Google ad sales bounce back sharply from pandemic slump

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Google’s advertising business staged a much stronger rebound from its coronavirus slump than expected in the latest quarter, boosting revenue and earnings of parent Alphabet well above what analysts had expected.

Earnings from the search giant — which came just days after it was hit with a landmark antitrust lawsuit from the US government — showed that its core search business had returned to growth after the pandemic led the company to report its first-ever business contraction.

Alphabet shares rose as much as 9 per cent higher in after-market trading. Along with a 3 per cent rally in earlier trading, the surprise recovery added more than $100bn to Alphabet’s stock market value on the day.

Sundar Pichai, chief executive, sought to play down the scale of Google’s outperformance, suggesting that it was only growing in line with the broader internet economy as more people go online to work, shop and entertain themselves. As a result, the company enjoyed “a strong quarter, consistent with the broader online environment”, he said.

While Google had been expected to benefit from stronger advertising demand as merchants shifted more of their ad budgets online to support sales during the pandemic, the strength of the recovery outpaced most analysts’ expectations. Ruth Porat, chief financial officer, said it reflected “broad-based increases in advertiser spending”.

Virtually all categories of search advertising started to rebound in August, she said, singling out home and garden, computers and work from home. Brand advertising on YouTube — which had dried up as advertisers turned to direct response formats after the coronavirus crisis hit — also staged a recovery.

Alphabet’s earnings in the latest quarter were lifted by an uncharacteristically slow increase in operating costs, which rose only 5 per cent, after deducting the cost of a legal settlement in the previous quarter.

The third quarter normally brings a boom in hiring as Google picks up students graduating over the summer. After freezing all but the most essential hires when the coronavirus hit, Google said it had added 4,623 people in the last quarter, about 30 per cent fewer than the same period the year before.

Most of the new hires were focused in the cloud computing division, which Ms Porat said would remain a significant focus of investment as Google tried to overcome a late start and catch up with Amazon and Microsoft. The spending showed further signs of paying off in the latest period, with cloud revenue jumping 45 per cent to $3.4bn.

Big Tech’s big earnings day

The greater level of disclosure about Google’s different divisions, which began at the start of this year, along with signs that it has been more disciplined about controlling operating costs, have brought a thaw in the company’s sometimes frosty relationship with analysts. Ms Porat indicated the company would go further in its next set of earnings, disclosing the operating profits of its divisions for the first time.

Advertising revenue in the latest quarter grew 10 per cent, after falling 8 per cent in the preceding quarter. Search advertising recovered from the 10 per cent fall in the second quarter to edge up 6 per cent, while advertising on YouTube bounced back strongly, rising 32 per cent compared to a 6 per cent gain in the second quarter.

Overall, Alphabet reported revenue of $46.2bn, up 14 per cent from the previous year, after a decline of 2 per cent in the second quarter. Earnings per share rose 62 per cent, to $16.40. Wall Street had been expecting revenue of $42.8bn and earnings per share of $11.18.