an annual basis, as the company missed analysts' sales expectations.

Net profit at Google's parent company dropped to about $13.9 billion in the three months to the end of September, from the same period in 2021.

Net profit on a quarterly basis fell about 13 per cent.

It was the second consecutive quarter that the California-based technology conglomerate reported a double-digit drop in net profit.

Revenue during the period rose 6 per cent annually to more than $69.1bn below expectations of about $70.58bn, according to Refinitiv estimates.

It was the slowest pace of sales growth in more than two years and fell short of analyst expectations for an increase of 9 per cent.

After the earnings announcement, the company’s stock dropped 7 per cent in after-hours trading to $97.6 a share.

The company’s stock has dropped almost 7 per cent in the past 12 months. After moves of Apple and Tesla in the past couple of years, the company carried out a 20-for-1 stock split on July 15.

Alphabet is focused on “investing responsibly” for the long term and “being responsive to the economic environment”, Alphabet and Google chief executive Sundar Pichai said.

“We are sharpening our focus on a clear set of product and business priorities," Mr Pichai said.

“Product announcements we have made in just the past month alone have shown that very clearly, including significant improvements to both Search and Cloud, powered by AI [artificial intelligence], and new ways to monetise YouTube Shorts,” Mr Pichai added.

Alphabet, which employs 186,779 people globally, earned more than 48 per cent of its third-quarter revenue, or nearly $33.4bn, from the US market.

In Europe, the Middle East and Africa, the company earned $19.5bn, or 28.2 per cent of its total sales.

Alphabet’s operating income dropped 19 per cent on an annual basis in the third quarter to about $17bn. Its earnings for each share dropped 24 per cent yearly to $1.06, missing analysts’ estimates of $1.25.

Google services business — which includes advertisements, Android, Chrome, hardware, Maps, Search, Google Play and YouTube — accounted for nearly 90 per cent of the company’s total sales.

It added almost $61.4bn to overall revenue, nearly 2.4 per cent more than the third quarter of 2021.

Google’s advertising revenue from Search, YouTube and other businesses increased about 3 per cent yearly to nearly $54.5bn in the third quarter.

The total revenue from the cloud business grew an annual 38 per cent to about $6.8bn in the July-September period.

Google Cloud includes the company’s infrastructure and data analytics platforms, collaboration tools and other services for enterprise customers.

It generates revenue mainly from fees received for cloud platform services and workspace collaboration tools.

Alphabet said its operating loss in the cloud segment reached $699 million during the quarter. It expanded from the third quarter of last year, when the division’s loss was $644m.

The company’s operating loss from other bets, or subsidiaries, increased more than 25 per cent yearly to about $1.6bn.

Other bets are derived mainly through the sale of internet offerings, as well as licensing and research and development services.

This includes Alphabet’s X lab, self-driving unit Waymo and other non-Google companies.

Alphabet spent more than $10.3bn on research and development, nearly 14.8 per cent of its total sales in the third quarter. This was about 34 per cent more than the R&D expenditure for the same period in 2021.

“Financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange," said ” Ruth Porat, chief financial officer of Alphabet and Google.

"We are working to realign resources to fuel our highest growth priorities."

YouTube added more than $7bn to Alphabet’s revenue, dropping around 2 per cent annually.

Google’s total acquisition costs stood at more than $11.8bn, up nearly 3 per cent on an annual basis, against analysts’ expectations of $12.3bn.

TACs are payments that search companies make to affiliates and online companies for bringing traffic to their websites. It is a major expense for companies such as Google and Yahoo.

Alphabet’s total cash, cash equivalents and marketable securities reached almost $116.3bn at the end of September, from $139.6bn at the end of last year.

To gain new customers, this month Google launched two new Pixel phones.

New devices come with enhanced camera features, improved machine learning capabilities and a return of facial-recognition technology, as the company vies with Apple and Samsung for more market share.