Google Parent Commits to Real Estate Investments as Revenue Growth Slows

Google parent Alphabet Inc. reported its slowest sales growth in two years, a sign that one of the tech industry’s largest real estate investors is feeling the weight of mounting economic pressures.

The Mountain View, California-based company said it would halt the hiring spree that has fueled record headcount growth and supported a string of blockbuster leases and acquisitions over the past two years.

Alphabet posted second-quarter revenue of nearly $69.7 billion on Tuesday, a roughly 12.5% increase from the same period last year. That is the slowest rate of growth since the second quarter of 2020, when the company said it would pause any real estate development or purchase plans as part of its decision to postpone large investments at the onset of the pandemic.

“Uncertainty is the best way to characterize what we’re seeing,” Alphabet Chief Financial Officer Ruth Porat told investors on the company’s earnings call Tuesday, referring to a landscape filled with challenges such as inflation, a pullback in advertising spending, fear of a looming recession and pandemic-induced headaches such as supply chain woes and labor shortages. “Our results continue to reflect the significant growth rates of last year, and on top of that, there’s uncertainty in the global economic environment and issues that differ across industries.”

Porat went on to say that revenue growth for the remainder of the year will have a tough time keeping pace with the growth the company achieved in 2021, when Alphabet rebounded past pre-pandemic levels of revenue after a brief lull in 2020 as a result of the pandemic.

“Going forward, the very strong revenue performance last year will weigh on year-over-year growth rates for the remainder of this year,” she said. For example, advertising revenue for the company’s YouTube division rose just 5% over the second quarter this year compared to a 84% quarter-over-quarter jump last year.

Still, the Google parent is adamant about investing in long-term growth. Alphabet is expecting to boost its capital expenditure plans for the remainder of the year, including focusing on spending on data centers, technical infrastructure, office finish-outs and groundbreakings for office projects it already has in the works.

For Alphabet CEO Sundar Pichai, the current uncertainty is a moment for the tech giant to catch its breath and hone its strategy for long-term growth.

“It’s a good time to sharpen our focus and it gives us the chance to digest and make sure we’re working on the right things as a company and taking the long-term view,” the CEO said. “We’ve had a few years of strong growth, and when you’re in growth mode it’s tough to take the time to make the adjustments you need to do. Now we get to double down on our long-term view, and we’ll be very disciplined.”

Facing headwinds from disrupted digital advertising spending and rising inflation, as well as a moderate hit from the war in Ukraine — the company said about 1% of its revenue in 2021 came from sales in Russia, which were suspended earlier this year — Alphabet is adapting to slower growth rates.

Second quarter sales fell almost $200 million short of analyst expectations. Rising expenses dragged net income down from the year-earlier period by more than 13.5% to $16 billion. Porat said the company’s largest source of rising expenses was its employment growth.

Alphabet was among the tech firms that raked in record profits during the pandemic, feeding significant spikes in hiring and feeding leases and acquisitions made in anticipation of the gradual return of its workforce to the office. The company said it hired about 10,000 people over the second quarter of the year and now has a global workforce of more than 174,000. It employed just shy of 140,000 people at year-end 2021.

The hiring has accelerated the company’s plan to invest aggressively in expanding its commercial real estate footprint across the U.S.

Pichai said earlier this month the company’s investments would be focused on a mix of office openings and data centers as well as upgrades to existing office space. Some of the corporate hubs it has in the works include an outpost in Atlanta; a spot in downtown Austin, Texas, that is under construction; a new campus in Boulder, Colorado; expanded campuses in the Boston, Pittsburgh and Seattle areas; as well as a new office in downtown Portland, Oregon.

The company is also building new data centers in Storey County and Henderson, Nevada; Council Bluffs, Iowa; Nebraska; Midlothian, Texas; Tennessee; Virginia; and Oklahoma.

“It might seem counterintuitive to step up our investment in physical offices even as we embrace more flexibility in how we work,” Pichai wrote in an early April company blog post about its real estate expansion plans. “Yet we believe it’s more important than ever to invest in our campuses and that doing so will make for better products, a greater quality of life for our employees and stronger communities.”

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