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Investor tells Google: Cut costs now and stop paying staff so much
Also wants Alphabet to slash losses in Waymo division, buy back shares, lots of them
Activist investor TCI Fund Management is calling on Google's parent Alphabet to pursue aggressive cost cutting on the back of a hiring spree during the pandemic, claiming the business could be more efficiently run.
The UK-based hedge fund first bought Alphabet stock in 2017 and currently has shares valued at more than $6 billion in its portfolio, which it says indicates its belief in the future of the organization.
...median compensation at Alphabet was 67 percent higher than at Microsoft and 152 percent higher than the 20 largest listed technology companies in the US. There is no justification for this enormous disparity...
Yet it reckons the cost base of the business is "too high and that management needs to take aggressive action. The company has too many employees and the cost per employee is too high," TCI said in an open letter to Alphabet.
One of the calls to action is for Alphabet's C-Suite, led by CEO Sundar Pichai, to publicly disclose an earning before income tax margin target, and "substantially reduce losses in Other bets and increase share buybacks."
Google Search, for example, has a high operating leverage and is "not labor intensive," TCI said.
"You have publicly stated that Google should be 20 percent more efficient. We could not agree more. Nearly all technology companies are reducing costs," the hedge fund added. TCI highlights the 11,000 job losses at Meta announced last week, the layoffs of 10,000 at Amazon, and actions taken by Microsoft, Salesforce, Stripe and Twitter
Alphabet's headcount has more than doubled since 2017, with more than 50,000 hired since the pandemic began and 37,000 of those in the last past 12 months alone. "The growth is excessive, both in relation to historic headcount growth and what the business requires."
In the last set of financial results for calendar Q3, Alphabet reported revenue of $69.1 billion, up 6 percent year-on-year – the slowest growth for years – and made a net profit of $13.91 billion, dramatically down on the $18.936 billion posted in the year earlier quarter. As a result, Alphabet said it was reviewing every single project.
Google launched Simplicity Sprint in August as a way to ask its 174,000 employees for ideas to up efficiency and boost productivity. Pichai said he thought the biz could become 20 percent more productive. Google is also attempting to reduce general overheads, including staff expenses.
TCI also criticized Google for paying "some of the highest salaries in Silicon Valley." The average compensation at Google was $295,884 in 2021, Alphabet confirmed in the Schedule 14 A filing.
"An analysis by S&P Global illustrates that median compensation at Alphabet was 67 percent higher than at Microsoft and 152 percent higher than the 20 largest listed technology companies in the US. There is no justification for this enormous disparity," said TCI.
It added that Google employs "some of the most talented and brightest computer scientists and engineers" but claimed this is just a "fraction" of the total workforce and those in general sale, marketing and admin functions should be paid in line with other tech businesses.
All of these changes are to get Google to an EBIT target margin of 40 percent – Google Search – was at 39 percent last year and so the required aim should be "achievable through operating leverage and cost cutting."
TCI also pointed out that Alphabet's Other Bets division – which houses operations including Waymo, Nest, Access, Calico and more – generated $3 billion in revenues in the past five years but incurred operating losses of $20 billion. "Other Bets have been unsuccessful" and operating losses estimated at $6 billion in 2022 should be reduced by 50 percent.
"The biggest component of Other Bets is Waymo," TCI added. "Unfortunately, enthusiasm for self-driving cars has collapsed and competitors have exited the market. Ford and Volkswagen recently decided to shut down their self-driving venture" saying that achieving profit in the short term was not likely.
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“Waymo has not justified its excessive investment and its losses should be reduced dramatically,” the investor added.
Shareholders love share buybacks – for obvious reasons – and Alphabet's run rate is $60 billion per year, yet it has $116 billion of cash on the balance sheet which, TCI claimed, is not serving shareholders or the company.
Alphabet’s ability to pursue M&A is limited due to “regulatory scrutiny” so it should follow Apple’s capital allocation strategy and become “cash neutral over time through increased share repurchases.” The group’s stock price is down 34 percent in the year to date, the share price is “cheap” and buybacks could take advantage of this, TCI said.
It concluded: “In the era of slower revenue growth, aggressive cost management is essential. We look forward to your announcement in a clear action plan as a matter of urgency.”
We have asked Alphabet to comment. ®