Google’s Ad Sales Slow Sharply, an Ominous Sign for US Economy

Google’s Ad Sales Slow Sharply, an Ominous Sign for US Economy
A wooden Google logo hangs at a stand at the 2022 Re:publica digital society festival in Berlin, Germany, on June 9, 2022. (Sean Gallup/Getty Images)
Naveen Athrappully

Google’s parent company Alphabet posted disappointing ad sales numbers in its third-quarter results, leading to a fall in the company’s share price, while indicating a dismal outlook for overall business confidence and the economy.

Total operating income for the quarter ended Sept. 20 was $17.1 billion, a decline of more than 18 percent from 2021’s third-quarter income of $21.0 billion. The operating margin also shrank, from 32 percent last year to 25 percent. Google Services income, which includes ads, play store, and YouTube, registered a decline of more than 17 percent.

Although third-quarter total revenues went up, from $65.1 to $69.1 billion, net income went down almost 27 percent, from $18.9 billion to $13.9 billion. Net income, year to date ended Sept. 30, declined by more than 16 percent. Analysts on average expected revenue to be $70.58 billion, based on Refinitiv data.

Pulling back on ad spending is a sign that business owners are losing confidence in the economy and moving toward conservative spending practices, which usually goes along with a slowdown in hiring.

Quarterly income results from Google, considered the largest digital advertising platform by market share, shattered hopes on Wall Street and reinforced recessionary views for the U.S. economy. The company's stock price fell more than 6 percent following the news release.

During an investors' call, Alphabet CEO Sundar Pichai described conditions as “uncertain,” and said it was “a tough time in the ad market."

Ruth Porat, Alphabet's chief financial officer, said that the slowdown was accentuated when compared to a “very strong third quarter” in 2021, even as she acknowledged that several advertisers were pulling back from spending on the platform.

“Online ad spending is clearly slowing more than we thought,” said David Heger, an analyst for Edward Jones, according to the Associated Press.

Reduction in Headcount

During the earnings calls on Tuesday, Pichai said that Google plans on reducing its hiring, a move emblematic of the current situation in the tech industry.

“Our fourth-quarter headcount additions will be significantly lower than in the third quarter,” Pichai said, adding that the company has been “clear that we’re going to moderate our pace of hiring going into the fourth quarter as well as 2023.”

The CEO said that the tech behemoth will be “focused on moderating operating expense growth.” Talent remains the company’s “most precious resource.”

At present, Alphabet is “reviewing projects at all scales,” including “pretty granularly,” to “make sure we have the right plans there and based on that, the right resourcing and making course corrections.”

Meanwhile, Porat said, “In the fourth quarter, we expect headcount additions will slow to less than half the number added in the third quarter.” Although the pace will be slower, Google will be hiring “top engineering and technical talent.”