The results, which were also hit by the strong dollar, drove shares
of the Web search company down 6 percent in late trading Thursday.
Alphabet's consolidated revenue rose to $20.26 billion from $17.26
billion, slightly below the $20.37 billion analyst consensus,
according to Thomson Reuters I/B/E/S. Non-GAAP earnings per share of
$7.50, excluding one-time items, missed analysts' expectations of
Chief Financial Officer Ruth Porat said on a conference call with
investors that payments to other web sites, known as traffic
acquisition costs (TAC), totaled $3.8 billion and accounted for 21
percent of advertising revenues. The percentage of ad revenues spent
on TAC grew 13 percent year-over-year.
That reflects the ongoing shift to mobile advertising and the
growing importance of programmatic advertising, in which ads are
bought, sold and displayed by automated systems.
Investors should get used to seeing increased TAC as "the cost of
doing business," said Sameet Sinha, B. Riley & Co. analyst.
"If you're getting mobile searches from Apple devices you have to
pay Apple for traffic so that revenue can happen," Sinha said. "The
same thing on the programmatic side, when you end up representing
more people and selling their ad space or buying their ad space, you
have to pay somebody else."
Porat said spending on traffic acquisition is expected to keep
rising as the shift to mobile continues - pressuring the company's
traditionally robust margins on its advertising business.
"I think investors expecting stable margins are probably being
overly optimistic. But that said you can have diminishing margins
and still have a great business and an incredibly lucrative one,"
said Pivotal Research Group analyst Brian Wieser.
Google's advertising revenue increased 16.2 percent to $18.02
billion, while the number of ads, or paid clicks, rose 29 percent,
the company said.
Losses increased at the company's Other Bets business, which
includes its broadband business Google Fiber, home automation
products Nest, self-driving cars and X - the research division that
works on "moon shot" ventures.
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The loss widened to $802 million, up from $633 million a year
earlier. Revenue rose to $166 million from $80 million.
Compared to Google's overall business, Wieser said losses in other
bets were "too small to matter" at the moment.
"If you're an optimist you can look to [other bets] and say it can
eventually support long term growth."
Porat said foreign exchange rates factored heavily into the results,
shaving $762 million from its revenue for the quarter or $593
million after the effects of a currency hedging program.
"Our total revenue grew 23 percent year-over-year and declined 4
percent sequentially, reflecting holiday seasonality," she said on
the conference call.
Martin Pyykkonen, an analyst at Rosenblatt Securities, said the
effect of foreign currency was worse for Alphabet than expected.
"If there had been a little better foreign currency translation, it
would have been better than the Street consensus," he said.
Alphabet's total net income rose to $4.21 billion, or $6.02 per
Class A and B share and Class C capital stock, from $3.52 billion,
or $5.10 per share.
The company's shares fell to $732.94 in after hours trade from a
close of $780.
(Reporting by Narottam Medhora in Bengaluru and Deborah Todd in San
Francisco; Editing by Peter Henderson, Savio D'Souza and Bernard Orr
and Andrew Hay)
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