• 1Q23 results were within expectations. 1Q23 revenue/PATMI were at 23%/21% of our FY23e forecasts. Adj. PATMI (excl. one-off restructuring charges) was at 24%. Earnings were hurt by a one-off US$2.6bn restructuring charge.
• Revenue growth of 3% was led by travel and retail advertising. Cloud turned the corner on profitability, even amidst slowing topline growth. Cautious outlook for the remainder of FY23e given the uncertain macroeconomic backdrop.
• We maintain BUY with an unchanged DCF target price of US$131.00, with a WACC of 7.3% and terminal growth of 3.5%.

The Positives

+ Revenue growth re-accelerated slightly due to advertising revenue. GOOGL saw a re-acceleration in revenue growth, posting total revenue of US$69.8bn, 3% YoY (4Q22: 1%). Growth was driven by a 2% YoY increase in advertising revenue from Search (4Q22: -2% YoY) as spending from its travel and retail verticals improved. Additionally, ad revenue from YouTube showed some signs of stabilisation, declining only 3% YoY (4Q22: -8% YoY) as YouTube Shorts monetization increased, offset by some incremental pullback in advertiser spend.

+ Google Cloud momentum slowing, but turned the corner on profitability. Cloud saw some slowdown in its growth momentum, with revenues up 28% YoY (4Q22: 32% YoY). This was led by a continued weaker macro environment, with customers choosing to optimise their current Cloud consumption instead of expanding. Even with topline growth slowing, Cloud posted its first profitable segment, with operating income of US$191mn (1Q22: US$706mn) – operating margin of 2.6%, as management remained focused on driving longer-term profitability in this segment.

+ Earnings in-line with our forecasts. GOOGL announced 1Q23 PATMI of US$15.1bn, in line with our expectations as the company continued to be more prudent with expenses. Earnings were hurt by a US$2.6bn one-off restructuring related charge, offset positively by a US$1bn reduction in depreciation expenses due to an increase in estimated useful life of servers and other equipment, and a delay in timing of its stock-based compensation. 1Q23 PATMI was at 21% of our FY23e forecasts, with Adj. PATMI (excl. restructuring charges) at 24% of our forecasts.

The Negative

– Cautious FY23e outlook. Given the ongoing uncertainty in the macro environment, management remained cautious for the remainder of FY23e, expecting advertising revenue growth to remain muted, with continued decline in Cloud momentum.