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Googleparent Alphabet has reported better-than-expected performance, both in terms of revenue and profit in its Q4 financial results for the quarter ending December 31, 2023. However, its shares declined as its advertising revenue fell short of expectations.

The company’s net profit in the quarter rose to $20.7 billion (or $1.64 per share) from $13.6 billion ($1.05 per share) in the year-ago period. Its fourth-quarter revenue surged by 13% to $86.3 billion from $76 billion in the same period of the previous fiscal year.

The search giant concluded fiscal year 2023 with $307.4 billion in revenue, a 8.7% year-over-year growth, and a net profit of $73.8 billion, a 23% increase from the previous fiscal year.

“Our results reflect strong momentum and product innovation continuing into 2024,” Sundar Pichai, Chief Executive Officer of Alphabet and Google, said during the earnings call, as he spoke about four main topics—investments in AI, subscriptions, cloud, and investments and focus to meet the growth opportunities ahead.

The majority of Alphabet’s revenue is derived from Google ads. Google’s advertising revenue, including Google Search, YouTube ads, and Google Network, was $65.5 billion in the fourth quarter, an increase from $59 billion in the same period last year. Its advertising revenue experienced a growth of 11% during the quarter.

“We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come,” Pichai noted.

Revenue from Google’s search, its largest business, rose 12.7% to $48 billion in Q4 “led again by solid growth in the retail vertical”. Meanwhile, YouTube’s ad sales in Q4 increased by 15.5% to $9.2 billion “driven by growth in both direct response and brand”.

Google Cloud Platform, the company’s cloud-computing unit, competes with Microsoft Azure and Amazon Web Services. In the fourth quarter, revenue from cloud increased to $9.2 billion from $7.3 billion in the previous year. The cloud computing division registered a profit of $864 million, against a $186 million loss in the previous year.

“We are very pleased with the momentum of GCP with an increasing contribution from AI,” Ruth Porat, Chief Financial Officer of Alphabet and Google, noted during the fourth-quarter earnings call.

Porat added, “The Cloud team is intensely focused on bringing the benefits of Gemini, our industry-leading AI technology, to enterprises and governments globally… The strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area.”

In December, Google introduced its largest and most capable AI model—Gemini, which can be used by developers to build their products as well on the search giant’s chatbot Bard and mobile devices.

“Gemini gives us a great foundation. It’s already demonstrating state-of-the-art capabilities and it’s only going to get better. Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products,” Pichai shared.

The Alphabet chief noted that the company will continue to invest responsibly in its data centres and compute to support the new wave of growth in AI-powered services.

Pichai also spoke about the firm’s efforts to durably reengineer its cost base and to improve its velocity and efficiency. “Teams are working to focus on key priorities and execute fast, removing layers and simplifying their organisational structures,” he said.

“Our devices team has brought together different teams from across Nest, Fitbit, and other teams into a new functional structure. This will help us pull resources and drive progress across our Pixel portfolio. Across different teams, we have wound down some non-priority projects, which will help us invest and operate well in our growth areas,” Pichai added.

As of December 31, 2023, Alphabet’s employee count was 182,502 down from 190,234 in 2022.

“Both product prioritisation and the organisation design efforts result in a slower pace of hiring, as you can see with our headcount down year-on-year, reflecting the reductions we announced in the first quarter of 2023 and a much slower pace of hiring,” Porat said, adding that the company will continue to invest in top technical and engineering talent.

The company recorded employee severance and related charges of $2.1 billion for the twelve months ended December 31, 2023.

Porat highlighted that the reported capital expenditure in Q4 was $11 billion, driven overwhelmingly by investment in the firm’s technical infrastructure with the largest component for servers followed by data centres. 

“The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that it offers. In 2024, we expect investment in CapEx will be notably larger than in 2023,” she noted.

“We remain committed to our work to durably re-engineer our cost base as we invest to support our growth opportunities,” Porat added.