Ads are the lifeblood of Big Tech. When the ad market slows as it did last year, companies like Alphabet, Meta, Amazon and even Microsoft suffer.
Tech’s biggest businesses have endured a conservative advertising landscape in recent quarters as companies look to conserve cash in this difficult environment characterized by economic uncertainty and high interest rates. However, new data from a number of tech businesses indicates that the ad market is recovering, partly due to AI.
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Yesterday, we saw how AI is beginning to help Alphabet and Microsoft. Today we’re studying quarterly results of Alphabet, Meta and Snap, but instead of focusing on AI, we’re looking to see how their advertising incomes can help us understand the market.
We’ll start with search, move to social ads, and wrap with Snap’s confidence for the near future and its reminder that advertising spend can shift quickly.
A changing advertising market
Investors liked what Alphabet had to report earlier this week and sent its shares up by around 5.5% yesterday and another 1.8% this morning.
Here are the key numbers regarding advertising from Alphabet:
- “Google Search & Other” reported revenue of $42.6 billion in Q2 2023, up from $40.7 billion a year ago.
- YouTube advertising revenue rose to $7.7 billion from $7.3 billion.
- Revenue from Google’s Network business dipped, but Alphabet’s advertising unit did well, reporting revenue of $58.1 billion from $56.3 billion a year earlier.
During the company’s earnings call, CFO Ruth Porat said:
Turning to our outlook for the business, with respect to Google Services, first, within Advertising, we were pleased with the acceleration of Search advertising revenue growth in the second quarter. . . . And in YouTube, we saw ongoing signs of stabilization in advertiser spending. We are prioritizing product focus on increasing quality consumption of video content with both Shorts and in the Living Room, which is translating into improved monetization.
That’s encouraging. Philipp Schindler, Google’s chief business officer, added a little more color:
It’s worth reiterating that while generative AI is now supercharging new and existing Ads products with tons of potential ahead, AI has been at the core of our Ads business for years. In fact, today, nearly 80% of advertisers already use at least one AI-powered Search Ads product.
It’s not unusual to see Alphabet enjoying an increase in search advertising revenue. But Microsoft also reported that search and news advertising revenue increased 8% in the quarter. Is that amazing? No, but it is enough growth to matter.
The real standout, though, was Meta. Its best advertising revenue result since Q4 2021 has sent the company’s shares up 8.5% this morning since the business accounts for the majority of Meta’s total revenues.
Here’s Meta discussing certain drivers of advertising this quarter:
Within ad revenue, the online commerce vertical was the largest contributor to year-over-year growth, followed by entertainment & media and CPG. Online commerce benefited from strong spend among advertisers in China reaching customers in other markets.
On Reels, we are making good progress on monetization, with more than 3/4 of our advertisers now using Reels ads. We remain focused on further reducing the Reels revenue headwind and narrowing the monetization efficiency gap with our more mature surfaces. However, we continue to expect time on Reels will monetize at a lower rate than Stories and Feed for the foreseeable future since people scroll more slowly through video content.
I suppose all those endless Temu and Shein ads that plague the internet are, in fact, boosting advertising spend levels in the U.S., at least.
That aside, Meta provided a useful amount of context regarding its ad performance. Replying to a question about the growth of the core ads business and Meta’s Advantage+ products driving some of that growth, CFO Susan Li said (emphasis ours):
In terms of the Q2 revenue acceleration, I’d highlight there are a few factors driving that. The first is, frankly, we’re lapping a weaker demand period, including the first full quarter of the war in Ukraine and the suspension of our services in Russia.
Second, we saw increased supply and improvements to ad performance, including improved Reels monetization as we continue to work down the Reels revenue headwind. And third, there were lower FX headwinds for us this quarter. So those were all three things that helped drive the revenue acceleration in Q2.
Advantage+ is one of multiple AI-powered ad products that we have right now in the market. With Advantage+ specifically, we’re seeing strong adoption and particular success with the e-commerce and retail verticals, and we’ve seen good traction with other verticals like CPG, especially DTC brands, and we’re continuing to launch features to unlock use cases for advertisers and make it easier for them to adopt Advantage+ campaigns and measure their performance gains.
