YouTube Ad Revenue Growth Slows Dramatically in Q1, Alphabet Misses Expectations

·4-min read

YouTube advertising sales for the first three months of 2022 grew 14%, to reach $6.87 billion — missing Wall Street expectations by more than $600 million and representing a major cooling off from the torrid pace the video giant had seen during the COVID pandemic.

By comparison, YouTube’s ad revenue was up 49% in the year-ago period and increased 46% for the full year 2021. Alphabet, the parent company of Google and YouTube, reported total revenue for Q1 of $68.01 billion, up 23%, and net income of $16.44 billion (or $24.62 per share), down 8%. That fell shy of Wall Street expectations on the top and bottom lines.

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Financial analysts on average expected Alphabet to post Q1 revenue of $68.1 billion and EPS of $25.96, per Refinitiv. YouTube ad revenue was projected to hit $7.48 billion in the quarter, according to FactSet. Alphabet’s Q1 net income included a loss of about $1 billion in the value of the company’s investments in equity securities.

Shares of Alphabet’s class A stock were down 5% in after-hours trading on the miss (after closing down 3.6% in regular trading).

The year-over-year deceleration in YouTube ad revenue primarily reflects “the lapping of the exceptional performance of direct response” advertising in the first quarter of 2021, Alphabet/Google CFO Ruth Porat said on the earnings call Tuesday. She said YouTube also saw a slowdown in spending by brand advertisers in Europe, related to Russia’s war on Ukraine. Porat added that Alphabet’s Q2 revenue will reflect the impact of the company ceasing the vast majority of commercial activities in Russia in early March.

Meanwhile, YouTube’s subscription services “continued to deliver substantial revenue growth,” driven by growth for YouTube TV, YouTube music and YouTube Premium, Porat said.

Sundar Pichai, CEO of Alphabet and Google, said on the call that YouTube Shorts — the video platform’s short-form video feature — now averages over 30 billion daily views, up more than fourfold from 6.5 billion a year ago. “As we’ve always done with products, we focus on building a great user experience first, and we’ll work to build monetization over time,” he said about Shorts.

Analysts have questioned whether viewing on YouTube Shorts, which currently does not serve ads, is siphoning users away from ad-supported videos on the core platform. Execs said YouTube plans to begin testing out ad formats for Shorts. “We are testing monetization on Shorts, and early advertiser feedback and results are encouraging,” Porat said. “And the team is focused on closing the gap with traditional YouTube ads over time.”

Meanwhile, Pichai said, in the year ahead YouTube will introduce new smartphone controls and interactivity features for connected TVs, allowing users to comment and share content. Viewers watch more than 700 million hours of YouTube content per day on connected televisions, he said. According to Nielsen, YouTube reached over 135 million people on connected TVs in the U.S. in December 2021.

In announcing Q1 results, Pichai highlighted strong growth in Google Search and Google Cloud revenue, “which are both helping people and businesses as the digital transformation continues. We’ll keep investing in great products and services, and creating opportunities for partners and local communities around the world.”

Google Search revenue grew 24%, to $39.6 billion. Cloud revenue jumped 44%, to $5.8 billion, and narrowed its operating loss to $931 million (versus -$974 million in Q1 2021).

“Google’s underwhelming results underline the view that the search giant is struggling with slowing revenue growth as advertisers cut back on spending due to a slowdown in consumer demand amid the current inflationary environment,” Investing.com senior analyst Jesse Cohen commented in a note.

Alphabet ended the first quarter with 163,906 employees, up 17% year over year, after adding 7,400 in the first three months of 2022. On the call, Pichai noted that Alphabet plans to create 12,000 new jobs in 2022 and invest $9.5 billion this year on U.S. data centers and offices.

In reporting earnings, the company said its board authorized an additional $70 billion buyback of class A and class C shares, up from $50 billion authorized for share repurchases in 2021.

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