Alphabet earnings hit by ‘significant slowdown’ in ad sales, but revenue boosts stock

Analysts surveyed by FactSet had estimated $10.71 a share on ex-TAC revenue of $33.32 billion on average, though projections had taken a hit ahead of the report. As of the end of January, average analyst expectations were for earnings of $12.34 a share on ex-TAC sales of $35.33 billion.

The first-quarter results, announced after the market’s close Tuesday, initially sent Google shares up more than 3% in after-hours trading.

A downturn in advertising was expected as the coronavirus pandemic plunges the global economy into a tailspin. Travel and entertainment ads in particular have dried up, driving down a rich source of revenue for Google and reportedly forcing the company to slash its marketing budget by as much as half in the second half of the year. Earlier this month, Alphabet Chief Executive Sundar Pichai told employees the company would reduce spending the rest of the year, starting with hiring.

Alphabet in the Age of COVID-19: Google braved one recession, and is more diversified

“Performance was strong during the first two months of the quarter, but then in March we experienced a significant slowdown in ad revenues,” Alphabet Chief Financial Officer Ruth Porat said in Tuesday’s announcement. “We are sharpening our focus on executing more efficiently, while continuing to invest in our long-term opportunities.”

Though $33.8 billion of Google’s total quarterly revenue of $41.16 billion came from advertising, a reflection of its continued reliance on a battered market, there is a silver lining. Sales from Google Cloud and YouTube continued to surge, underscoring versatility in the company’s overall product line — YouTube ad revenue increased 33.4% to $4.04 billion from $3.03 billion a year ago, while Google Cloud sales grew 52% to $2.78 billion from $1.83 billion.

During a conference call with analysts late Tuesday, Pichai described Q1 as a “tale of two quarters”: a strong start that quickly tailed off because of COVID-19. He said search offers promise in pivoting to adapt to the economic crisis, and Google is more diversified now with cloud services than it was during the Great Recession in 2008-9.

Porat added that Google’s non-advertising business remained strong throughout the quarter, especially Google Cloud. “We anticipate the second quarter will be a difficult one for our advertising business,” she said.

Steep declines in transportation and entertainment ads are expected to plunge digital display ad spending in the U.S. between 5.5% and 18% in the first half of 2020, or about $8 billion to $13 billion less, according to eMarketer analyst Nicole Perrin. In early March, before COVID-19 began its stranglehold on the economy, she expected a 19% increase for the year.

See also: Google, Facebook stocks take a beating after analysts cut outlooks on internet advertising

Shares of Alphabet and Facebook Inc. US:FB were battered last week as part of a broad technology-sector selloff after Wall Street analysts at Raymond James and Deutsche Bank warned about further weakness in online advertising sales.

Snap Inc. US:SNAP offered a snapshot of the current economic landscape: Its revenue, largely dependent on advertising, decelerated to 11% in the week leading up to its first-quarter results on April 21. Previously, it was up 58% in January and February, before slowing to 25% in March, and 15% so far in April.

See also: Snap stock posts best day in two years but ‘jaw-dropping’ slowdown is warning sign for Facebook and Google

Facebook, second only to Google in digital ad revenue, reports fiscal first-quarter results on Wednesday.

Alphabet stock is up 2.8% in the past 12 months, while the S&P 500 index US:SPX has declined 2.8%.