Alphabet Q3 2024 earnings call: AI, advertising, and cloud drive growth

Alphabet’s core business remains advertising, which accounted for more than three-quarters of its revenue in Q3 2024. The company continues to innovate in advertising, introducing new ad experiences on platforms like Search and YouTube. Alphabet is integrating artificial intelligence (AI) into its products and services to enhance user experience, improve response times, and drive revenue growth. The company’s focus remains on connecting users with relevant advertisers, products, and services.

Alphabet had a good third quarter in 2024 as its consolidated revenue increased 15.1% year-on-year (or 16% in constant currency) to US$88.3 billion. The company is seeing momentum across all its products and platforms, driven by its focus on innovation and AI.

Alphabet is making significant investments in infrastructure to support its AI initiatives. This includes building data centres, developing AI chips, and expanding its global fibre network. In Q3 2024, the company invested over US$7 billion in data centres, primarily in the U.S. Overall, Alphabet invested US$13 billion in its technical infrastructure during the quarter, with a focus on server upgrades, data centres, and networking equipment. Similar levels of investment are anticipated in Q4 2024.

Alphabet’s costs increased due to a US$607 million charge to optimise its global office space as well as the significant infrastructure investments mentioned. This involved restructuring AI teams and moving the Gemini app team to Google DeepMind to accelerate development. Additionally, higher YouTube’s traffic acquisition costs, higher R&D expenses and depreciation costs associated with increased infrastructure investments contributed to increased costs. Furthermore, the early launch of Google devices in the third quarter led to higher hardware, sales, and marketing costs.

The company is streamlining its cost base through headcount management, facilities optimisation, and process efficiency improvements, which will positively impact its bottom line. For instance, over 25% of new code at Google is created by AI and then reviewed and approved by engineers, enhancing both efficiency and productivity.

As a result, its operating income increased 33.6% quarter-on-quarter to US$28.5 billion in Q3 2024 while operating margin expanded from 27.8% in Q3 2023 to 32.3% in Q3 2024.

Google’s core services, such as Search, YouTube ads, and Google Network, along with subscriptions, platforms, and devices, generated most of Alphabet’s revenue. Google Cloud contributed the remaining portion.

The Google Search & Others segment experienced broad-based revenue growth, with significant contributions from the financial services, insurance, and retail sectors.

YouTube’s ad revenue growth in Q3 2024 was fuelled by both brand and direct response advertising. Revenue from advertising in general increased as the company benefited from election-related ad spend in the third quarter, particularly on YouTube. Its combined ad and subscription revenue in the last 12 months surpassed US$50 billion for the first time. Compared to Q3 2023, the company’s advertising business grew more slowly this year because last year’s growth, especially from Asian retailers, was unusually high. Advertising revenue in the upcoming quarter will be similarly affected.

Revenue from Google Network in Q4 2023 reduced marginally quarter-on-quarter due to a much higher traffic acquisition cost rate.

The growth in revenue from Subscriptions, Platforms, and Devices was due to the launch of new Google devices in Q3 2024 as well as subscription growth in YouTube TV, NFL Sunday Ticket, YouTube Music Premium, and Google One.

Google Cloud’s revenue growth was driven by strong performance across multiple areas. This includes increased demand for AI infrastructure and generative AI solutions on Google Cloud Platform, as well as significant growth in Google Workspace, particularly due to higher average revenue per user.

Alongside higher revenue, Other Bets registered a narrower operating loss at US$1.1 billion in Q4 2023 compared to US$1.2 billion in Q3 2023.

Net income increased 33.6% quarter-on-quarter to US$26.3 billion in Q3 2024 while diluted earnings per share increased 36.8% to US$2.12 over the same period. During the quarter, the company spent US$15.3 billion repurchasing its shares and distributing US$2.5 billion worth of dividends to shareholders. Overall, the company returned nearly US$70 billion to shareholders in the past 12 months through dividends and share buybacks.

Google Services – Google Search & other

New GenAI-enabled search products like AI overviews, Circle to Search, and new features in Lens are now handling more queries and in fact can now handle longer and more complex queries. They are transforming what and how people can search for information, resulting in increasing search usage and user satisfaction.

In October 2024, AI Overviews was rolled out to more than a hundred new regions. One billion users use AI Overviews monthly. However, this shift can impact website traffic as AI Overviews provide direct answers within the search results page, potentially reducing clicks to websites. Circle to Search is now accessible on over 150 million Android devices, and fast-growing Lens processes over 20 billion visual searches monthly, with a quarter of these searches having commercial intent. The company is progressively expanding ad placements to AI Overviews and Lens. Gemini’s integration into Google Assistant on Android is progressing well for both consumers and developers. There are opportunities to monetise AI Overviews further in the future.

Demand Gen uses AI to create visually appealing ads across various Alphabet platforms, including YouTube, Discover, and Gmail. These ads with multiple videos, images, and texts are designed to capture attention, drive engagement, and ultimately lead to conversions and are increasingly adopted by advertisers like Audi and DoorDash.

