Plus, Facebook's Q2 sales top estimates thanks to ads while Pinterest's sales lift as advertisers and users return.

(Bloomberg)—Alphabet Inc.’s revenue growth machine ground to a halt for the first time in the company’s two-decade history, stopped by the coronavirus pandemic and ensuing economic fallout that forced advertisers to pull back spending.
Ad sales, which make up the bulk of sales at the Google parent, were $29.9 billion in the second quarter, down 8.1% from the same period last year. That’s the lowest they’ve been since the third quarter of 2018 and the first-ever decline. The slide was a stark contrast to digital advertising rival Facebook Inc., which saw overall revenue grow 11% in the quarter.

But Google’s ad sales were picking back up again by the end of the quarter, chief financial officer Ruth Porat said on a conference call. And growth at YouTube and Google’s cloud business continued to be relatively strong. Shares inched higher in extended trading.

“We are cautiously encouraged by our results,” Porat said, adding that “it’s premature to say that we’re out of the woods.”

Google’s giant advertising business had already begun to slow well before the pandemic. Investors are increasingly interested in the prospects of smaller but faster-growing units. Cloud revenue rose 43% from a year earlier to $3 billion, while YouTube grew 6% to $3.8 billion, partly thanks to more people staying home due to lockdowns, Porat said. Overall, revenue fell 2% and was $31.6 billion excluding fees paid to partners, the Mountain View, California-based company said in a statement.

The pandemic has boosted the case for cloud services, which help people work remotely, but the looming recession also means companies are hesitant to spend freely on new software and infrastructure.

advertisement

“Overall I felt the momentum was strong” in cloud, CEO Sundar Pichai said. Rival Amazon.com Inc.’s cloud unit, which is much bigger than Google’s, grew 29% to $10.8 billion in the quarter.

Spending and hiring will continue for the cloud business, Porat said. Google brought on around 4,000 new workers during the quarter, about the same as it did in the same period a year ago, despite saying earlier this year it would slow hiring. Google ended the quarter with 127,498 employees, up 18% from the quarter a year earlier.

When it comes to new real estate, though, Google did cut back. Porat said the company would “reimagine” what their future workspaces would look like while most employees continue to work remotely. On Monday, Google said workers could stay home until July 2021 if they wanted to.

The spending cuts weren’t enough to stop net income from falling 30% to $6.96 billion. Earnings per share were $10.13, compared with $14.21 last year.

Facebook’s Q2 sales top estimates as ads rebound

 Facebook Inc.’s second-quarter sales topped analysts’ highest estimates, rebounding from a pandemic-fueled disruption to digital advertising earlier in the year as its social media apps continued to draw more users.
Revenue rose 11% to $18.7 billion, compared with the $17.3 billion average analyst projection. Facebook’s main social network logged 2.7 billion monthly active users in the period, according to a statement, compared with the 2.63 billion average estimate of analysts polled by Bloomberg.

advertisement

Facebook, whose business model is built on collecting user information so ad messages can reach the most fruitful targets, made the case that such targeting is now an essential service for small businesses forced to close storefronts during the COVID-19 outbreak. On a conference call, Chief Executive Officer Mark Zuckerberg said government privacy regulations—some already in progress, some threatened for the future—“would reduce opportunities for small businesses so much,” at a time when their livelihoods depend on reaching out to locked-down customers.

“That would probably be felt at a macroeconomic level, and is that really what policymakers want in the middle of a pandemic in recession?” Zuckerberg said.

The better-than-forecast report shows advertisers were willing to boost budgets in the second quarter after holding off earlier in the year. Profit doubled to $5.18 billion, or $1.80 a share, beating the $1.39 per-share average estimate. Because of Facebook’s vast reach and the rise in usage during the pandemic, the company’s results have been able to withstand a broader economic slowdown better than many other large companies.

Most of Facebook’s advertising revenue comes from small and medium-sized businesses that have few other options to reach customers. But not all advertisers are happy with the Facebook option. In the current quarter, Facebook is confronting an advertiser boycott, after civil rights leaders called on major brands to protest the company’s handling of harmful content and misinformation. More than 1,000 advertisers, from Verizon Communications Inc. to Coca-Cola Co., pulled promotions from Facebook starting in July.

