Alphabet Earnings: Google Cloud Drives Revenue Growth, While Ad Business Stalls

Alphabet (GOOGL -0.14%) (GOOG -0.15%) stock edged down less than 0.2% on Wednesday, following the technology giant’s release on the prior afternoon of its first-quarter 2023 results.  

The market’s yawn makes sense, as the report was neither rosy nor bad. On the positive side, the quarter’s revenue and earnings exceeded Wall Street’s consensus estimates. That said, analysts’ expectations were modest because of the challenging digital advertising market. Concerns about a slowdown in economic growth and a possible recession have led many companies to cut back on their ad spending. On the negative side, investors were likely concerned that the company’s core ad business posted a revenue decline.

Here’s an overview of Alphabet’s first-quarter results, centered around four key metrics.

1. Revenue rose 3%

Alphabet’s net sales increased 3% year over year (and 6% in constant currency) to $69.8 billion, surpassing the $68.9 billion Wall Street had expected. Growth was primarily driven by Google Cloud, though Google Search and Google Other also contributed. 

Traffic acquisition cost edged down 2.2% year over year and  decreased revenue by $12.0 billion.

Data source: Alphabet. YOY = year over year. This percentage would usually be rounded down to 0%, but the metric in the chart was used to show that the company’s core ad business did post a revenue decline, though a very small one. 

Reiterating what I wrote in my article on the company’s third-quarter 2022 results, “There can be little doubt that the increasing popularity of TikTok is hurting Alphabet’s video-streaming platform [YouTube], which was growing at a strong pace not that long ago.”

For context, in the prior quarter (Q4 2022), revenue edged up 1% year over year (and 7% in constant currency) to $76 billion. Total ad revenue fell 4% year over year. Ad revenue for Google Search, YouTube, and Google Network declined 2%, 8%, and 9%, respectively. 

2. Operating income dropped 13%

Operating income declined 13% year over year to $17.4 billion. Operating margin (operating income divided by revenue) was 25%, down from 30% in the year-ago period.

Google Services (includes the company’s core ad business plus Google Other, which is heavily comprised of hardware) generated an operating profit of $21.7 billion, roughly flat with the year-ago period. Google Cloud turned in an operating profit of $191 million. That’s modest, but it’s a nice improvement from its operating loss of $706 million in the year-ago period.

Other bets had an operating loss of $1.2 billion, 47% higher than its loss in the first quarter of last year. Unallocated corporate costs increased about tenfold to $3.3 billion, driven by the $2.6 billion in charges related to employee layoffs and a reduction in office space. 

3. EPS edged down 5%

Net income came in at $15.1 billion, or $1.17 per share, down 5% from the year-ago period. Wall Street was looking for earnings per share (EPS) of $1.06, so the company easily beat this expectation.

The quarter’s net income was hurt by $2.6 billion in charges related to reductions in the company’s employee count and office space.

4. Operating cash flow fell 6%

Alphabet generated cash of $23.5 billion running its operations in the quarter, which was down 6% from the prior year’s quarter. It ended the period with cash and cash equivalents of $25.9 billion, up 24% from the year-ago period. 

Decent results, given the tough macro environment 

Given the challenging macro environment for its core ad business, Alphabet turned in a decent first quarter. Notably, operating cash flow remains robust, and Google Cloud turned in a solid quarter. Moreover, the recent employee and office space downsizing should help improve profits and cash flow in 2023.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet. The Motley Fool has a disclosure policy.