The UK-based hedge fund first bought Alphabet shares in 2017 and currently has more than $6 billion worth of shares in its portfolio, which indicates its confidence in the future of the organization.
…Alphabet’s average compensation was 67% higher than that of Microsoft and 152% higher than that of the 20 largest publicly traded technology companies in the United States. There is no justification for this huge disparity…
However, it believes the company’s cost base is “too high and 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 a pre-income tax profit margin target and “substantially reduce losses in Other Bets and increase share buybacks own”.
Google search, for example, has high operating leverage and “isn’t very manpower intensive,” TCI said.
“You’ve said publicly that Google should be 20% more efficient. We couldn’t agree more. Almost every tech company is cutting costs,” the hedge fund added. TCI highlights 11,000 job losses at Meta announced last week, 10,000 layoffs 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 start of the pandemic and 37,000 in the last 12 months alone. “The growth is excessive, both in relation to the historical growth of the workforce and to what is required by the business”.
In its latest set of financial results for the third quarter of the calendar, Alphabet reported revenue of $69.1 billion, up 6% year over year – the slowest growth in years – and posted net income of $13.91 billion, down sharply from the $18.936 billion reported in the prior year 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 increase efficiency and increase productivity. Pichai said he thought the business could become 20 percent more productive. Google is also attempting to reduce overheads, including payroll costs.
TCI also criticized Google for paying “some of the highest salaries in Silicon Valley.” Google’s average compensation was $295,884 in 2021, Alphabet confirmed in its Schedule 14A filing.
“An analysis by S&P Global shows that Alphabet’s average compensation was 67% higher than that of Microsoft and 152% higher than that of the 20 largest publicly traded technology companies in the US. There is no justification for this huge disparity” TCI said.
He added that Google employs “some of the most talented and brilliant computer scientists and engineers” but said they are only a “fraction” of the total workforce and general sales, marketing and administration duties should be paid online. with other technological activities. .
All of these changes aim to bring Google to a target EBIT margin of 40 percent — Google Search — was at 39 percent last year and so the required target should be “affordable through operating leverage and cost reduction.”
TCI also pointed out that Alphabet’s Other Bets division — which houses operations including Waymo, Nest, Access, Calico and others — has generated $3 billion in revenue over the past five years, but suffered $20 billion in operating losses. . “Other bets have failed” and operating losses estimated at $6 billion in 2022 are expected to be cut by 50%.
“The most important component of Other Bets is Waymo,” TCI added. “Unfortunately, enthusiasm for self-driving cars has plummeted and competitors have exited the market. Ford and Volkswagen recently decided to shut down their self-driving venture,” he said, saying it was not likely to turn profits in the short term.
“Waymo has not justified its overinvestment 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 a year, yet it has $116 billion of cash on its balance sheet that, TCI said, doesn’t serve shareholders or society. society.
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 buybacks.” The group’s share price is down 34% in the year to date, the share price is “cheap” and buybacks could benefit, TCI said.
He 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 asked Alphabet for comment. ®