Google’s robust revenue overshadowed by advertising decline, impacting investor trust.

The tech behemoth exceeded Q4 2023 revenue expectations but fell short on anticipated advertising earnings.

Alphabet shares dipped over 5% in after-hours trading on Tuesday, despite narrowly surpassing overall Q4 2023 revenue forecasts. The tech giant fell short in its crucial advertising sector, reporting $65.52bn against the predicted $65.8bn. However, it exceeded expectations for total revenue at $86.31bn compared to $85.36bn, marking a 13% year-over-year increase.

Regarding the exceeded overall revenue, the CFO of Alphabet described the results as “very strong” and emphasized their commitment to restructuring costs while supporting growth opportunities. However, the subdued reaction to the report follows the January layoff of 1,000 employees, as reported by the Alphabet Workers Union. CEO Sundar Pichai mentioned later in the month that additional layoffs might occur in 2024 as the company shifts focus towards “investing in our big priorities,” particularly the integration of artificial intelligence into Google’s flagship products.

Analysts suggest that recent layoffs have reassured investors, who may view the downsizing as a strategic cost-cutting move in response to increasing interest rates. Despite this positive perception, the layoffs have not been without consequences. On an earnings call on Tuesday, Porat mentioned that severance expenses are expected to reach $700 million in the first quarter of 2024. In 2023, Alphabet incurred severance-related charges of $2.1 billion and $1.8 billion in charges related to vacating office locations.

Despite the general decline in advertising, Alphabet reported that YouTube advertising revenue reached $9.2 billion, surpassing the approximately $8 billion recorded in the same period in 2022 and exceeding analyst predictions of $9.16 billion.

CEO Sundar Pichai expressed satisfaction in a statement accompanying the earnings, highlighting the “growing contribution from YouTube.” He also mentioned that the company’s digital subscription services, encompassing YouTube and the cloud storage service Google One, achieved a total of $15 billion for the year.

The notable surge in our subscription revenues in recent years showcases our teams’ proficiency in delivering high-value offerings, laying a robust foundation for further growth,” he stated.

Similar to numerous tech companies, Alphabet has worked energetically to leverage the AI boom ignited by the success of ChatGPT, a tool provided by the Microsoft-backed firm OpenAI. The term “AI” was referenced more than 70 times in Tuesday’s earnings call. Pichai emphasized the company’s intentions to incorporate its new AI model, Gemini, across various products, including search, advertising, and cloud.

Alphabet’s emphasis on AI aligns with the company’s efforts to broaden its revenue sources, given the plateauing of its core search advertising business and the escalating challenges posed by antitrust lawsuits. The U.S. Department of Justice has filed a lawsuit against Google, alleging the monopolization of digital advertising technologies. In January, a judge ruled that the company would face trial over charges from multiple states, accusing it of dominating the advertising market. Additionally, Google encountered another antitrust trial last year, focusing on its agreements with other tech firms, such as the annual payment of around $18 billion to Apple to maintain its position as Safari’s default search engine.

“The specter of antitrust regulation looms large, and with the impending demise of third-party cookies, Google must prepare for what could be its most demanding year to date,” remarked Evelyn Mitchell-Wolf, Senior Analyst at Insider Intelligence.