Google announces Q1 2023 earnings [pdf]
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Some things that stood out to me, changing depreciation rules to “magically” generate $770M in revenue. Traffic acquisition costs down for the quarter (I think this is the first time in like 10 years it has gone down). And a stock buyback which does the “let’s pretend our stock is going up” trick. (IBM has been a master of this for years).
None of it looked very hopeful for the future of Alphabet. A friend of mine who was in the “sudden layoff of entire projects” wave is starting to feel better about having gotten out with a severance package. I told them (as a survivor of a couple of layoffs back in the dot.com days) that there are pluses and minuses to being picked or being passed over. But everyone gets reminded to polish up their resume and start looking at the alternatives. If you still work there, keep an eye on the people you know are the ones who “get things done” as they will often be the first to leave as it is easier for them. Folks who have moved from cancelled project to cancelled project will find it harder as interviewers will be unconsciously biased against applicants who have never worked on a successful project/product.
Take heart though, when “gorilla/monster/dominant” technology companies die, their former employees fertilize the field of new ideas and, at least as I’ve observered over the last 40 years, new greatness emerges.
Interviewers don't know whether your projects were successful or not (and often don't care, I don't remember ever being asked this type of questions, SWE interviewing has always been mainly technical for me).
The number of degrees of freedom between any two people is remarkably small. As someone who has interviewed and hired perhaps two or three hundred people over my career, it was rare that as an interviewer I didn't know more about the interviewer than their resume stated. Later in my career, the depth of information in "ATS" (Applicant Tracking Systems) applications at companies has only gotten deeper. Social media posts, comments on HN :-), peer analysis from others hired from the same company, Etc.
What is more, from Google's perspective, a lot of their hiring teams who used these systems to screen candidates were contractors and have often been laid off when Google needed to make better numbers. They didn't just "forget" everything they knew, a number of them with whom I worked, contacted me post Google employment after setting up their own business as recruiters.
Not saying its good or bad, just that it is important that a lot of information exists that "follows you" around. The longer you work, the more senior you become, the more it fills with a ratio of "haters/meh/supporters" info.
The thing that always annoyed me and I had to ASK recruiters to send me candidates that matched but their "whisper network" suggested they were problems/losers. Sometimes just getting past that screen is really tough for someone.
EDIT: sometimes the wording is tricky.
"Recruiter will supply all sources of information consulted prior to offering candidate for consideration, if it is discovered that undisclosed sources were used, recruiter agrees to forfeit their fee."
Employed on site recruiters you can have a good conversation with and say "Even if you hear they are not good, if they check the boxes on where we're looking I would like to review." Which, given they are evaluated by candidates delivered rather than candidates hired, works out.
Changing depreciation schedule has no impact on revenue. It only affects costs and therefore profit.
Public companies can change their depreciation schedules at any time and accountants use that fact to change their "losses" in a way that is most beneficial to the company. Too much profit so have to pay taxes? Depreciate things faster. Not enough profit to appease the investors? Depreciate things more slowly.
Not sure what trick you're referring to. Buybacks are the new dividends; they accomplish the same thing but in a more tax-efficient manner for investors.
What is good about buybacks for investors is that you can choose how to time your sales, which can result in tax benefits. Dividends you pay tax on a schedule that might be less suitable to whatever financial massaging investors might want to engage in.
[1] https://en.wikipedia.org/wiki/S%26P_500_Dividend_Aristocrats
A bonus 1% tax on buybacks was recently added by the Inflation Reduction Act, and Biden has called for that to be increased to 4%. If the tax is high enough, more companies will go back to paying dividends.
If you buy a truck you expect to use for 10 years for $50k, the company's cash goes down by $50k but its capital assets go up by $50k to match that. This purchase has no impact on the company's net income, because the cost and the value of the asset are the same. Every year the value of the truck is considered to be $5k less, so its assets go down by that amount. To make the books balance out, there's a $5k depreciation expense for that year.
