Alphabet Q4 earnings: Search down 2%, YouTube down 8%

Alphabet announced Q4 2022 earnings yesterday: overall advertising revenue of $59BN was down 3.6% on a year-over-year basis, with Search advertising revenue declining by 1.6%, YouTube advertising revenue declining by 7.8%, and Network revenue declining by 8.9%. Overall Q4 revenue of $76BN was up by less than 1% on a year-over-year basis; overall 2022 revenue of $283BN was up by roughly 10%.

In The App Tracking Transparency Recession, I propose that the difference in growth rates (and, for Q4 2022, rates of decline) between Search and YouTube is explained by the varying degrees to which Apple’s App Tracking Transparency (ATT) policy affects both. Search is almost entirely exempted from ATT; YouTube is not. Alphabet’s Q4 results seem to affirm that premise.

Alphabet’s 10-K filing disclosed that, while Clicks across Alphabet’s advertising business were up 10% in 2021, the Cost per Click registered down by 1%. In response to a question in the earnings call about weakness in Google Search, Ruth Porat, Alphabet’s CFO, said:

In the 10-K that we’ll be filing shortly, you’ll see that for the full year 2022, CPCs were down 1% versus last year. And as we’ve talked about in prior quarters, the change in CPCs can reflect a number of different factors; geographic mix, property mix, all sorts of things. Clicks were up 10% in 2022, reflecting a number of factors, including increased engagement, primarily on mobile devices and improvements in ad formats.

YouTube Shorts likely contributed to growth in impressions over the year; according to Sundar Pichai, Alphabet’s CEO, YouTube Shorts is now averaging 50BN daily views, up from 30BN in the Q1 2022 earnings call, which took place last April:

Engagement expansion against conversion price suppression was a theme within the social media segment of the digital advertising space this earnings season, with Meta seeing a 23% increase in impressions served in Q4 against a 22% decrease in average price per ad; similarly, Snap saw “growth of impressions” in the quarter (notably, with 18% growth in DAU) and a 9% decline in CPMs.

Some interesting insights into the performance of PMax, or Performance Max, which is Google’s automated ads management and optimization tool were shared in the earnings call:

Third, to drive retail performance further, we focus on great ads products, from automation and insights to bidding tools and omnichannel solutions to AI-powered campaigns like PMax, we’re helping retailers hit their goals and connect with customers no matter where or when they shop.

Two quick insights on PMax, which we upgraded the majority of advertisers to from smart shopping campaigns last year. First, advertisers on average see a 12% uplift from SSC to PMax. Second, it was a success story during the holidays in Cyber Five, its ability to scale and adapt to changing traffic over a volatile peak retail season drove strong results for many retailers, particularly mid-market advertisers.

I provide an overview of PMax here.

And as a final observation: the share of advertising revenue contributed by Google’s network business, which is the subject of a recent lawsuit by the Department of Justice (my summary here), declined to an all-time low of 14.35% in the quarter:

Regarding contractions in advertising revenue, Pichai said this on the call (emphasis mine):

Thank you, Jim, and good afternoon, everyone. It’s clear that after a period of significant acceleration in digital spending during the pandemic, the macroeconomic climate has become more challenging. We continue to have an extraordinary business and provide immensely valuable services for people and our partners….However, our revenues this quarter were impacted by pullbacks in advertiser spend and the impact of foreign exchange. I’ll focus on two major things today in a bit more detail, and then I’ll give a shorter-than-usual quarterly snapshot from across our business.

The broad thesis of The App Tracking Transparency Recession is that a reversion to pre-COVID consumer engagement behaviors, as well as the drag on advertising efficiency engendered by Apple’s ATT privacy policy, are primarily to blame for weakness in social media advertising, not any macroeconomic factors.

That thesis seems to be supported by the advertising revenue performance of Snap, Meta, and Alphabet this earnings season, especially in the context of the BLS’ payroll data release today. Total nonfarm payrolls jumped by 517k in January (against consensus estimates of 187k), and unemployment has declined even further to just 3.4% in January — a half-century low — from 3.5% in December, along with a number of other similarly encouraging signals such as the revision up by more than 70k of nonfarm payroll data from December and November. If macroeconomic justifications for weakness in advertising spend made little sense in Q2 and Q3 of last year, they are simply untenable now.

Photo by Mitchell Luo on Unsplash