So we’ve got a lot in the pipeline there that we’re excited about for both the Advantage+ Shopping Campaigns specifically, which were our first sort of foray into this area, but then the Advantage+ portfolio more broadly that basically enables us to take that same playbook of helping advertisers iterate and test very quickly and apply it to many different steps of the end-to-end ad buying experience.
So the feedback and results that we’ve seen from advertisers is good, and we think it’s a really promising area that we’re continuing to invest in. But it’s one of many ways that we’re using AI to continue to sort of help make our ads systems and recommendations and ranking engines, more performant to deliver better measurement and results to advertisers.
In short, Meta is being judged against a lackluster set of results from last year, and this time it had more ads to sell, those ads performed better, currency fluctuations were less of a headache, and AI-driven advertising tools are coming along well.
Some of that is Meta-specific, but when you take a step back and add in Alphabet’s and Microsoft’s advertising results, the picture is one of a recovering advertising market.
But what about smaller companies? How is Snap doing? Not great, but not very poorly either.
The easy take on Snap’s Q2 2023 results is that investors hated them and so its stock is down quite a bit. But if you dig deeper, there are a few positives worth noting:
- “The combination of improvements to our machine learning (ML) infrastructure and systems for ad ranking and optimization have led to more relevant ads and a more than 30% increase in purchase-related conversions quarter-over-quarter.”
- “As we enter Q3, we anticipate continued robust growth in our global community and, as a result, our financial guidance for Q3 is built on the assumption that DAU will reach 405 million to 406 million in Q3. From a revenue perspective, our business remains in a period of rapid transition as we work to improve our advertising platform, while forward visibility of advertising demand remains limited. Our guidance range for Q3 revenue reflects our best estimate of these factors, with total revenue estimated to be between $1,070 to $1,130 million, implying negative 5% to flat year-over-year growth.”
The first quote notes that improvements to its ad tech is helping Snap deliver better results to its advertisers. That’s bullish for ad spending, since the more efficient ads are, the more spending we can expect.
The second quote is a perfect example of something that’s both good and bad. It’s clearly Not Good that Snap expects –5% to 0% growth in the current quarter. However, it is encouraging that the company provided a forecast at all!
When asked during the post-results conference call if the company could “share just what’s giving [it] the confidence to guide more formally now,” Snap’s CFO Derek Andersen said (emphasis ours):
Hey, it’s Derek speaking. Thanks for the question. And you’re right. I’d note that we’ve not provided formal guidance since the very beginning of 2022.
So, it is a big shift for us to begin providing formal guidance again. And I think that does reflect an increased confidence in the trajectory of our business. Historically, I think, when we’ve approached thinking about guidance, one of the things that we’ve tried to do is make sure that we’re reasonably including at the top end, the attainable upside that we see in the business. And then on the downside, making sure that we’re including the reasonably visible and quantifiable downside on that side. . . .
So, we’re increasingly confident that these investments are a key input to sustain revenue growth over time. That said, how the continued ramp in these investments will impact the ad platform performance, advertiser demand and top-line growth in the immediate weeks and months ahead is more difficult to predict with precision. In addition, forward visibility of advertising demand remains somewhat limited. We’ve seen continued strength with verticals such as CPG and restaurants and travel.
Well, we’ve got some other sectors that continue to face challenges that are unique to their sector or the macro environment and therefore, make forward visibility on advertising demand a little bit more difficult or challenging to calibrate, especially in a quarter is typically somewhat back-end weighted.
So, for Q3, the guidance range calls for a range of between negative 5% and flat on a year-over-year growth basis. And we think this reasonably includes the attainable upside and all of these risks that could possibly drive us toward the low end.
That’s not entirely positive, but transitioning from a lengthy period of not providing any forecasts to doing so conservatively is itself a feat. Sure, the numbers aren’t what investors wanted to hear, but at least you have them.
Snap is a smaller player in the social media space compared to Meta, but its commentary adds one more note to our developing theme: Advertising is on its way back. For Big (and medium) Tech, that’s good news.
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