This is totally standard accounting, every company does it with any kind of capital goods. See the depreciation line item in the cash flow statement.
This is them saying that a server's expected lifetime is now 6 years rather than 4 years, so the amount of depreciation "expense" per quarter is lower.
Interestingly enough, it looks like everything except cloud grew at a rate less than inflation.
Ad revenue is falling. What implications does this have for internet companies reliant on the assumption advertising revenue will be going up forever?
The market is reacting to Cloud turning a profit for the first time, and faster than expected.
Youtube was a large contributor to growth in 2021-2022, and that engine appears to have slowed. (Not just the "Youtube ads" line that is separated out.)
Most likely the market is reacting to these results not being any worse. Cloud gains were already priced into the stock, in my opinion.
So:
- ad revenue is down (that's 80-90% of all of their revenue)
- all their expenses are way up (cost of revenue 1B up, R&D expenses 2.3 B up, sales and marketing costs ~0.7 B up)
- "other bets" losses increased are 400 million higher YoY
- unallocated corporate losses are 3B higher YoY
But google cloud (which includes both GCP and Google Workspace) is 191 million in profit. Must be nice, I guess.
That would make Cloud by itself one of the 50 biggest companies in the world in terms of profits...
Companies are valued at profits for 10+ years. So Cloud continuing its promising growth trajectory is a very good thing for investors.
Obviously growth rates are unlikely to stay as high as they are for 5+ years - but the outlook for Cloud & Google - is still very promising.
If. Would. etc.
It could also not grow, and slip back to losing billions.
> Companies are valued at profits for 10+ years.
Wat?
It's been growing at similar rates for 13 years - rate of growth slowly decreasing.
It's way more likely to continue at it's rough trajectory than to have a sudden massive reversal.
But, sure, anything is possible. Google could also get obliterated by an alien civilization. Not gonna bet on that scenario, though.
$2.5 billion of that is charges related to the layoffs.
> - all their expenses are way up (cost of revenue 1B up, R&D expenses 2.3 B up, sales and marketing costs ~0.7 B up)
Likewise half of this (i.e. you're double counting). See the table on page 3.
> - ad revenue is down (that's 80-90% of all of their revenue)
78% is not 80-90%. It's impressive that you managed to quote a ridiculously large range, and still get it wrong, in a discussiong about the earnings report.
The ad revenue from Google properties, not from the display ad network, is up.
I couldn't care less to calculate it this time. It fluctuates around the same number YoY
> The ad revenue from Google properties, not from the display ad network, is up.
And that somehow makes it less of an ad revenue? Or different? Or something?
Uh-huh. It was 77% in Q4, 79% in Q3, 80% in Q2. It has not been 90% for a decade.
> And that somehow makes it less of an ad revenue? Or different? Or something?
So you weren't making any kind of point when saying that ad revenue was down? If that's the case, I'm happy to also pretend that I'm also a member of the non sequitur club.
Who has that assumption? At some point ads just reach steady state as a percentage of an economic sector, and therefore their growth simply mirrors GDP growth. Yes it will grow forever as the economy grows forever, but no faster.
I don't think anybody thinks advertising is going to eat the whole economy, so I don't think there are any implications in that not happening.
Economic growth might not stop in next 10 or 100 years, but natural limits exist and eventually growth will stop.
You can get 5% GDP growth without any actual growth by just devaluing dollars by 5% more than you measure inflation.
Theoretically, there's nothing stopping people from paying more money for monkey JPEGs indefinitely.
Physically, there's limits to how efficient things can get.
To the contrary, if you figure out a way to manufacture the same widget X but using 25% less energy, that's economic growth.
Long-term economic growth is primarily a phenomenon of increasing human efficiency which is enabled mainly via improved education which leads to ongoing technological progress.
Sure we need energy to heat our homes and grow our food and power our transportation and build our phones and so forth, but those needs are not growing exponentially whatsoever. Homes in the developed world, for example, are becoming more energy efficient rather than less.
