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Bottom line: As more people bunkered down into their homes, Google saw an increase in web traffic to its many online services, but expected a significant slowdown in ad revenues. While the advertising business has indeed taken a hit, it’s not nearly as bad as it could have been thanks to some clever cost-cutting on marketing and hiring.
Google’s parent company reported revenues of $41.2 billion for the first quarter of 2020, which is a 14 percent year-over-year increase at a time when the global economy has taken a beating with many businesses shuttered or downsizing to stay afloat.
The results are surprisingly good if you consider that just like Facebook, Google makes most of its revenue from its advertising business, and the two companies were previously expected to see a $44 billion loss this year. CEO Sundar Pichai called it a “tale of two quarters” during the earnings call with investors, noting that March was indeed a bad month for its ad efforts and that he’s reserving cautious optimism for the second quarter.
Advertising revenue for the first three months of this year totaled $33.8 billion, with traffic acquisition costs coming in at $7.45 billion, which is actually a bit less that expected. This means the company made 82 percent of its quarterly revenue from ads, where it saw a deceleration in display ads for YouTube and the Google Display Network.
The pandemic has actually boosted some parts of Alphabet’s business. For instance, search traffic is booming, with peak traffic reaching four times that of Super Bowl search activity. Unsurprisingly, YouTube watch time is going through the roof as well, and Google says livestreams were the primary driver for that growth. Ad revenues from YouTube saw a 33 percent year-over-year increase to $4.04 billion.
There are now over 2.5 billion monthly Google Play Store users, which again highlights the sheer scale of the Android ecosystem. App downloads increased 30 percent between February and March, but new device activations are slowing, which is indicative of the waning demand for new phones.
Pichai says Google’s Chromebook bet is finally paying off, with a 400 percent spike in demand registered in the third week of March. The company saw more than 100 million students and educators using its Classroom education tools, a doubling in activity in the span of one month.
The Cloud business brought in $2.78 billion, which is a healthy 52 percent boost. This includes the Google Cloud Platform along with the productivity and collaboration tools that are part of G Suite. Google Meet, the company’s videoconferencing app for businesses, is now adding three million users every day, up from two million per day that was the norm before lockdown and social distancing measures went into effect.
Google’s ‘other revenues’ category – which includes hardware like Pixel phones and accessories, YouTube Premium, and Play Store – brought in $4.45 billion, while the ‘other bets’ category continues to bleed money. For Q1 2020 it lost $1.12 billion, which is an increase from the $868 million lost in Q1 2019. That includes Verily – the company behind the Covid-19 screening website – and Waymo, the autonomous car project.
Google CFO Ruth Porat explained the company’s positive financial report is the result of working to conserve its resources through a combination of halting all hiring for short-term projects as well as slashing marketing budgets. She noted that Google will continue to invest in long-term opportunities, but in the meantime the focus has shifted to executing more efficiently.
Whether or not ad spend will increase in the coming quarters will depend on a lot of factors, but Google earlier this month started letting any business list products on Google Shopping for free. If anything, that should open up a lot of opportunities for small businesses to sell their products online, which in turn could contribute to a higher ad spend in the future.
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