Technology

Google’s advertising revenue slipped 4 per cent in the final quarter of last year, marking only the second quarterly contraction in the company’s history, according to figures released late on Thursday.

The advertising decline followed a sharp slowdown in Google’s business last year as economic growth weakened and the pandemic-fuelled boom in digital services receded. It left parent Alphabet with overall revenue growth of only 1 per cent, compared to the 32 per cent surge in business it registered the year before. Revenue would have grown 7 per cent had it not been for the strengthening US dollar.

The news pointed to an even sharper deceleration than many analysts had expected and left the company’s shares down about 4 per cent in after-market trading.

Google also reported a slip in its operating profit margin as cost growth outran revenues, resulting in a 32 per cent fall in earnings per share, to $1.06. Wall Street had been expecting earnings of $1.18 a share.

The latest figures are likely to intensify Wall Street’s focus on Alphabet’s costs. Last month, it announced 12,000 job cuts, though it still came under fire from an activist investor for not taking more drastic action.

The company was “on an important journey to re-engineer our cost structure in a durable way”, chief executive Sundar Pichai said in a statement ahead of a call with analysts.

Alphabet said it expected to incur costs of $1.9bn-$2.3bn as a result of the job cuts and another $500mn from reducing its office space, most of it in the first quarter of this year.

Google executives sought to use the company’s earnings call with analysts to reassure Wall Street that they were racing to release a new round of AI services. In his first public comments since ChatGPT presented a challenge to its search business, Pichai said Google would act “very soon” to give users a way to “interact directly with our newest, most powerful language models . . . in experimental and innovative ways”.

In another sign that Alphabet is refocusing its investments around AI, chief financial officer Ruth Porat said the financial results of UK research arm DeepMind would be taken out of the Other Bets division and treated instead as direct corporate expenses. The move, which appeared to point to a closer integration of DeepMind into the rest of Alphabet, reflected the fact that its work had become important to many parts of group’s business, Porat said.

Revenue growth from cloud computing slowed to 32 per cent in the fourth quarter of last year, down from 38 per cent in the preceding three months — a sharper deceleration than most analysts had expected. Advertising on YouTube, which is more exposed to an economic slowdown than the search business, fell 8 per cent after registering a 2 per cent decline in the third quarter.

Google’s first-ever revenue fall came at the start of the Covid-19 crisis, as many advertisers suspended their ad budgets, but growth rebounded strongly as digital spending boomed during the pandemic.

UK ministers were criticised on Friday for continuing to delay a long-awaited strategy to support the semiconductor industry by a committee of MPs.

The government had intended to publish the plan to develop Britain’s chip sector by the autumn 2022, according to a report by the business, energy and industrial strategy committee.

However, its release has continued to be pushed back, causing widespread concern in the tech industry about the UK losing ground to rival countries in fostering growth in an important sector.

The delays have also been a factor in the deliberations at Japan’s SoftBank over whether to list Cambridge-based chip firm Arm in the UK, as well as the US, according to people close to the process.

On Friday, the MPs on the committee said delaying the semiconductor strategy further was an “act of national self-harm”.

A blueprint to ensure security of chip supply chains must be published urgently, the committee added, or the development of Britain’s chip manufacturing sector would be put at risk.

In a report in November, the committee’s recommendations included that the UK undertake better co-operation with allies to safeguard supply and to secure inward investment. But the MPs cast doubt on whether government support for the industry was “sufficient to have any meaningful effect”.

Committee chair and Labour MP Darren Jones said the government was hiding “behind its failure to publish a semiconductor strategy for not responding to our practical recommendations fully”.

The blueprint is expected to set out the results of a review of the sector to improve the resilience and security of UK supply chains and drive innovation.

The committee pointed out that the US Chips Act committed $52bn to subsidise US semiconductors, while the EU has set aside €43bn and Japan has its own multibillion-dollar plans.

Jones added: “Countries across the globe have grasped the importance of securing semiconductor supply chains for their futures, why haven’t we? While others race ahead, ploughing billions into setting up fabs or industry support, we’re not even at the starting line.”

The report by MPs follows a letter sent to the prime minister in January from tech industry executives calling for a co-ordinated and comprehensive semiconductor strategy “as a matter of urgency”.

The signatories included Hermann Hauser, director of Amadeus Capital Partners and one of the co-founders of Acorn Computers, where he helped spin out Arm.

The letter warned that Britain’s status as a leading tech ecosystem is at risk given how swiftly the US, the EU and China are acting to invest in silicon research and construction of chip plants.

It said: “The technology and manufacturing sectors have been waiting more than two years for the promised strategy, and confidence in the government’s ability to address this industry’s vital importance is steadily declining with each month of inaction.”

DCMS said: “We are committed to supporting the UK’s vitally important semiconductor industry. Our strategy will address the recommendations identified by the committee, including opportunities to grow the sector further and make sure we have a resilient supply chain.

