Daily Management Review

Higher Taxes Hit Earnings, Strong Revenue Growth, Posted by Alphabet


Higher Taxes Hit Earnings, Strong Revenue Growth, Posted by Alphabet
While analysts cheered the company's progress in diversifying its business beyond advertising, hurt by a higher tax rate, Google parent Alphabet Inc posted fourth-quarter profit below analysts' estimates.
Alphabet Chief Financial Officer Ruth Porat underscored that the company is broadening its business - pointing to growth in hardware, app sales and the cloud business while advertising still accounts for the lion's share of Google's revenue, rising 17.4 percent to $22.4 billion in the quarter.
Climbing 62 percent to reach $3.4 billion was the company's other revenue, which captures such businesses.
"We see tremendous potential ahead for these businesses, as well as in the continued development of non-advertising revenue streams for YouTube," Porat said on a call with investors.
Wall Street sent shares down 2.2 percent to $838 in extended trade after closing at $856.98 on Nasdaq as the results were met with a mixed reaction from Wall Street. Contributing to the dent in profitability, compared to 19 percent for the year overall Google faced a higher tax rate of 22 percent.
"If you look above that, it’s business as usual," said analyst James Wang of ARK Investment Management. "There has been no margin compression in the actual business."
They are beginning to reap the rewards of their investment in hardware, executives suggested. Saying sales doubled during the key holiday period including Black Friday and Cyber Monday, Porat spotlighted the company's line of Nest smart home products.
Google Chief Executive Sundar Pichai said during the call that the Pixel smartphone gained traction over the holidays and Google-branded hardware also showed promise as Google Home, a smart speaker.
"We’re committed to this for the long term as a great way to bring a beautiful, seamless Google experience to people," he said.
As advertisers spent more to reach an expanding user base that spends more time on smartphones and YouTube, the company posted a stronger-than-expected 22.2 percent increase in quarterly revenue.
58.8 percent of the search ad market worldwide or $60.92 billion in search ad revenue this year will be captured by Google, estimates Research firm eMarketer.
Compared with a 33 percent increase in the third quarter, paid clicks or clicks on Google ads rose 36 percent. Paid clicks are those ads on which an advertiser pays only if a user clicks on them.
According to FactSet StreetAccount, analysts on average had expected a rise of 26.9 percent.
Since Google sells more mobile ads, which command lower prices, cost-per-click dropped 9 percent, a slide that has continued. However, Rice added that since Google is selling more ads on YouTube, which are seen as a key growth driver, the shift is not necessarily alarming.
While the operating loss of $1.09 billion narrowed from $1.21 billion, Alphabet's Other Bets revenue increased to $262 million from $150 million a year earlier.
Self-driving technology company Waymo, X, the company's research facility that works on "moon shot" ventures, broadband business Google Fiber and home automation products Nest are the Other Bets of Google.
For a minority stake in the company, Singapore-based investment company Temasek had invested $800 million for a minority stake in Verily Life Sciences, one such bet, the company announced on Thursday. Analyst Jan Dawson of Jackdaw Research said that the investment suggests a potential new model for the other bets and reflects Alphabet's greater fiscal discipline under Porat.
"Getting external investors involved helps spread that risk out and reduces Google’s exposure," he said. "It also allows some things to move faster than they would if it were just Google's cash backing them."