By Douglas MacMillan
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 24, 2018).
Google parent Alphabet Inc. posted surging profits as
advertisers kept swarming to the search giant amid a global debate
about internet privacy that threatens to affect its main revenue
generator.
Alphabet's earnings also got a multibillion-dollar boost from
the company's stakes in startups including Uber Technologies Inc.
but were tempered by the costliest spending spree in its 14-year
history as a public company.
Net profit jumped 73% to $9.4 billion in the first quarter, up
from $5.4 billion in the same period last year, a performance that
highlights the firm's huge lead in the global market for online
ads. The earnings growth was Alphabet's strongest since the fourth
quarter of 2009.
Advertising revenue, which accounts for nearly all of the
company's top line, soared 24% to $26.6 billion. Revenue from
"Other Bets," a segment which includes Waymo self-driving cars,
totaled $150 million, an increase of 14% from the same period last
year.
The results landed while regulators in Washington are
considering getting tougher on internet privacy. While most of the
attention on the issue has focused on Facebook Inc., many observers
believe Google's dominant role online means the firm will also be
subject to tougher scrutiny. The European Union is also moving
forward with a sweeping set of rules called the General Data
Protection Regulation, which goes into effect May 25. The new law
could affect the revenue of Alphabet, which has already announced
some changes to the way it collects consent from visitors of sites
displaying its ads.
Companies found in violation of the sweeping regulation will
face fines of up to 4% of their annual global revenue.
Asked about the impact of the European regulations on a call
with analysts Monday, Chief Executive Sundar Pichai said Google has
spent more than a year preparing to be compliant. Because Google
derives most of its revenue from search ads, which rely less on
personal targeting, much of its business won't be affected by the
changes, he said.
Alphabet's first-quarter earnings received a boost from a change
in accounting rules that caused the company to begin reporting the
current fair value of nonmarketable securities, including its
valuable stake in ride-hailing giant Uber.
Alphabet attributed about $3 billion of its net profit increase
to the value of those securities, though the company didn't break
out individual holdings or disclose what portion of that increase
was made up by Uber.
The fair value of Uber shares is something of a mystery. Last
December, Uber backers and employees sold shares to a group of
investors led by SoftBank Group Corp. at a $48 billion valuation --
a roughly 30% discount to the last time it sold new shares to
investors, at a $68 billion valuation.
Alphabet's earnings boost helped offset the rising costs it pays
partners such as Apple Inc. to direct more smartphone users to
Google's search engine. Those costs have raised concerns that the
company has to give up chunks of its revenue to maintain its level
of growth.
Brian Wieser, an analyst at Pivotal Research, said the
advertising business not based on Google's home page search
activity -- which comes from partners -- "is growing faster, which
helps their top line, but is lower margin."
Traffic costs rose to $6.3 billion, up 35% from a year earlier
and have made up one-fifth of the company's revenue for five
consecutive quarters.
The company also drastically increased its spending in other
areas. Alphabet spent $7.3 billion on capital expenditures in the
first quarter of the year, more than triple the amount it spent a
year earlier. That included its $2.4 billion purchase of a building
in New York's Chelsea Market as well as investments in data centers
and undersea cables.
The spending caps several quarters of rising costs at Alphabet,
which is investing in the infrastructure the company says is
critical to maintaining its lead in future technologies such as
machine learning, a branch of computer science dedicated to helping
computers find patterns in data.
Alphabet Chief Financial Officer Ruth Porat suggested the
spending could continue, saying "it reflects the demand we are
seeing" and not one-off expenses.
Alphabet's shares were little changed in after-hours
trading.
Google has maintained its lead in the global market for online
ads despite its massive size and growing competition from
fast-expanding challengers. Google is expected to control 31% of
the global ad market this year, down slightly from 31.7%, according
to estimates from eMarketer.
Google's ad business accounts for the vast majority of revenue
but the company is increasingly looking to emerging areas, such as
Waymo and high-tech health-care division Calico, for continued
growth.
Alphabet generally doesn't disclose results from those units
individually, but it did give investors a rare glimpse at the
financials of Nest Labs, the pioneer in internet-connected home
devices such as thermostats and home security cameras that the
company acquired for $3.2 billion in 2014.
In all four quarters of 2017 combined, Nest generated $726
million in revenue, or about 60% of the total sales of the "Other
Bets" segment over that period, according to Alphabet's data. Nest
was moved from "Other Bets" to the Google unit last year, a move
seen a retrenchment of Alphabet's strategy to let more units grow
as independent businesses.
Nest has been slow to release new products and has been upstaged
by talking speakers with embedded virtual assistants -- mainly the
Amazon Echo and Google Home -- which have become the hubs for
connected homes.
Alphabet doesn't share results for a much bigger driver of
revenue, YouTube. Some investors and others have renewed calls for
more transparency from YouTube, which analysts estimate will
generate from $11 billion to $20 billion this year, representing
between 10% and 18% of Alphabet's overall revenue.
The company said the product was part of a broader suite of
ad-supported businesses.
Write to Douglas MacMillan at douglas.macmillan@wsj.com
(END) Dow Jones Newswires
April 24, 2018 02:47 ET (06:47 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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