Still, Facebook said ad revenue in the first three weeks of July was in line with the second quarter’s 10% growth rate, taking into account “the impact from certain advertisers pausing spend on our platforms related to the current boycott.”

advertisement

Facebook’s problems are “short-term and not structural, as FB has a good track record of managing advertiser concerns,” Mizuho Securities analyst James Lee wrote in a note to investors before the report.

The Menlo Park, California-based company said that every month, 3.14 billion people use at least one of its products, including photo-sharing app Instagram and the WhatsApp messaging platform. Facebook said user growth is likely to slow or flatten as shelter-in-place orders are lifted. The company has continued to hire rapidly during the pandemic, and ended the quarter with 52,534 employees. That’s up 32% from a year earlier.

Researcher EMarketer attributed the positive quarterly results to Instagram. Facebook doesn’t break out revenue for Instagram, though people familiar with the matter have said the mobile app brings in more than a quarter of Facebook’s sales.

“Instagram has played a major role in Facebook’s ability to withstand the effects of the pandemic,” said EMarketer analyst Debra Aho Williamson. “Its success is helping to buoy Facebook as a whole.”

The company’s earnings report was delayed from Wednesday, the day of an antitrust subcommittee hearing in the U.S. House, where representatives for hours interrogated Chief Executive Officer Mark Zuckerberg, alongside other tech leaders. Armed with documents collected during the inquiry, the lawmakers asked Zuckerberg about Facebook’s acquisitions of WhatsApp and Instagram, which Zuckerberg admitted were purchased in part to remove competition.

advertisement

Zuckerberg also told the Congressional panel that he was listening to the advertiser boycott, but was “not going to set our content policies because of advertisers. I believe that that would be the wrong thing to do.”

In its outlook, Facebook said it expects business to become more challenging because of new regulations, like the California Consumer Privacy Act, as well as changes to mobile operating platforms “which we anticipate will be increasingly significant as the year progresses.” Apple’s iOS 14 smartphone operating system, soon to be released, will put restrictions on tracking users across apps — a tool that Facebook relies on for targeting mobile ads.

Pinterest sales lift as advertisers and users return

 Pinterest Inc. surged as much as 30% in early trading Friday after it said revenue in July jumped from a year earlier as advertisers and users returned to the social-sharing service.
The company estimated year-over-year sales growth of about 50% for this month, through July 29. “We are encouraged by the performance of our business,” it said in a statement on Friday. “But a tremendous amount of uncertainty remains given the ongoing COVID-19 pandemic and other factors.”

For the whole of the third quarter, Pinterest expects sales to grow in the mid-30% range, year over year. The shares rose as high as $32.87 in premarket trading after closing at $25.29 on Thursday in New York. They had gained about 35% this year through Thursday.

The San Francisco-based company lets users “pin” photos, web links and other content to digital boards with different themes. The app is popular among fans of fashion, home decorating, cooking and other hobbies. During the Covid-19 pandemic, Pinterest has attracted more users, but it has suffered financially as some advertisers cut spending.

advertisement

On Friday, the company had better news, saying second-quarter advertiser growth accelerated year over year. Spending by small and medium-sized marketers comprised almost half of revenue, thanks to better-automated buying tools and momentum overseas.

Revenue came in at about $272 million in the second quarter, up 4% from a year earlier and ahead of Wall Street estimates, according to data compiled by Bloomberg.

“I’m pleased with the way we responded and remained engaged with our advertising partners,” said chief financial officer Todd Morgenfeld. “It has been encouraging to see the recovery in our business over the past few months.”

The company also said it had 416 million monthly active users, up 39% from a year ago and again above analysts’ expectations. Growth was particularly strong in the U.S., driven by existing users returning to the service. However, the company expects slower growth in monthly active users going forward.

“In these tough times, we’re seeing more and more people rely on Pinterest to cook at home, plan kids activities and set up a home office,” Ben Silbermann, chief executive officer of Pinterest, said in a statement. “Businesses are helping them turn their ideas into reality as people are increasingly discovering and buying products on Pinterest.”

advertisement
Favorite