I don't pay so much attention to investment news, but the last time I heard of huge buybacks was when Intel decided to drastically cut back its research and development. It seemed to not be good for Intel. Or maybe it was good for the ones making those decisions, if they are getting bailed out by billions of government money, I don't know. Maybe I have cause and effect mixed? It could be possible.
Search for "$big_company stock buyback" and you'll find just about any of them there
Who needs messy user tracking when users will voluntarily feed you their deepest secrets? Why fight ad blockers, and waste resources on ad placement research, click-through rate optimization and all that noise, when you can just slip subtle ads into conversations with humans?
Ad revenue isn't going anywhere but up. This is just a minor blip in the grand scheme of things.
In your classic scenario, you navigate the SERP and hit various websites, that's a lot of surface area for ads. In this supposed new situation, you don't browse and scan, you just get the answer. The end. It's a way shorter interaction. I'd imagine you see 1 ad. Instead of dozens now.
Also, if you're never hitting any individual websites anymore, surely they'll become hostile, protect content, put up walls, or push for legislation.
This is not a done deal.
You're thinking of this in the classical ad placement sense. If there's an established sense of trust with an AI, advertising can become much more subtle and even more manipulative than it currently is. Ad campaigns can last years, and span many conversations, where brands can be woven into the subconscious much more deeply than a traditional ad could do.
They could then be surfaced whenever the user is most vulnerable to be swayed into making a purchase.
> In your classic scenario, you navigate the SERP and hit various websites, that's a lot of surface area for ads.
Most of which never get seen or clicked on. It's a lot of wasted real estate. Ad conversion can become much more efficient if the system deeply knows the person they're interacting with.
You can ask the same question about social media or any Big Tech product today. The answer is somewhere between convenience, a better product, and inertia ("everyone else uses it", etc.).
If Google comes up with an AI that integrates with Gmail, Docs, Drive, Search, and all their other products, and leverages the amount of information they already know about you, then they can provide a much better UX than any competitor could.
I don't doubt there will be OSS competitors that don't do any mind manipulation to get users to purchase something, but most users won't use them. Just like we have sane alternatives to all Big Tech products today, and they're mostly only used by a niche group of technical users.
Users will know they're talking to a corporation and feeding it information in the case of LLMs, and they're likely to give it a loss less information voluntarily than tracking was taking (and will continue to take).
LLMs will become an even bigger part of our everyday lives than social media is today. It would be naive to think adtech won't monetize that in the most insidious ways imaginable. Advertising, uh... finds a way.
I mean, that's to be expected. Google did this sweeping cost cutting measure with the layoffs they did, rather than the usual “we don't see a future in this product and we're discontinuing it” that they are more famous for. They didn't even seem to try to target a specific performance bar—I think of this as trying to knock out walls which have lower measures of structural stresses in your house, you don't have the architectural plan so you just sledgehammer some walls that look like they're not holding much up.
The problem with these broad cost cutting measures, “everyone is losing 5%-10% of head count” etc. is that even if you do a really good job targeting, 80% of the people you cut were doing something (just, if you are well-targeted, not enough on average to justify their salary) and 20% of those were in fact “load bearing” in some sense (they actually were doing enough to justify their salary, often “and then some”)... your metric just did not apply very well to them. The rest of the building needs to carry the load that you just shed, average performance takes a staggering hit.
The bet is that the cut costs will save more than the performance drops, although they won't immediately due to expensive severances etc. ... Those numbers were carefully timed to be paid out in Q2 so expect those numbers to be worse and then if Pichai’s bet pays off they'll start recouping it in the second half of 2023, or else he'll feel the same pressures in late 2023 that he felt in late 2022, announce another round of layoffs... Things aren't that bad yet but I worry for my friends at Alphabet.
revenue only grew 3%. while they had increased costs via massive hiring during the pandemic.
certainly, they need to cut back on other bets and personnel and salaries.
This is reckless.
Cutting the number of employees is fine, but reducing salaries leads to reduced quality of the employees, which is a stupid move.
