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Google Services’ Q4 recovery was driven by Search, YouTube, network ads

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Google parent Alphabet Inc’s quarterly revenue growth of 23% reflect increases in advertiser spending in Search and YouTube within Google Services, as well as “ongoing strength” in Google Cloud, chief financial executive Ruth Porat said in an earnings call on Tuesday

The Services segment saw significant recovery from the impact of COVID-19, driven by Search, YouTube, and network advertising. Recovery can be credited to the broader shifting of activities online and advertisers reactivating spend that had been put on hold in the earlier months. In Q4, retail was the largest contributor to the year-on-year growth of the ads business. Tech, media and entertainment and consumer packaged goods were also strong contributors. In Q4, growth rates in retail searches was 3x of last year. Google’s merchant community grew over 80% in the past year, with “significant growth in small and medium-sized businesses”.

Increase in cost of revenue by 24% to $26.1 billion was driven by ‘Other cost of revenue’ of over $15 billion. This, in turn, was driven by:

  • Content acquisition costs, primarily driven by costs for YouTube’s advertising-supported content, followed by costs for subscription content; 
  • Costs associated with data centers and other operations, including depreciation.

Ad spend recovers on YouTube, growth in Shorts, Premium subscribers

YouTube’s Direct Response ad format saw substantial growth throughout the year, including in Q4. Brand spending began to recover in Q3 from pull back in the initial months due to the pandemic, with marketers realising the need to keep brand recall intact even if consumer demand was low. Direct Response was non-existent three years ago, but is the fastest growing ad offering on YouTube, according to Philipp Schindler, SVP and chief business officer. 

60% of TrueView for action customers are new to YouTube, and the number of active advertisers using TrueView for action more than doubled in the first six months of 2020. YouTube also reached more 18-49 years old than all linear TV networks combined, with watch time increasing, lending to the company’s subscription strategy. 

Operational highlights — YouTube

  • YouTube live and Shorts: Over 0.5 million channels live-streamed on YouTube for the first time in 2020 and Shorts is seeing over 3.5 billion daily views, with plans to expand Shorts to more countries in 2021.  
  • YouTube and YouTube TVOver 100 million people in the US watch the services on their TV screens each month 
  • YouTube has over 30 million Music and Premium paid subscribers. It’s operational in 95 countries.

Network advertising revenue benefited, particularly AdMob and Ad Manager, from increase in ad spends.

Subscriptions and Play revenue drive ‘Other’ revenue

Google ‘Other Revenue’ was driven by growth in YouTube’s non-advertising revenues, primarily from subscriptions and Google Play revenue growth. App revenue with Google Play benefited from elevated engagement levels, leading to increases in active buyers and spend per buyer due to the COVID-19 pandemic. The Google Pay app is used by over 150 million people in 30 countries. 

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‘Disciplined’ investments in Cloud to continue in 2021

As we reported, the company’s Cloud segment is growing fast in terms of revenue, while also posting losses throughout the year. The company has been “investing aggressively” in Cloud given the market opportunity, and will continue to make “disciplined investments” to scale and improve profitability in Cloud.

Cloud is an area which “the longer you are in, the cohorts add up and so contributes more and the economies of scale starts working as well” according to chief executive Sundar Pichai.  

“Cloud’s operating loss reflects that we have meaningfully built out our organization ahead of revenues, as we’ve discussed in prior quarters, with respect to the substantial investments in our go-to-market organization as well as engineering and technical infrastructure,” — Ruth Porat, CFO, Alphabet Inc 

Google Cloud Platform grew at a higher rate than the overall Cloud platform. Workspace (earlier G Suite) revenue was driven by growth in both seats and average revenue per seat.  

Earnings Call Transcript | Press Release

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