Google Services – YouTube ads

According to Nielsen, YouTube is the leading streaming platform in the U.S as watch time on YouTube grows, due partly to Olympics in Q3 2024.

YouTube viewers watch more than 70 billion YouTube Shorts daily. Seventy percent of the videos uploaded to YouTube each month are Shorts. Long-form videos on YouTube have traditionally offered higher monetization potential compared to Shorts. However, this gap is narrowing, especially in the U.S. and other high-monetization markets. YouTube executives have noted that the platform is closing the gap between Shorts and long-form monetization, with Shorts views more than doubling since the introduction of revenue sharing.

Advertisers can now choose to display their ads to viewers on Shorts in nearly 40 markets. They are provided with precise targeting options, for instance, by integrating shorts into video reach campaigns. They are committed to spend 20% more than the previous year.

Veo, Google DeepMind’s advanced video generation model, will be integrated into YouTube Shorts later this year while Gemini will be leveraged to enhance video recommendations as well as deliver more relevant and personalised content to viewers.

Google Services – Google subscriptions, platforms, and devices

The early launch of the Google Pixel 9 series in Q3 2024, featuring advanced AI models like Gemini Nano, has led to an increase in buyers on the Google Play Store. However, this shift may result in a headwind for the upcoming quarter, as the typical Q4 sales boost from new device releases has already been realized.

Additionally, Gemini Live, an AI assistant capable of real-time conversations, has been integrated into Android devices, including Samsung Galaxy models. This integration allows users to engage in natural, intuitive interactions with their devices, enhancing the overall user experience.

Google Cloud

AI has been integrated into various Google Cloud products and services like AI-powered cybersecurity solutions like Google Threat Intelligence and Security Operations, BigQuery, enterprise AI platform Vertex AI and Customer Engagement Suite. Clients including Deloitte, Hiscox, Snap, and Volkswagen use these tools to improve customer engagement and accelerate response times.

Google Cloud has demonstrated significant growth and improved profitability. Its operating income surged more than seven-hold quarter-on-quarter to US$1.9 billion in Q3 2024. Its operating margin improved from 3.2% in Q2 2024 to 17.1% in Q3 2024, which is still relatively low compared to its peers at around 30% according to an analyst.

Other Bets

Waymo remains Alphabet’s largest venture under Other Bets. It is the leader in the autonomous vehicle industry that serves more than one million fully autonomous miles and over 150,000 paid rides weekly. As Waymo continues to scale and accelerate, it has significantly lowered its unit costs while providing safe, private, and reliable autonomous rides to customers. It partners with Uber and Hyundai to bring fully autonomous driving to other cities like Austin and Atlanta. With its sixth-generation system, Waymo is looking to work with other network partners and fleet managers.

Wing, a subsidiary of Alphabet, is a leading drone delivery service provider that leverages advanced drone technology to deliver packages to customers’ doorsteps. The company has been working with Walmart for more than a year in the Dallas-Fort Worth area. It currently serves 26 different places from 11 Walmart stores.

Key analyst questions

Overall, analysts wanted to know if AI is bringing tangible results to Alphabet. CEO Sundar Pichai highlighted that seven core Google products have over 2 billion users each and are incorporating Gemini. The usage of the Gemini is now more broadly available to developers, for example on GitHub Copilot. This will help accelerate the development of AI-powered applications while Google is actively developing its third-generation Gemini AI model.

While there is a lot of buzz around AI, Google has been answering questions for years through Featured Snippets. Google is now expanding on this by introducing multimodal search and experimenting with new ways to interact with information in line with evolving user expectations.

Pichai does not see any constraints as the company scales its Search products and services. In fact, the latency and cost per query of these tools reduced by more than 90% as the company makes more investments.

Alphabet’s investment in cost-competitive AI infrastructure, including Tensor Processing Units (TPUs) and Graphic Processing Units (GPUs), has led to significant cost efficiencies for both them and clients. Its sixth-generation TPUs (Trillium) offer superior performance and enable them to optimise its infrastructure.

The antitrust lawsuits filed by the U.S. Department of Justice against Google are still ongoing given Google’s dominance in search and advertising markets and its alleged anti-competitive practices. However, with two Nobel Prizes linked to its scientists’ work, Google can strengthen its image as a company that benefits society, potentially easing public and regulatory scrutiny amid antitrust concerns. During the quarter, the company paid a US$2.7 billion fine to the European Commission for exploiting its market dominance in shopping comparisons.

Google Cloud’s business is driven by economies of scale and operational efficiencies. Strong customer demand, particularly for server solutions, has fuelled revenue growth. While there are short-term costs associated with infrastructure investments, these investments are expected to yield long-term benefits. To mitigate these costs, Google is actively pursuing efficiency initiatives across its operations.

The fifth perspective

Alphabet remains optimistic about its position in the AI era. The company is heavily investing in AI and has a proven track record of innovation. Moving forward, Alphabet aims to balance AI investments with cost discipline to ensure sustainable growth. The company is confident in its ability to leverage its core strengths to capitalise on the AI opportunity and drive future revenue growth. Its Cloud segment is worth watching given its high revenue growth and operating income margin expansion.