Alphabet (GOOGL) earnings Q1 2020

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Google CEO Sundar Pichai

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Alphabet is set to report earnings for the first quarter of fiscal 2020 after the bell on Tuesday, making it the first of the five big tech giants to report earnings since the coronavirus pandemic struck.

Wall Street is anticipating earnings per share of $10.33 on revenue of $40.29 billion, based on Refinitiv consensus estimates from analysts. Traffic acquisition costs are expected to come in at $7.51 billion, according to analysts polled by FactSet. However, it’s difficult to compare reported earnings to analyst estimates for Alphabet’s first quarter, as the impact of the coronavirus pandemic on earnings is complicated to assess.

Google, which is highly reliant on small advertisers, faces its biggest test since the financial crisis over a decade ago—and all under a CEO who’s been in the role for less than six months but has already begun facing slowing ad growth, heightened federal regulatory scrutiny and employee rebellion.

While advertising has consistently grown, the rate at which it’s grown has slowed over the last year — even before the pandemic. Advertising still makes up the vast majority of Alphabet’s revenues — 84% last year.

Certain segments particularly hard hit by the pandemic are expected to draw back on Google ads. For instance, travel companies like Expedia Group and Booking Holdings normally spend heavily on Google search ads, since so many travelers search for trips with terms like “flight to London” or “hotel in San Francisco.” But Expedia recently said it normally spends $5 billion on ads, but that it probably “won’t spend $1 billion” this year. Similarly, Booking could slash its ad spending on Google from about $4 billion in 2019 to $1 billion to $2 billion this year, Mark Mahaney, an analyst at RBC Capital Markets, predicted.

Analysts expect Alphabet’s second quarter to be the worst impacted as advertisers began pulling back toward the end of the first quarter period, so investors will be looking closely at any guidance the company offers.

However, the company is expected to have reeled in more users in its Cloud business unit, which has expanded while stay-at-home orders cause people to rely on cloud-based apps. For instance, Javier Soltero, Google’s General Manager and VP of G Suite, told CNBC that the Google Meet video-calling service included in G Suite is getting 25 times more use than it did in January. YouTube is also likely to have added more viewers as shelter-in-place orders favor digital entertainment platforms.

Last quarter, Google began breaking out revenue numbers for its Cloud unit, which generated $2.61 billion, and YouTube ads, which generated $4.72 billion. This quarter, analysts are expecting cloud revenue of $2.81 billion, according to analysts polled by FactSet, and YouTube ad revenue of $4.14 billion, according to StreetAccount analyst estimates, but these estimates could be inaccurate given the difficulty of predicting the impact of the coronavirus.

The company has begun to put some cost-cutting measures in place. Last week, CNBC reported that the company is cutting marketing budgets by as much as half while placing freezes on various parts across the company. It also told employees that it would be pulling back investments on from data centers and educational resources for workers. By contrast, the company’s headcount, which is the largest driver of R&D expenses, grew by 4,903 employees in the fourth quarter, a 20% increase from the year prior.

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