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3-Bullet Sunday (Earnings round up: Google, Amazon and Meta)
Hey 👋 - Thomas here.
Good day to my fellow compounders!
In today’s issue, I summarize my key takeaways from Google, Amazon and Meta.
Their earnings call gave some insights into how the war in Ukraine is affecting the economy and offer clues into changes to consumer spending as COVID restrictions relaxes.
Let’s dive in!
Another solid quarter for Google as they delivered revenue growth of 23% year over year (YoY) from $55.3b to $68b.
Let’s dive deeper into its two main revenue segments: (1) Google Services and (2) Google Cloud.
(1) Google Services
Google Services includes revenue from Google Search, Youtube Ads, Google Network, PlayStore, and Youtube Subscription accounted for 90.4% of Google’s total revenue. This segment is up 20.1% YoY from $51.2b to $61.5b, talk about a long runway for digital advertisement!
The only segment sticking out like a sore thumb is YouTube ads, where growth slowed to 14.4% from $6b to $6.9b. Some reasons highlighted by management:
The war in Europe resulted in a pullback in advertiser spend on YouTube.
“In terms of revenues, the most direct impact is the fact that we suspended the vast majority of our commercial activities in Russia, as we announced in early March. And to your question, about 1% of Google revenues were from Russia in 2021, and that was primarily from advertising. In addition, from the outset of the war, there was a pullback in advertiser spend, particularly on YouTube in Europe. So a couple of impacts from the war.”
We need to look at growth from a two-year stack since COVID-19 provided a strong boost to digital ad spending in 2021.
“In terms of the deceleration in the year-on-year revenue growth rate relative to the first quarter, the largest factor was lapping an exceptionally strong quarter in direct response, as we noted last year.”
To a smaller extent, Apple’s iOS changes affected YouTube's ad revenue.
“Then in addition, as we mentioned on the third quarter earnings call, we continue to experience a headwind from ATT primarily in direct response. And the dollar impact from ATT has been consistent since it was implemented in April of last year.”
Rolling out YouTube Shorts (TikTok copycat feature) slowed down ad revenue growth as they are testing out how to monetize this segment. Similar to Facebook’s Instagram Reels, it is experiencing strong growth and it is weighing down on monetization.
“We're experiencing a slight headwind to revenue growth as Shorts viewership grows as a percentage of total YouTube time. We are testing monetization on Shorts, and early advertiser feedback and results are encouraging. And the team is focused on closing the gap with traditional YouTube ads over time. So we're excited about the new opportunities with Shorts, but a slight headwind.”
Although YouTube Ad revenue slowed, it’s operating metrics revealed by management during the earnings call suggest that it is still showing good growth:
Strong growth in YouTube Shorts, with view count up 400% from a year ago.
“As Sundar said, Shorts now has 30 billion daily views. That's 4x higher than a year ago. And I think that really goes to your question about the level of activity that we're seeing.”
Monthly active users and creators monetizing on YouTube continue to grow, creating a strong flywheel effect.
“ But there are 2 billion plus logged-in viewers who visit YouTube every single month, and more people are creating content on YouTube than we've ever seen before. And the team remains very focused on trying to help creators grow, trying to innovate. And just to give you a number, 2021, the number of YouTube channels that had made at least $10,000 in revenue was up more than 40% year-over-year.”
Accounts for the lion share in ad-supported streaming watch time.
“Over 135 million people in the U.S. were reached via YouTube on connected TVs in December. We've recently rolled out new tools to help advertisers consistently plan and measure their CTV spend across platforms. And later this year, in partnership with Nielsen, we'll help brands directly compare their YouTube reach to linear TV, including the ability to measure co-viewing. This apples-to-apples comparison will be a game changer in helping advertisers make smarter investment decisions. According to Nielsen, in the U.S., YouTube accounts for over 50% of ad-supported streaming watch time on connected TVs among people ages 18 and up. And over 35% of viewers in this group can't be reached by any other ad-supported streaming service. In other words, we're seeing that when users choose to watch ad-supported CTV, they choose to watch YouTube, and YouTube delivers CTV audiences that advertisers can reach anywhere else.”
(2) Google Cloud
Google Cloud now accounts for 8.5% of Google’s total revenue and has grown 43.8% YoY from $4b to $5.8b. For context, Amazon’s AWS is up 36.6% at $18.44b and Microsoft’s Azure is up 46%.
Operating margins trended upwards from -24% to -16%. Given the size of the market, it makes sense for Google to focus more on growth than short-term profitability. As AWS has demonstrated with operating margins of 30%, operating leverage will kick in as you scale.
Fun fact: In 2017, AWS was already delivering operating margins of 24.6% when it was operating on a similar scale as Google. This shows the benefit of being a first-mover and it took seven years before competition entered.
Amazon’s Q1 2022
Revenue growth came in soft for Amazon, with net sales increasing 7% from $108.5b to $116.4b. It was largely a drag by their ecommerce operations:
1P falling 1% YoY from $52.9b to $51.1b, and
The higher margins 3P posting a soft growth of 7% from $23.7b to $25.3b
Similarly, they were coming off a strong year due to COVID boost and went evaluate on a 2-year stack, 1P growth comes in at 16.2% annualized and 3P growth at 32.3% annualized.
Ad revenue posted a strong 23.6% growth from $3.9b to $8.5b, although it is a deceleration from previous quarters.
AWS continues to be the star of the show, with no signs of deceleration as it grows 36.6% from $13.5b to $18.4b
Despite AWS operating margins expanding from 30.8% to 35.3%, overall margins fell at the company level to 3.15%.
The increased cost were largely due to their fulfillment business, and it was driven by two factors: (1) Inflation, and (2) Excess capacity/inefficiencies
Supply chain problems and the war in Ukraine led to higher shipping rates.
