Alphabet Q2 2024 earnings call: AI driving growth

At its core, Alphabet is fundamentally an advertising company. Google, its search engine, has been a staple in our lives for so long that the term ‘Google’ is often synonymous with ‘search’. With the rise of AI, the company’s Google Cloud segment has seen additional growth. The recent Q2 2024 earnings call highlighted this focus on AI.

In Q2 2024, Alphabet’s consolidated revenue increased 13.6% year-on-year to US$84.7 billion (or up 15% in constant currency). Google Search and Google Cloud are gaining momentum and making progress as AI initiatives drive new growth.

Google Services (including Google Search, YouTube ads, Google Network, and Google subscriptions, networks, and devices) contributed to majority of Alphabet’s revenue while the remaining revenue was from Google Cloud.

In Q2 2024, the United States remained the largest revenue contributor to the company at 49% while EMEA, APAC, and other Americas made up of the remaining 29%, 16% and 6% respectively.

Operating margin improved from 29% in Q2 2023 to 32% in Q2 2024 because of revenue growth and the company’s efforts to keep its cost base in check.

The number of employees dropped 1.2% year-on-year to 179,582 in Q2 2024 as Alphabet laid off hundreds of its employees and slowed down hiring. It has also consolidated and reorganised its AI teams. Headcount is expected to increase in the third quarter as Alphabet continues to hire fresh graduates and invest in top engineering and technical talent.

Net income increased 28.6% year-on-year to US$23.6 billion in Q2 2024.

Google Services

Google Search & other

Google Search remained the largest contributor to Alphabet’s revenue growth in Q2 2024. The revenue growth was due to notable growth in advertising from the retail sector, followed by financial services.

The company continues to release innovative search functions to engage users including visual search via Google Lens as well as Circle to Search feature on selected Android smartphones. It is looking into generative audio and video experiences that are relevant to YouTube.

YouTube ads

YouTube ads revenue growth was driven by growth in brand (general brand advertising) and direct response (immediate results and conversions like YouTube Shopping). Viewers spend more time watching YouTube as they continue to shift from traditional to connected TVs. YouTube has maintained its top spot as the most-watched streaming platform on U.S. TVs for 17 consecutive months according to Nielsen. However, when considering all TV viewing, including ABC and ESPN owned by Disney, YouTube ranks second overall.

YouTube remains relevant as customers are seeing significant improvements by incorporating video into AI-powered campaigns like Performance Max and Demand Gen. Customers can create and enhance video ads easily using automated tools. In fact, advertisers using both image and video ads within Demand Gen campaigns have reported a 6% increase in conversions per dollar spent compared to those using only image ads on Discover. APAC-based retailers are expected to increase their advertising on YouTube, a momentum that started since the second half of 2023.

Alphabet is still in the early stages of monetising YouTube Shorts. Despite more than doubling views of YouTube Shorts on connected TVs in 2023, young people spent close to two hours on TikTok daily compared to 40 minutes on YouTube, according to a study conducted by Common Sense Media.

Google Network

Google Network consists of revenue generated from AdMob (ads display within apps), AdSense (ads display on websites), and Google Ad Manager (ads management platform). The segmental revenue declined 5.2% year-on-year to US$7.4 billion in Q2 2024 because of reduced revenue from AdMob. The segmental revenue was adversely affected by changes in foreign exchange currency rates in the first half of 2024. The management did not touch a lot on this segment during the earnings call.

Google subscriptions, platforms, and devices

The revenue growth in Google subscriptions, platforms, and devices was led by strong growth in Google One and YouTube subscriptions particularly in YouTube TV and YouTube Music Premium. However, its growth decelerated as YouTube TV prices increased in 2Q 2023. The impact is expected to persist through the rest of 2024.

In terms of Google Platforms, the number of buyers in Google Play increased. When it comes to Google Devices, new Pixel phones will be released in Q3 2024, benefiting the quarter.

Google Cloud

Google Cloud’s rapid revenue growth in Q2 2024 was fuelled by strong performance in the business-to-business Google Cloud Platform, including increased AI contributions, and Google Workspace, driven by higher average revenue per seat. Its quarterly revenues crossed the US$10 billion mark for the first time.

Chief Investment Officer Ruth Porat replied to an analyst that most of Alphabet’s top 100 customers are using its generative AI solutions such as Vertex AI, Gemini for Workspace, and Gemini for Google Cloud. AI is serving as a catalyst for further growth and development. Google Cloud Platforms grew faster than the overall Google Cloud segment.

Operating income from this segment almost tripled from US$0.4 million in Q2 2023 to US$1.2 billion in Q2 2024. Despite passing the US$1 billion mark in quarterly operating profit, its operating income contribution remained small to Alphabet at less than 5%.

Overall, its segmental margin improved as revenue grew and the company achieved better efficiency. It is worth watching this fast-growing segment in the future.

Other Bets

Waymo is arguably the most established and furthest along of Alphabet’s Other Bets. Waymo develops self-driving car technology as well as offers ride-hailing services in some cities with fully autonomous vehicles. It has also achieved several milestones in the field. With over 2 million completed trips and 20 million autonomous miles driven on public roads, the company is now offering paid rides to the public at a rate of over 50,000 per week in San Francisco and Phoenix. Waymo has opened up its service to everyone in San Francisco and is expanding fully driverless testing to other Bay Area locations.

This segment is still in its early stages, and the relative success of these companies including Waymo can fluctuate over time.

Key analyst questions

The key theme of this earnings call revolved around AI.

AI is employed internally by engineers for coding and enhancing efficiency. The insights gained are continuously integrated, leading to improvements in models and products. Externally, AI is leveraged to enhance customer service experiences, increase conversions, and boost basket sizes. Additionally, Google AI optimizes ad placement to connect brands with viewers who are most likely to be interested.

According to Chief Business Officer Philipp Schindler, Alphabet is working on monetizing generative AI by placing ads either above or below its newly introduced opt-in AI Overviews. Through AI Overviews, the company is gradually expanding the range of questions it can assist users with, from providing planning ideas and step-by-step instructions to soon displaying relevant Search and Shopping ads in a “sponsored” section. This feature is currently available for specific searches where generative responses are considered beneficial, initially for users in the U.S. and eventually expanding globally.

An analyst was concerned about Alphabet’s aggressive expansion in terms of capital expenditure. CEO Sundar Pichai thinks that ‘the risk of underinvesting is dramatically greater than the risk of overinvesting’. These infrastructures are useful and have long lifespan which will benefit its core areas and products such as Google Search and YouTube, as well as support its innovative long-term Other Bets. He thinks that the capital expenditure is necessary to protect Alphabet’s business turf.

The internet giant incurred capital expenditure amounting to US$13.5 billion in Q2 2024 as it invested heavily in its technical infrastructure particularly servers, followed by data centres. As a result, its operating margin in the third quarter will likely maintain or reduce slightly because of higher capital expenditure and depreciation expenses as well as the accelerated Pixel launch costs.

The full-year operating margin in 2024 is expected to expand marginally from 2023. The company will focus on improving overall efficiencies and investing for long-term returns.

The fifth perspective

Alphabet’s Q2 2024 performance underscores its continued dominance as an advertising powerhouse, with substantial growth in both Google Search and Google Cloud. The company’s focus on AI and innovative features, such as AI Overviews and generative AI solutions, highlights its commitment to enhancing user experience and driving revenue growth. Despite the challenges posed by a highly competitive landscape, Alphabet’s strategic investments in infrastructure and technology are poised to secure its position in the market. The company’s balanced approach to expansion and efficiency, coupled with its emphasis on long-term investments, sets the stage for sustained growth and profitability.