Google parent's profit jumps 24% in quarter, driven by consumers making a fast shift

By Jack Nicas 

Google parent Alphabet Inc. said quarterly profit soared 24%, the second internet giant in two days to report blockbuster earnings driven by consumers' rapid shift to mobile devices.

Alphabet said growth continued as companies bought more ads on its search engine and other products, while users increasingly clicked on those ads. Revenue, fueled by Google's advertising business, rose 21% to $21.5 billion in the second quarter from a year ago, beating analysts' average estimate of $20.76 billion.

The rise of smartphones has put internet-connected computers in the pockets of more than a billion people world-wide, leading to a surge in internet use -- and a major boost to the bottom lines of tech giants such as Google and Facebook Inc. As consumers use the companies' wildly popular free services more, Google and Facebook can sell more ads to companies trying to reach those users.

"The strength of the quarter is about mobile," Google Chief Executive Sundar Pichai said Thursday. "Our investment in mobile now underlines everything that we do today, from search and YouTube to Android and advertising."

Alphabet stock, which had slid 1.6% in 2016 through Thursday's close, jumped 4% in after-hours trading. The company had recently struggled to meet investor expectations, with earnings missing analysts' estimates in eight of the past 12 quarters.

"The big overhang of concern on Wall Street was that Google's best days are behind it and that search is a dramatically maturing business. I think they just proved that's not the case," said Mark Mahaney, an analyst with RBC Capital Markets. The shift to mobile phones has revitalized Google's business, he said. "More smartphones means more use of Google, and YouTube, too."

Facebook, Google's chief rival, also is gaining strength from mobile. Facebook said Wednesday that its second-quarter profit nearly tripled from a year earlier to $2.1 billion, easily beating Wall Street estimates. Mobile accounted for 84% of its $6.2 billion in second-quarter advertising sales.

While Google still controls about 31% of the roughly $187 billion world-wide digital-ad market, Facebook's market share has risen to 12% from 8.6% in 2014, according to research firm eMarketer.

Google's success capturing advertisers and users as they shift to mobile devices from traditional personal computers is helped by its Android smartphone software, which gives its search engine and other services top billing on more than a billion devices. Google also pays Apple Inc. to make Google the default search engine on iPhones.

Google said last year that more than half of its searches now come on mobile devices, and some analysts estimate more than half of its revenue comes from mobile. Advertisers' spending on mobile search ads increased 63% in the second quarter over a year prior, while overall search-ad spending rose just 10% over the period, according to marketing-technology firm Kenshoo Ltd.

Alphabet on Thursday said net profit in the quarter that ended June 30 rose to $4.88 billion, or $7 a share, from $3.93 billion, or $4.93 a share, a year earlier. Excluding certain items, Alphabet earned $8.42 a share, beating analysts' estimates of $8.04 a share.

Clicks on ads that Google shows users increased 29% in the second quarter over a year prior, the fourth consecutive quarter with growth above 22% after a year of slower growth.

Google said it is now reaping the rewards from the shift to mobile because companies are increasingly willing to advertise on smartphones. That is in part because Google is adding new mobile ad formats and better measuring the efficacy of such ads, including tracking users' locations to see if they visit a physical store after seeing an ad for the store on their phones, Google said.

One downside to mobile's rise for Google has been a simultaneous decline in the average amount that advertisers pay Google per ad click. Mobile ads are generally less expensive than desktop ads, so as the number of mobile ads has increased, advertisers' overall cost per click has declined.

But analysts say there are some signs ad buyers are bidding more for mobile ads, and on Thursday Google said advertisers' cost per click decreased 7% in the second quarter over a year prior, compared with a 9% decline in the first quarter and steeper declines before that.

Google's 19% growth in advertising revenues was outpaced by nonadvertising sales, which grew 33% to $2.17 billion over a year prior. That jump was an acceleration for Google's nonadvertising business, which executives said was primarily driven by its cloud business of hosting other companies' data and processing on its servers.

Google is betting the cloud can become a major revenue driver over the next several years and is investing hundreds of millions of dollars in building new data centers. Other nonadvertising businesses include hardware sales and Google's share of app sales in its Play Store.

Thursday's results are the third time the firm reported as Alphabet, a parent company created in October to house Google and a series of "other bets," from home-automation firm Nest to the research lab X, which is working on long-term projects such as self-driving cars, internet-beaming balloons and delivery drones.

While the Google unit accounts for virtually all of Alphabet's revenue, analysts and investors have closely watched financial results of the other initiatives for a sense of how much money they are losing. Revenue for those other bets increased to $185 million from $74 million a year ago, and the operating loss widened to $859 million from $660 million.

Cost controls have also been a recent focus since the arrival of former Morgan Stanley executive Ruth Porat as finance chief last year. Investors cheered Ms. Porat's hire, hoping she would step up scrutiny of Alphabet's costs. Second-quarter total expenses increased 20% to $15.53 billion, a slightly slower pace than revenue grew.

Write to Jack Nicas at jack.nicas@wsj.com

 

(END) Dow Jones Newswires

July 29, 2016 02:48 ET (06:48 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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