“The strategy will be published as soon as possible.” 

Mark Zuckerberg has pushed hard to promote his vision of the metaverse. But the chief executive of Meta Platforms on Wednesday sounded more grounded. In a call with analysts following fourth-quarter results, Zuckerberg vowed 2023 will be the “Year of Efficiency”.

The company behind Facebook, Instagram and WhatsApp now plans to spend between $30bn and $33bn on capital expenditures in 2023. While that is still an increase on 2022, it is a meaningful cut from its previous forecasts of between $34bn and $37bn. He plans to control operating expenses, expected to be in the range of $89bn to $95bn.

Zuckerberg’s newfound passion for reining in costs is welcomed. The 20 per cent jump in Meta’s share price after-hours trading suggests as much. But investor hopes should remain realistic.

For starters, Zuckerberg has not abandoned his dreams of conquering the metaverse. Reality Labs, the division responsible for developing Meta’s virtual and augmented reality projects, remains a money pit. The unit made an operating loss of $13.7bn last year. The company said that will widen in 2023 but would “continue to invest meaningfully in this area”.

Meta’s shareholders could do with some savings. True, its shares have rallied more than a fifth since the start of January. But at just 16 times 2023 earnings, Meta has lost any earnings growth premium. That is well below the five-year average of 21 times.

The company’s core ad business has challenges. Competition from Amazon and TikTok, Apple’s privacy changes and a general slowdown in demand for digital advertising dragged overall revenue lower last year. Net income fell 41 per cent to $23.2bn as operating margin collapsed 15 percentage points to 25 per cent. Free cash flow more than halved to $18.4bn.

Efforts by Meta to lessen its dependence on third-party data for ad targeting are encouraging. Plans to buy back an additional $40bn in shares will help support the stock. But Zuckerberg still needs to rethink his spending on the metaverse and get Meta back to reality.

Sony has promoted its chief financial officer Hiroki Totoki to president and chief operating officer, in a move seen as lining him up to be the future head of the entertainment and consumer electronics group.

News of Totoki’s promotion came as the technology conglomerate upgraded its annual guidance on Thursday, forecasting stronger profits for its PlayStation gaming business.

The management reshuffle will take place on April 1, with Totoki, described as “a steady hand” by investors, also remaining as finance chief and working alongside Sony’s current president Kenichiro Yoshida, who will double as chief executive and chair.

Analysts have considered Totoki as the natural successor to Yoshida, with the duo having worked closely together in engineering a turnround at Sony following years of losses in its consumer electronics business.

Totoki will be expanding his role at a time when most of the group’s profits come from content — games, films and music — while the original electronics business accounted for less than 20 per cent of operating profits in its 2021 fiscal year.

The shift towards the media business had begun before Yoshida became president in 2018, but the company has solidified its position as a global entertainment giant and more than doubled its market value since he took over.

Another of Yoshida’s strategic bets has been on electric vehicles, which the company has pursued through a joint venture with Honda. Even if that flops, however, analysts say Sony’s sensor business and in-car software platform can be sold into the global market for EVs.

Totoki indicated at Thursday’s earnings conference that he would maintain Yoshida’s strategic direction while pursuing new drivers of growth.

“I am obsessed with growth. When growth stagnates, you fall into a negative spiral,” he said. “We have defined our company’s purpose with Yoshida’s leadership. My job is to make that a concrete project,” he added.

Yoshida said the company needed to strengthen its management structure and allocate its capital more efficiently as Sony navigates US-China tensions and amid rapid changes in the global tech industry.

He added that his right-hand man’s biggest contribution had been to “support growth investments”, citing how Totoki led the $2.3bn acquisition of EMI Music Publishing in 2018 and aggressive investments in its semiconductor business.

Sony said it expected an operating profit of ¥1.18tn ($9.1bn), up 2 per cent from its forecast in November, for the fiscal year through March. The group cited the recent strengthening in the yen as a boost for its gaming division since it lowers the dollar-denominated costs of manufacturing as well as the prices of raw materials and components purchased in dollars.

For the October to December quarter, its net profit fell 6 per cent from a year earlier to ¥326.8bn, dragged down by its film division. It performed worse than a year ago when the blockbuster movie Spider-Man: No Way Home drove profit.

Quarterly revenue increased 13 per cent as sales of PlayStation 5 consoles grew to 7.1mn for the holiday quarter compared with 3.9mn a year earlier, as chip supply shortages eased. Sony increased its forecast for PS5 sales from 18mn to 19mn for the fiscal year and raised its operating profit guidance for its gaming division by 7 per cent.

Separately on Thursday, Panasonic cut its full-year net profit forecast by 11 per cent from October, blaming a slowdown in the Chinese economy for lower sales of its electronics devices and factory automation business.