Google Strength Drives Alphabet Profit Higher
October 27 2016 - 04:50PM
Dow Jones News
Google parent Alphabet Inc. reported rising third-quarter profit
Thursday, extending a streak of strength as users spend more time
on smartphones and advertisers spend more to reach them there.
Alphabet said net income rose 27% to $5.06 billion, or $7.25 a
share, from $3.98 billion, or $5.73 a share, in the same quarter a
year ago. Excluding certain expenses, Alphabet said it would have
earned $9.06 a share, beating analysts' estimates of $8.62 a share,
according to FactSet.
Alphabet revenue, driven almost entirely by its advertising
business, rose 20% to $22.45 billion.
Shares of the company rose 1.5% to $806.95 after hours.
Alphabet—the world's No. 2 company by market value, after Apple
Inc.— continues to grow at a steady clip on the back of the mobile
revolution. Users are accessing the internet more because they
carry computers almost everywhere they go. That shift to mobile
boosts Google's business in other ways, too.
The company controls 95% of the mobile-search market, compared
with 78% on personal computers, according to digital-marketing firm
Merkle Inc., largely because it is the default search engine on
both iPhones and Android devices. Mobile users also click on search
ads at a higher rate than desktop users, Merkle said, in part
because mobile ads take up virtually the entire screen for some
searches. Some analysts now estimate more than half of Alphabet's
revenue come from ads on mobile devices.
The rise of smartphones also poses challenges to Google. Mobile
ads are generally cheaper than desktop ads, so advertisers' average
price for an ad click has declined as mobile ads have increased.
Google said Thursday that advertisers' cost per click decreased
11%, compared with 7% in the second quarter.
Alphabet shares have risen just 5.1% this year through
Thursday's close, lagging rivals Facebook Inc. and Apple. Facebook,
in particular, is proving a tough competitor for digital ads; its
profits nearly tripled to $2.1 billion in the second quarter, with
84% of its $6.2 billion in ad revenue coming from mobile. Facebook
reports third-quarter earnings next week.
There has also been tumult outside of Alphabet's core Google
business, in the company's "other bets." On Tuesday, the head of
Alphabet's high-speed internet business, Google Fiber, stepped down
as the service said it would lay off 9% of staff and suspended
plans in 11 cities. Top executives have also recently departed from
Alphabet's home-automation firm Nest and projects to build
self-driving cars, delivery drones and internet-beaming
balloons.
Some of the shake-up comes amid a stronger focus on financials
from Alphabet Chief Financial Officer Ruth Porat, who joined the
company in May 2015 from Morgan Stanley. Alphabet executives have
said she is leading an effort to rein in costs.
Analysts look for signs of Ms. Porat's presence on the financial
results of the "other bets," which consistently lose money as they
spend heavily to try to invent new technologies or gain traction in
new markets. Other bets' revenue increased to $197 million from
$141 million a year ago, and the operating loss narrowed to $865
million from $980 million.
Google's business of hosting other companies' businesses on its
computers, known as the cloud, is fueling growth outside of
Google's advertising business. Non-advertising revenue increased
39% to $2.43 billion over a year prior; in recent quarters,
executives have attributed growth in Alphabet's non-advertising
revenue largely to the cloud business. Google is hoping to continue
to diversify from being a pure advertising business by investing
heavily in the cloud and developing new hardware to sell, such as a
new line of Google smartphones it unveiled earlier this month.
Write to Jack Nicas at jack.nicas@wsj.com
(END) Dow Jones Newswires
October 27, 2016 16:35 ET (20:35 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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