How is he still CEO? Not to even mention his insane salary.
And let's be realistic. Had Google been the first to introduce a publicly accessible chat LLM, all the regulators that were already concerned about Google being too powerful would have intensified their calls for antitrust action against Google.
Also recall that Google was not the first to ship a modern smartphone OS and it took them years to achieve a similar quality to iOS, but now they dominate the worldwide smartphone OS market.
Now just like in cloud they're gonna be playing catch up forever.
> but now they dominate the worldwide smartphone OS market
And now they are slowly losing market share to Apple, another major Sundar mistake.
And if LLMs will indeed be the revolution that some make them out to be, and Google is able to capture 70+% market share within a few years as they were able with mobile OSes, that's not a bad place to be in.
Google could have surely at least bought a gaming company instead trying to start a new one and then killing it a year or two later.
> revenue only grew 3%. while they had increased costs via massive hiring during the pandemic.
The operating margin is still 25% up from 20% in 2019Q4. So compared to pre-pandemic each employee brings in more money now (post-pandemic).
Google advertising in 2023 54,548
Yikes. that's a steep drop. Youtube revenue is almost flat too.
Pretty worrying as a shareholder :-/
Google Search & other 40B YouTube ads 6.7B Google Network 7.5B Google other 7.4B Google Cloud 7.5B Other Bets 0.288B
The future for Google almost certainly includes a lot more layoffs in order to keep their EPS up.
The layoff isn't counted yet. But I agree, if ads isn't printing as much money, Google layoffs are going to continue.
For Google historically the buybacks have exceeded SBC, but looks like in the recent quarter that was not the case.
Meta was famous for its buybacks being fully canceled out by SBC, though recently buybacks have started to exceed employee comp.
Which is why FCF is a poor metric to use for a company that has a large portion of SBC. Completely hides the actual economics of the business.
https://www.macrotrends.net/stocks/charts/GOOG/alphabet/shar...
https://www.macrotrends.net/stocks/charts/META/meta-platform...
But even if compensation were just in cash, buybacks are irrelevant for employees and have nothing to do with long term prospects.
Profit is always going to be returned to shareholders via dividends or buybacks (they're basically the same thing) or corporations wouldn't even exist in the first place. And profits being returned to shareholders are the sign of a healthy, profitable, sustainable corporation.
[Citation needed]
1) Corporations exist for a purpose that they have to outline in their charter which is never "because I want to make a lot of money" 2) https://en.wikipedia.org/wiki/Nonprofit_corporation
If you buy back 10% of shares, you have also paid 10% of the market cap of the company out in cash, which is net neutral for share NAV in the present. Ignoring sentiment based factors.
BBBY bought back 50% of shares over the last 10y and what did that amount to for shareholders in the end?
https://www.macrotrends.net/stocks/charts/BBBY/bed-bath-beyo...
Similarly with dividends, you’re paying out a portion of NAV in a distribution, net neutral. Though if your business can reasonably expect to cash flow steadily over time, of course your total wealth will grow as the business accrues earnings.
Dividends are a return to shareholders in the present, buybacks are a deferred return which may never materialize as tangible value for the stockholder
Most people who invest in a stock will reinvest dividends, and so a 2% dividend ends up with you holding 2% more of the stock at the same value. A buyback that results in a 2% price increase results in you holding the same # of shares at 2% more value, with the overall market cap the same.
As long as you assume the market is fairly efficient and liquid, you can sell your shares, or not, in either case. If instead you choose not to reinvest your dividends, you can also sell off excess value after a buyback (e.g., say "I will hold no more than $1000 and when the value increases beyond that I will sell excess shares to reduce my value to that number", or sell buyback/market cap% of your holdings, or whatever).
Ultimately the difference is taxation, where buybacks win out (cap gains, not income).
> BBBY bought back 50% of shares over the last 10y and what did that amount to for shareholders in the end?
Well, for the shareholders of the 50% that was bought back, probably pretty well I'd assume.
