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Alphabet Touts New Areas Like Google's YouTube Shorts After a Tough Quarter

The company plans to re-focus on profitable areas after its financial results miss analyst expectations.

Google headquarters in Mountain View, California
Stephen Shankland/CNET

Google parent Alphabet posted on Tuesday weaker-than-expected quarterly earnings as it deals with an inflation-mired economy and slowing ad spending. But Chief Executive Sundar Pichai defended the company's priorities, arguing that investments in areas like YouTube Shorts eventually will pay off.

In the quarter ended Sept. 30, Alphabet reported net income of $13.9 billion, or $1.06 per share, on revenue of $69 billion. Analysts expected the company to post earnings of $1.25 per share and revenue of $70 billion, according to Yahoo Finance. Net profit fell 27% from a year earlier.

"Times like this are clarifying," Pichai said, acknowledging the difficult results and economic climate. Alphabet is working "to make sure we are set up for the decade of growth ahead," with investments in areas like artificial intelligence, visual search, the Google Cloud computing service and its TikTok rival, YouTube Shorts, which attracts 1.5 billion viewers per month.

The weaker-than-expected results come as advertising, the company's main revenue source, sees a contraction in a tumultuous economy. Inflation rose 8.2% in the US in September, and other parts of the world are seeing prices rise by upward of 50%, eating into consumer appetite for spending. 

Although advertising revenue increased 2.5% year over year to $54.4 billion, it fell 3% between the second and third quarters. For comparison, a year ago, Google's ad revenue surged 69% when advertisers were battling to meet consumer demand in the midst of the pandemic.

"Search will continue to feel like a safe space for brands to invest due to the intent and measurability of the platform," said Liz Rutgersson, chief media officer at Merkle, a marketing and advertising company. Rutgersson added that digital video is harder for advertisers to glean results, therefore Google must focus on "enabling advertisers to truly measure the impact of all media, particularly brand media," so that they can properly determine performance.

It's the third consecutive quarter Alphabet missed estimates. Google executed a 20-for-1 stock split earlier this year.

Google's search and cloud computing businesses have healthy fundamentals, Chief Financial Officer Roth Porat said in a statement. But acknowledging the difficult results, she added, "We're working to realign resources to fuel our highest growth priorities."

Google continued to hire in the third quarter, even as Pichai said in July the company would slow hiring. The search giant added 12,765 employees to its workforce between June and September, growing from 174,014 workers to 186,779. The employee increase stems in part from Google's $5.4 billion purchase of security company Mandiant in September. 

"The slowing pace of hiring will become more apparent in 2023," Porat said on a conference call about the quarter's results.

As Google faces revenue issues, it's focusing on growth areas like YouTube Shorts and Cloud. Pichai reiterated YouTube's commitment to Shorts monetization, challenging TikTok directly and courting creators to the platform. Last year, Google launched a $100 million Shorts creator fund to be distributed over two years. While its cloud computing service remains unprofitable, Google plans to continue investing in what it still believes is an important long-term business.

The strong US dollar is hurting international sales for US companies as exchange rates effectively raise prices outside the country. Investment bank and financial services company Goldman Sachs said in a report earlier this month that it expected companies to blame the US dollar for falling revenues.

Indeed, Porat said exchange rates hurt Google's business, decreasing revenue 6%. The foreign exchange issues will be even stronger in the fourth quarter, she added.