Amid a sagging digital ads market and a new threat to its search business from generative AI, Google parent Alphabet reported a drop in earnings from the prior year quarter.

Alphabet’s net income dropped 34% to $13.6 billion, and fell short of the analysts’ expectations of $15.3 billion.

The company reported sales of $76 billion in Q4 2022, down 1% from the year earlier quarter.

The company’s overall ad business fell from $61.2 billion in the last quarter 2021 to $59 billion in Q4 2022.

Alphabet’s YouTube ad business brought in $7.9 billion in the fourth quarter, down from the $8.6 billion it reported in Q4 2021. Analysts had expected $8.2 billion.

Google’s growing cloud business, which has been making strides toward profitability, saw its losses narrow to $830 million from the $1.7 billion it lost in the same quarter last year.

Alphabet CEO Sundar Pichai attributed the disappointing ad sales results to “pullbacks in digital ad spend and in the impact of foreign exchange rates.”

Going into today’s announcement, analysts and investors were wondering how Google is weathering the downturn in digital ad spending (as many brands hunker down for a possible recession this year), and whether signs exist that the spending decline may have bottomed out. The numbers suggest the company’s troubles in the ad market may not be over yet.

RESPONDING TO OPENAI AND CHATGPT

During the earnings call with analysts, Google management had a lot to say about its plans to release new AI products and features across its various platforms and services.

After spending billions on artificial intelligence R&D and acquisitions, Google has been upstaged during the past quarter by OpenAI, whose ChatGPT chatbot has captured the public’s imagination. (Google even reportedly fears ChatGPT could upend search, its cornerstone business.)

Google says it will release its ChatGPT competitor, Lambda, to the public in the “coming weeks and months.”

In a broad outline of the company’s AI vision, Pichai highlighted a number of other initiatives: the development of large language models, which he said will soon “become even more useful for people as they provide up-to-date and more factual information”; new tools to enable developers and creators to build their own applications using AI; AI cloud services; and AI-assisted ad campaigns.

“We’ll pursue this work boldly, but with a deep sense of responsibility. With our AI principles and the highest standards of information integrity at the core of all our work,” he said. “We continue to invest in AI across the board, and Google AI and DeepMind are integral to a bright AI-first future. . . . We are just at the beginning of our AI journey and the best is yet to come.”

In addition, the company’s DeepMind AI subsidiary will no longer be reported under “Other Bets” but as part of the larger Alphabet business.

Alphabet’s stock price fell 4% in after-hours trading, after rising 7% during normal trading hours Thursday.

Alphabet said in January that it would lay off 12,000 workers, or 6% of its workforce. Management said it would hire “judiciously” for key roles during 2023.