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4 Key Takeaways from Google-Parent Alphabet's Earnings Call

Sundar Pichai, CEO of Google and Alphabet
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Shares of Google parent Alphabet (GOOGL) dropped in after-hours trading after the company reported its fourth-quarter earnings. In the company's post-earnings conference call, company executives focused on generative AI, subscriptions, cloud, and the company’s investments for growth.

Google Says Advertisers Will Get an AI Boost

In the fourth quarter, the company’s advertising revenue rose 11% from a year earlier but trailed analysts' estimates. During the conference call, company executives discussed the role of AI in helping advertisers, especially its new AI model, Gemini, released in December 2023. This tool, which the company says is superior to Microsoft’s (MSFT) chatGPT, is now being weaved into all of Google’s products such as its Bard search tool and its advertising products. CEO Sundar Pichai said that Gemini was already reducing search latency by 40% and that a Gemini Ultra version is launching soon.

Advertisers are increasingly interested in the company’s AI tools for enhanced marketing campaigns as customers became more “price conscious” in the fourth quarter, said Chief Business Officer Philipp Schindler. AI-driven campaigns can give customers access to 3 billion users and Google was seeing an increased conversion rate for its retail advertisers.

Google Cloud Revenue Tops $9 Billion, AI Lands Corporate Partnerships

The fast-growing Google Cloud segment delivered $9.1 billion in revenue, up 26% from a year ago, and may help to ease investors’ fears after a third-quarter slowdown.

The company's Duet AI and Vertex AI have helped Google win a multitude of corporate clients including McDonald's (MCD), Verizon (VZ), Moody's and Victoria's Secret (VSCO).

Some powerful customer-facing relationships include Samsung's Galaxy S 24 smartphones for advanced text-to-image applications as well as Shutterstock (SSTK) that can help generate unique visuals with text descriptions.

"Customers are increasingly choosing Duet AI are packaged AI agents for Google workspace and Google Cloud Platform to boost productivity and improve their operations," Pichai said.

AI Isn't Cheap, But Alphabet Will Be Disciplined

One of the big takeaways from the latest earnings was an increase in the company’s cost of revenue, which was up 6% year-on-year. Alphabet Chief Financial Officer Ruth Porat said this was being driven by content acquisition for the company’s subscription offerings.

She added that total expenses were up 11% over the same period, with the company planning for expected growth in AI with a big investment required in real estate and data centers. That drove capital expenditures to $11 billion in the fourth quarter, but Porat said that 2024 would see a “notably larger” capital spend.

The push to be at the forefront of generative AI with new platforms and products is also adding to research and development costs, with the company posting R&D expenses of $45.4 billion in 2023, up nearly $6 billion from the previous year.

Pichai did stress at the top of the earnings call that Alphabet is committed to discipline in its growth investment plans, but some analysts may be concerned about the short-term drag on earnings in 2024 with AI demand still in its infancy.

Subscriptions Growth A Key Priotiy

Alphabet's subscriptions crossed $15 billion annually and the company is seeing strong performance in areas such as YoutubeTV. According to Pichai, a premium subscription powered by Gemini Ultra is also in the works. Google One, which offers cloud storage and phone back-up, has also crossed 100 million subscribers.

Schindler, the Chief Business Officer, also said that the company was focused on its Subscriptions, Platforms, and Devices segment, previously known as Google Other. He noted that its TikTok rival, Google Shorts, was seeing 70 billion in daily views. The company has also been seeking to take on Apple (AAPL) with its Pixel phones, and Schindler noted that this will play a big part in the segment.

YouTube's deal for the NFL Sunday ticket is also good news for the company's subscription growth.
"NFL Sunday Ticket supports our long-term strategy and really helps solidify YouTube's position as a must-have app on everyone's TV," Schindler said, adding that the company is pleased with NFL sign-ups both as a part of the YouTube TV bundle as well "as standalone offering on YouTube primetime channels. "
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