Slowing Ad Spending & Headcount Growth Continue to Weigh on Alphabet
Alphabet reported marginal sales growth and a double-digit percentage decline in its operating profit in the third quarter of 2022. The results reflect large unfavorable currency effects, pullbacks in advertising spending, impacted by more challenging macro conditions, and a comparison against last year's strong performance. In addition, Alphabet's headcount rose at an accelerated pace in the quarter, with some impact from an acquisition. The management plans slower additions but will still seek to add more top engineering and technical talent.
The operating profit fell by 18% YoY, with the strong dollar being an even stronger headwind for costs, as most of the staff is located in the US. Reported net income fell by 26%, reflecting sharply deteriorated returns on Alphabet's sizeable investment portfolio. However, the firm highlighted resilience in search ads, supported by strong spending from customers active in retail and travel. The management attributed the significant slowdown in the search revenue growth pace primarily to currency effects and the lapping of last year's strong performance when the business grew by 44%.
However, there have recently also been pullbacks from some advertisers, such as those active in financial services, in areas like insurance, mortgages, and crypto subcategories. Advertiser pullbacks worsened for both the Google network and YouTube in the quarter. As many firms face demand uncertainty, advertisers may shift their spending to search ads.
Search ads are bought to spur online sales and stimulate offline retail activity and purchases of services. The decreasing ad budgets also hurt YouTube, and the video platform is confronted with the growing success of TikTok, the app of Chinese origin that pioneered short videos.
Alphabet's headcount growth and computing investments for Cloud and YouTube segments, which are about 20% of total sales combined, may weigh on margins in the near term.