Google ad revenue falls in Q4, reversing several years of growth

Advertising declines spread across Google properties in the fourth quarter of 2022 as the company was impacted by a continued shrinking of brand budgets.

Video streaming platform YouTube, which fell into the red in the third quarter following consecutive quarters of growth deceleration, posted an 8% decline in ad revenue to $7.9 billion in Q4 compared to the year prior.

The decline also worsened in Google’s Network division — revenue Google generates from selling ads outside of its own properties. Revenue fell 9% year-on-year to $8.5 billion in Q4.

Google’s massive search business, which had remained buoyant throughout much of the challenges of 2022, also slipped into a decline in Q4, with ad revenue falling 2% to $42.6 billion.

Executives had noted in October that search “tends to do relatively well” in harsh economic environments. 

But Google CEO Sundar Pichai said the macroeconomic climate “has become more challenging” during its Q4 earnings call on Thursday, Feb. 2, resulting in further pull backs in ad spend.

Total advertising revenue across Google properties slipped to $59 billion — down by 4% or $2.2 billion from the prior year.

Since 78% of Google’s revenue is derived from advertising, according to its Q4 figures, the ad retraction dragged on parent company Alphabet’s performance.

Alphabet's net income fell 34% to $13.6 billion in Q4, representing its fourth consecutive decline in profit. Revenue rose by 1% to $76 billion.

Beyond reduced ad budgets, chief financial officer Ruth Porat said the company’s results were impacted by foreign exchange headwinds and tough year-on-year comparisons to the unusual growth of 2021.

Echoing a similar sentiment expressed by Meta on Wednesday, executives laid out plans to “re-engineer the company’s cost base” to reduce losses and put a lid on rising costs.

“We're committed to investing responsibly with great discipline, and defining areas where we can operate more cost effectively,” Pichai said.

Alphabet’s operating expenses increased 10% to $42.5 billion in Q4, which Porat attributed to headcount growth (it added 3,455 people in Q4) and legal costs. Sales and marketing expenses declined 6% to $7.2 billion as the company spent less on its own marketing.

The company’s recent announcement that it would shed 12,000 employees forms part of its cost-saving plans. It said it expects to take a severance charge of between $1.9 billion to $2.3 billion in Q1 this year as a result of the layoffs.

Alphabet said it will also “meaningfully slow the pace of hiring in 2023,” focusing its hiring efforts on engineering and technical talent.

Other areas it is seeking cost savings involve reducing its office space — which it expects to cost $500 million as it exits leases — and reviewing its spend with suppliers and vendors.

Pichai talked at length about Alphabet’s artificial intelligence (AI) investments during the earnings update, including how it plans to use AI and automation to improve productivity for operational tasks. Meta is also deploying AI tools to increase the productivity of its engineers.

Alphabet is betting big on AI to deliver better, more efficient tools to advertisers and to improve the experiences for users in search.

“AI is the most profound technology we are working on today,” Pichai said. 

Alphabet is not alone in identifying AI as a key investment: Meta’s investments in generative AI dominated much of its Q4 earnings call, while Microsoft last month invested multiple billions in ChatGPT creator OpenAI.

Pichai acknowledged the technology is at “an inflection point,” but said Alphabet was in a strong position having begun its investments six years ago.

Investors questioned YouTube’s health prospects as the company continues to face monetizion headwinds from its short-form video product YouTube Shorts.

Google chief business officer Phillip Schindler said the company was “confident in YouTube's long term trajectory…despite ongoing revenue headwinds in Q4.”

He cited YouTube’s new revenue share program for Shorts as an example of where the platform is “differentiated.”

“What sets YouTube apart is we give creators more ways to create content and connect with fans and more ways to earn money than any other platform,” he said. “More creators means more content means more viewers, which leads to more opportunities for advertisers.” 

YouTube Shorts has now surpassed 50 billion daily views, the company said.

Alphabet didn’t appear to convince investors of its ability to reverse weaknesses. Its stock dropped 4.6% in after-hours trading.