Alphabet Inc. (NASDAQ:GOOGL [$GOOGL] & NASDAQ:GOOG [$GOOG]), the company that owns the Google suite of products, Youtube, as well as the Android operating system, have made available its 4th quarter and full-year results ended 31 December 2022 (i.e. FY2022) last Thursday (02 Feb 2023). 

This post was originally posted here. The writer, Jun Yuan Lim is a veteran community member and blogger on InvestingNote, with a username known as @ljunyuan and has close to 2100 followers.

In this post, you’ll find a summary of the salient points to take note of regarding the tech company’s latest financial figures, debt profile, whether or not at its current traded price, it is considered to be ‘cheap’ or ‘expensive’, along with my thoughts as a shareholder (with my average invested price at US$120.00.) 

Let’s begin…

Financial Performance – FY2021 vs. FY2022:

** Correction: Typo in the image above – Net Profit for FY2021 should be US$76,033m, and for FY2022, it should be US$59,972m – My apologies. **

My Observations:

• The only positive can be seen in the 9.8% growth in total revenue, attributed by improvements in advertising revenue (by 7.1%, from Google Search, YouTube ads & Google Network), Google Other (by 3.6%, from Google Play, hardware [including Fitbit, Google Nest, and Pixel], & revenues from subscription to YouTube Premium & YouTube TV), Google Cloud (by 36.8%), Other Bets (by 41.8%, from sale of health technology & internet services), and hedging gains (by >100%.)
• As a result of cost of revenues growing at a higher percentage (due to a 7.4% increase in traffic acquisition costs [TAC] & increases in data centre costs, other operations costs and hardware costs (up by 18.2%), its gross profit margin dipped by 1.5pp.
• Net profit fell by 21.1% due to increase in costs and expenses (by 16.2%, where cost of revenues, research & development, sales and market, general and administrative all went up), along with other expenses of $3,514m incurred (compared to other income of $12,020m recorded the year before). This led to Alphabet’s net profit margin to fall by 8.3pp. 

Financial Performance – Q4 FY2021 vs. Q4 FY2022:

My Observations:

• Largely a weaker set of numbers, with the only slight positive being the slight 1.0% improvement in its total revenue, contributed by increases in the following: Google Other (from $8,161m to $8,796m), Google Cloud (from $5,541m to $7,315m), Other Bets (from $181m to $226m), and Hedging Gains (from $203m to $669m), offset by declines in the following: Google Advertising (from $61,239m to $59,042m.)
• As a result of a 8.3% rise in total costs & expenses, coupled with other expenses of $1,013m (compared to other income of $2,517m recorded in the same time period last year), its net income declined by 34.0%. 

Debt Profile – FY2021 vs. FY2022:

My Observations:

• Net cash flow from operating activities dipped by 0.2% due to the net effect of increase in cash received from revenues, offset by increase in cash paid for cost of revenues and operating expenses, and an increase n tax payments driven by the effects of capitalisation and amortisation of R&D expenses beginning in 2022 as required by the 2017 Tax Cuts and Jobs Act.
• An increase in cash & cash equivalents (by 4.5%), coupled with a drop in total borrowings (by 0.8%), saw the company’s net cash position improve by 17.1%. 

Comments by Alphabet’s CEO & CFO:

CEO Sundar Pichai:

“Our long-term investments in deep computer science make us extremely well-positioned as AI reaches an inflection point, and I’m excited by the AI-driven leaps we’re about to unveil in Search and beyond. There’s also great momentum in Cloud, YouTube subscriptions, and our Pixel devices. We’re on an important journey to re-engineer our cost structure in a durable way and to build financially sustainable, vibrant, growing businesses across Alphabet.”

CFO Ruth Porat:

“Our Q4 consolidated revenues were $76 billion, up 1% year over year, or up 7% in constant currency, and $283 billion for the full year 2022, up 10%, or up 14% in constant currency. We have significant work underway to improve all aspects of our cost structure, in support of our investments in our highest growth priorities to deliver long-term, profitable growth.”

Is the Current Traded Price of Alphabet Considered ‘Cheap’ / ‘Expensive’? 

Closing Thoughts:

• Given the current economic headwinds, with companies trimming costs, the a dip in the company’s ad income in the 4th quarter was well within my expectations. In fact, its ad income is likely to be adversely impacted in the coming quarters ahead for the same reason. 
• On cost cutting measures by the company, I noted that it have, in January 2023, announced the reduction of 12,000 roles, and is expected to incur employee severance & related charges of $1.9bn – $2.3bn, with a majority to be recognised in Q1 FY2023. This is on top of exit costs of approximately $0.5bn to be incurred in the same quarter as it optimises its global office space to cut costs. As such, I expect the tech company to report a weaker net profit in Q1 FY2023 compared to a year ago (i.e. Q1 FY2022.) 
• One small upside I noticed is the 17.1% improvement in its net cash position – as a result of a 4.5% rise in cash & cash equivalents, as well as a 0.8% drop in total borrowings.

Disclaimer: At the time of writing, I am a shareholder of Alphabet Inc. 

Once again, this article is a guest post and was originally posted on ljunyuan‘s profile on InvestingNote. 

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