Google parent Alphabet’s profit surges in Q3 as ad spend ‘stabilizes’

Google parent Alphabet said it witnessed a “stabilization” in advertising spend in the third quarter of 2023 with double-digit growth in its search and YouTube revenue helping to soar profits by 42% to $19.7 billion.

Ad spend across Google’s products grew 9.5% to $59.6 billion in the quarter ended September 30, accelerating from a 3% lift in the prior quarter. 

YouTube’s turnaround was particularly noteworthy, with ad revenue growing 12.5% to $8 billion in the quarter, which the company said was driven by both brand and direct response advertisers.

The video streaming platform returned to growth in Q2 following three consecutive quarters of decline, which it blamed on a broader retraction in ad spend during economic turbulence as well as slow monetization of Shorts.

Shorts now average over 70 billion daily views and are watched by over 2 billion signed-in users every month, Alphabet and Google CEO Sundar Pichai said during an investor call Tuesday.

The retail sector was noted by executives as a key growth driver for Google’s ad performance in the quarter. 

Google chief business officer Philipp Schindler told investors that the company is benefiting from a continued focus from retailers on “driving ROI and efficiency,” which is causing increased demand for its artificial intelligence-powered ad solutions such as Performance Max.

“In a market where every dollar counts, our proven AI-powered solutions like search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel,” Schindler said.

Google’s Network division — revenue Google generates from selling ads outside of its own properties — continued to retract, albeit at a lower rate, with revenue falling 2.6% to $7.7 billion.

Growth in YouTube subscribers lifted Google’s ‘other’ revenues by 21% to $8.4 billion, the company said, though as it invested in content to drive subscribers, its cost of revenues increased by 7% to $33.2 billion.

Alphabet's performance was strongest in Europe, Middle East and Africa region, which grew revenues 17% as reported or 12% on a constant currency basis. Asia-Pacific grew 14% as reported or 17% on constant currency terms, Other Americas posted 10% growth, or 13% on constant currency. Once again, the U.S., Alphabet's largest market, had the weakest performance of 9% growth.

The results paint a picture of a business that continues to be resistant to scrutiny over its ad practices. In the same quarter that YouTube’s ad revenue accelerated, an explosive report from Adalytics alleged it was serving inappropriate ads to viewers of “made for kids” content and potentially triggering the widespread tracking of children online.

Media buyers have also expressed concerns about the efficacy and limitations of Performance Max, which was cited multiple times on Tuesday as a key driver of Google’s ad business in the third quarter. 

While Alphabet’s profit exceeded expectations, investors were disappointed by the performance of Google’s cloud division, which posted a 22% increase in sales to $8.4 billion, shy of forecasts and a slow down from the growth rates of prior quarters. The division, which turned profitable in Q1, posted a profit of $266 million in the third quarter.

Rival Microsoft’s cloud division exceeded expectations on Tuesday, with revenue from Azure growing 29%.

Alphabet shares fell more than 6% in after-hours trading.