- Alphabet, Google’s parent company, missed Wall Street’s earnings expectations Monday, reporting a third-quarter profit that declined even farther than what analysts had forecast.
- A drop in the value of the company’s investments weighed down its overall results.
- But Alphabet’s bottom line was also hampered by its operating costs, which grew faster than its sales.
- The company’s stock fell on the news.
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Google parent Alphabet fell far shy of Wall Street’s earnings expectations on Monday as a decline in the value of its investments weighed heavily the bottom line, marring a quarter of solid sales growth in the company’s advertising and cloud businesses.
A hefty $1.5 billion loss on the value of undisclosed equity investments took a toll on Alphabet’s bottom line, overshadowing healthy revenue growth in mobile search advertising, YouTube advertising and sales in the Google cloud business.
Alphabet did not list which of its investments went south in the quarter. But the company invested in both Uber and Slack before they went public. Both companies have seen their stock prices decline since they debuted on the market earlier this year.
Alphabet’s shares dropped on the news. In after-hours trading following its report and a conference call with analysts, the company’s stock was down $23.25, or 2%, to $1,266.75.
A strong showing in Google’s Cloud
Alphabet posted a per-share profit of $10.12 in the third quarter, well below the $13.06 a share it recorded in the same period last year. Analysts polled by Bloomberg were expecting the search giant’s profit to dip from the year-ago period, but not nearly that far; they were looking for a per-share profit of $12.35.
Google’s net revenue grew more than 21% during the third quarter, topping analyst expectations. And the company’s “Other Revenues” category, which includes Google’s cloud business, app sales in the Google Play Store, and hardware sales, increased by 39% year-over-year to account for roughly 16% of the company’s total revenue.
Here’s what the internet giant reported and how that compared with analysts’ expectations, where applicable, and Alphabet’s year-earlier results:
- Q3 net revenue (excluding traffic acquisition costs): $33.01 billion. Wall Street was looking for $32.7 billion. In the same period last year, Alphabet posted $27.2 billion in net sales.
- Q3 earnings per share: $10.12. Analysts had forecast $12.35 a share. In the third quarter last year, the company earned $13.06 per share.
- Q3 “other bets” revenue: $155 million. In the same period last year, the company’s businesses other than Google brought in $146 million in sales.
- Q3 “other bets” operating loss: $941 million. In the third quarter a year ago, those non-Google businesses posted an operating loss of $727 million.
- Q3 Google capital expenditure: $7.3 billion. In the same period last year, the search business invested $5.6 billion on such items.
- Number of employees: 114,096. At the end of the third quarter last year, Alphabet had 94,372 employees. At the end of the second quarter, it had 107,646.
- Q4 net revenue (analysts’ pre-report forecast): $38.4 billion. In the holiday period a year ago, Alphabet saw $31.7 billion in net sales.
- Q4 EPS (analysts pre-report forecast): $12.90. In last year’s fourth quarter, the company earned $12.77 a share.
Alphabet’s costs grew faster than sales
Alphabet’s investments weren’t the only thing hampering its bottom line. Rising costs also helped to depress its profits.
The company’s overall operating costs rose to $31.3 billion. That was up nearly 25% from the $25.1 billion in operating costs Alphabet recorded in the same period last year.
By contrast, the company’s net revenue grew 21% year-over-year.
Alphabet saw a particularly sharp rise in its general and administrative expenses. Those grew about 48% from the third quarter last year to $2.6 billion.
The surge in administrative expenses was due in large part to a deal Google announced last month with France to settle a tax dispute, Ruth Porat, Alphabet’s chief financial officer, said on the conference call. Google agreed to pay France a $554 million fine as part of the settlement. Without that amount, Alphabet’s general and administrative costs would have risen by just 16%.
But the company saw other costs rise faster than its sales growth. Both its cost of revenue – the expenses directly related to the products and services it offers – and its research and developments costs outpaced its revenues.
Alphabet’s cost of revenues were largely driven by data-center related costs and depreciation, Porat said. Its research and development expenses, by contrast, were boosted by its hiring of new engineers, she said.
Analysts largely ignored regulatory and workplace troubles
Google – along with Facebook and Amazon – has been under regulatory scrutiny lately, as antitrust officials in Washington and within most of the states are scrutinizing its impact on competition. It’s also been seeing growing tension with employees over its workplace culture and controversial projects, including a now-abandoned effort to develop a censored search engine for China.
But analysts largely ignored those topics during the call. Only one, Baird’s Colin Sebastian, asked about the antitrust scrutiny, wondering if it might affect Alphabet’s ability to innovate. Google CEO Sundar Pichai responded by saying that the company wanted and intended to continue to innovate and appeared to blame some of the scrutiny on Alphabet’s rivals in its newer markets being afraid of competing with it.
There are “many new areas of opportunities available for us, and in many of these areas we are new entrant, and we create competition,” Pichai said. “And sometimes the competitive pressures can lead to concerns from others.”
The company’s stock closed regular trading Monday up $24.87 a share, or about 2%, to $1,290.
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