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Google: Alphabet's revenue jumps 21% despite high costs, $2.7 bn EU fine

Alphabet and Facebook, which together dominate the online ad market, compete for advertising dollars

Reuters  |  San Francisco 

Alphabet profit sends shares up, overtakes Apple in value

Inc reported a 21 per cent jump in quarterly on Monday, maintaining a growth rate that is rarely seen among its size and suggesting the big sales gains enjoyed recently by the other firms are not done yet.

Alphabet, the owner of and YouTube, said it made $3.5 billion in net income on sales of $26 billion. The profit would have been much larger but for a record $2.7 billion European Union antitrust fine.

Still, the company noted that costs were rising faster than sales and warned that expenses would remain high as more searches shift to mobile devices.

The squeeze on expected future profit appeared to weigh on Alphabet's share price, which fell about 3 per cent to $967 after the bell. Shares had closed up in regular trading and have gained 26 per cent for the year.

Alphabet's cost of revenue, a measure of how much money the company must spend to keep its platforms running before added costs such as research, rose 28 per cent, well above the growth in itself.

The rising costs, including what pays to drive traffic to its search engine, hurt operating margins more than most people had expected, said Doug Kass, president of Seabreeze Partners Management.

"This could be problematic going forward," Kass said.

Chief Financial Officer Ruth Porat, asked about margins during a conference call with analysts, said the company was focused on getting bigger.

"As we've often said, we're focused on and operating income dollar growth and not on operating margins," she said.

Increasing costs, Porat added, are a result of more money going into high-growth products that she said would create value for shareholders.

With its latest profits, reported $15.7 billion in and equivalents, and another $79 billion in marketable securities.

and social media rival Inc, which together dominate the online ad market, compete for advertising dollars.

This year, is expected to have $73.75 billion in net digital ad worldwide while is expected to take in $36.29 billion, according to research firm eMarketer. Together they will have about 49 per cent of the market, eMarketer said.

is due to report earnings on Wednesday.

The technology sector has led a big rally in US stocks. The S&P 500 information technology index is up 23.1 per cent this year, compared with a 10.4 per cent rise in the S&P 500.

Antitrust risk has shadowed for years, and antitrust enforcers in the European Union last month fined 2.42 billion euro ($2.7 billion) for favouring its own shopping service.

The fine came in the first of three EU probes of Google's dominance in searches and smartphone operating systems, and analysts are going to monitor the downside closely, said Josh Olson, an analyst with Edward Jones.

"It is not so much the money or the fine itself," Olson said, but "questions linger about what impact that could have on Google's Europe business, and they did not really comment on that."

US antitrust enforcers thus far have chosen not to follow Europe's lead.

If not for the fine, said that earnings per share would have been $8.90 in the second quarter, compared with $7 a year earlier. With the fine, reported earnings per share of $5.01, beating an average estimate of $4.49.

Sundar Pichai, chief executive officer of Google, said in response to an analyst question during Monday's call that would fight to continue bundling its Android operating system with popular smartphone apps such as Maps -- a practice the EU antitrust officials are investigating.

"It's a very open market, open ecosystem, and it works well for everyone, and I expect that to continue," Pichai said, adding that billions of people use products.

Pichai was also appointed to the board of directors on Monday.

Google's ad rose 18.4 per cent to $22.67 billion.

from other products, a category that includes the Pixel smartphone, the Play Store and Google's cloud business, rose 42.3 per cent to $3.09 billion. competes heavily in the fast-growing cloud business with tech Inc and Microsoft Corp.

Losses from other units - an array of businesses known as "other bets" that includes the Waymo self-driving car company, thermostat-maker Nest and the life sciences firm Verily - narrowed to $772 million from $855 million a year earlier.

First Published: Tue, July 25 2017. 09:43 IST