Your understanding of buybacks is wrong. You can’t “sell off” after the buyback as a buyback is mechanically neutral to share price. Cash holdings of the company go down such that NAV per share is the same after the buyback. It may go up due to sentiment or technical reasons, but not for fundamental reasons.
A company buying back their own shares must be judged the same as an investor buying the shares, if a company has a 1% earnings yield and no earnings growth, then a buyback is effectively the same as locking in a 1% annual return on that cash.
If the company shrinks, as it did with BBBY, then the buybacks were dilutive. Shareholders would have more per share today if BBBY had sat on that cash rather than buying back.
The math is simple, straightforward, and not really subject to debate… I’m describing the mechanics behind it. The realized value of a buyback can only be known with hindsight… you get nothing today. It’s a bet on the future of the company/earnings just as it is when an investor purchases shares.
Final note. You will pay capital gains tax on any future stock sales or dividends, so accretive buybacks can only be said to be tax deferred. In the end when you realize the investment you pay tax on that amount, which may or may not be higher tomorrow than it is today.
You're right, but you're also wrong, you can't sell off after a buyback because the buyback is the action. You can, however, sell off after a buyback is announced, and in that case the value more or less does go up for fundamental reasons, not in the company, but in the market for the company's shares, since you know there's an increased demand. The idea I was getting at was that you'd target owning the same percent of the company before and after the buyback, which you can calculate at least as of the announcement. Obviously since share prices fluxuate over time, you can't know it in general though.
> If the company shrinks, as it did with BBBY, then the buybacks were dilutive.
This is equally true with dividends though. If a company bankrupts itself by paying too many dividends, that's also equally bad for shareholders in the long term.
Like fundamentally, there is zero difference between the following two situations:
1. A company announces and implements a 1% dividend
2. A company announces a 1% buyback, and every shareholder sells 1% of their holdings to the company.
In both cases, the exact same transaction has taken place. Everyone owns the same percentage of the company before and after, and everyone has the same increase or decrease in cash holdings.
You mean like, 99% of Android users?
It's the fringe that use de-googled-yet-still-android phones - not the norm.
If you're into Android, Pixel is a great offering.
What are you talking about then? Pixel is a high-end android device, even if you try not to use google services.
Will be interesting to see where the focus of the "significantly accelerated AI strategy" will be. AI for adtech customers or AI for Cloud customers?
The adtech business model seems stagnant but its not obvious (to me) what AI could do to revive its fortunes.
The cloud business model seems to be growing and selling AI services (IBM Watson style) an apparently natural fit but does this mean I could use gcp to run a LLM based search service? :-)
This is really a "shitty-futurism" situation for me, but it would be quite possible for ChatGPT-style assistants to do product placements in their conversations.
Good test for the Efficient Markets Hypothesis: how does this make any sense?
Also no one has poured more money into AI hardware and software than Google, it's pretty naive to think OpenAI/Microsoft has a huge lead by releasing a nice product a year or two earlier.
It seems like there's a new edition that came out. [2]
[1] https://www.amazon.com/Financial-Statements-Step-Step-Unders...
[2] https://www.amazon.com/Financial-Statements-Step-Step-Unders...
On Apr 25, 2023 GOOG stock price is ~$103.85.
I don't understand this narrative against Pichai. This is objectively a massive success in any reasonable metric. I can think of one glaring reason why there's this crusade against him.
In other words, Sundar is not a war CEO; he is there to ensure things are "on track" for the foreseeable future, while many people expect him to be a trailblazer who comes up with new innovative products (and not just tweaks to Ads UI).
edit: but the NASDAQ 100 pays dividends, so Google's stock price has underperformed over that period
What about their hardware business?
It was never taken seriously (source: worked there)
Pixel sells as many phones per year as iPhone sells on the first day.
As with anything that is not ads, it's losing money.
When they IPO in 2004, Google was expecting to dominate the world. First trillion dollars company, 10x the size of Apple, and Microsoft being acquired as a fun side project for them. They are so far behind this and the future does look dark.