“Line haul air and ocean shipping rates continue to be at or above the rates in the second half of last year, which were already much higher than pre-COVID levels. Some of this is due to the impact of the Omicron variant in China and labor shortages at point of origin, and the start of the war in the Ukraine has contributed to high fuel prices.
For example, the cost to ship in overseas containers more than doubled compared to pre-pandemic rates. And the cost of fuel is approximately 1.5x higher than it was even a year ago. Combined with the year-over-year increases in wage inflation, these inflationary pressures have added approximately $2 billion of incremental costs when compared to last year. While we will continue to look for ways to mitigate these costs, we expect they will be around for some time.”
(2) Excess capacity/inefficiencies
During COVID-19, Amazon ramped up its headcount and logistics capabilities aggressively and as the bottleneck and COVID-19 restrictions eases, there’s now a glut which the management is trying to address by emphasizing on productivity:
“In the second half of 2021, we were operating in a labor-constrained environment. With the emergence of the Omicron variant in late 2021, we saw a substantial increase in fulfillment network employees out on leave, and we continue to hire new employees to cover these absences. As the variant subsided in the second half of the quarter and employees returned from leave, we quickly transitioned from being understaffed to being overstaffed, resulting in lower productivity. This lower productivity added approximately $2 billion in costs compared to last year.
The last issue relates to our fixed cost leverage. Despite still seeing strong customer demand and expansion of our FBA business, we currently have excess capacity in our fulfillment and transportation network. Capacity decisions are made years in advance, and we made conscious decisions in 2020 and early 2021 to not let space be a constraint on our business.
During the pandemic, we were facing not only unprecedented demand but also extended lead times on new capacity. And we built towards the high end of a very volatile demand outlook. Now that demand patterns have stabilized, we see an opportunity to better match our capacity to demand. We have lowered our operation's capital expenditures for 2022 and are evaluating other ways to increase our fixed cost leverage. We estimate that this overcapacity, coupled with the extraordinary leverage we saw in Q1 of last year, resulted in $2 billion of additional costs year-over-year in Q1. We do expect the effects of the fixed cost leverage to persist for the next several quarters as we grow into this capacity.”
Buy with Prime: Putting the excess logistics capacity to use
With this excess capacity, Amazon announced Buy with Prime, a new benefit for Prime members in the U.S. that extends the convenience of shopping with Prime to online stores beyond Amazon.com. Prime members can shop directly from participating merchants’ online stores using their Prime member benefits, including fast and free delivery, a seamless checkout experience, and free returns on eligible orders. You can think of it as logistics as a service.
Meta’s Q1 2022
Revenue growth came in soft for Meta as well, up 7% YoY from $26.2b to $27.9b.
Operating expenses increased at a much faster pace, up 31% from $14.8b to $19.3b with their heavy reinvestments into Reality Labs. As a result, operating margins shrank from 43% to 31%.
When we look at the Family of Apps alone, operating margins remain strong at 42%.
Looking at the business metrics, more people than ever are using Meta’s family of apps:
DAP up 6% to 2.87b
MAP up 6% to 3.64b
DAUs up 4% to 1.96b
MAUs up 3% to 2.94b
This figure is expected to dip in Q2 due to Russia banning Meta's Family of Apps.
With increased usage, ad impressions increased 15% YoY but the average price per ad decreased by 8%. Here’s the reason:
“Impression growth was driven primarily by Asia Pacific and Rest of World. The year-over-year decline in pricing was driven primarily by the ongoing mix shift in ad impressions towards regions and services that monetize at lower rates.”
Free cash flow came in at $8.5b and management poured $9.4b into repurchasing shares.
Applying AI recommendations to all content
With the increasing popularity of short-form content, users are increasingly consuming content that is driven by AI recommendations instead of social content.
In other words, rather than just seeing what your friends share or post, you will now see content that isn’t from your social circle.
“We're also seeing a major shift in Feeds from being almost exclusively curated by your social graph or follow graph to now having more of your feed recommended by AI, even if the content wasn't posted by a friend or someone you follow. Social content from friends and people and businesses you follow will continue being a lot of the most valuable, engaging and differentiated content for our services, but now also being able to accurately recommend content from the whole universe that you don't follow directly, unlocks a large amount of interesting and useful videos and posts that you might have otherwise missed.”
“I think the biggest shift here is that now the universe of content that are candidates to show in a person's feed is way bigger. It used to just be, okay, here are the people, here are the friends or businesses or pages that you follow. Maybe it was on the order of 1,000 or a few thousand potential posts a day that we could show and we built a new Feed system that could help rank those to show the most interesting ones to you at the top.”
Navigating Apple’s iOS
“In the near term, we're working closely with advertisers to help them navigate the new landscape, while we evolve and improve our ad solutions. For example, we're encouraging partners to integrate with our conversions API to create a direct, reliable and privacy safe connection between their marketing data and Meta. And we've recently introduced a faster and easier way for SMBs to integrate with it called the Conversions API Gateway.
One way we're helping advertisers get better insights with less data is with conversion modeling. This can help them understand measurement and campaign performance, even when we're not able to see or aggregate certain conversions. We're also helping businesses connect directly with customers and grow more on-site data conversions through products like click-to-message ads. This is where you click on an ad on your Facebook or Instagram feed and it opens a chat with the business in Messenger, Instagram Direct, or WhatsApp. It's already a multibillion dollar business with healthy double-digit year-over-year growth in Q1.”
As a result of the war in Ukraine and the pull-forward demand from COVID, we are seeing some softness in growth for Google (or YouTube more specifically), Amazon and Meta. Overall, the data does not suggest that their competitive positioning is impaired and they remain seated on a strong secular tailwind. Here’s a parting thought to end off the earnings round up:
That’s all for today.
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See you again soon.