Google Alphabet beats revenue targets, but shares hovering near closing price

Justin Sullivan/Getty ImagesGoogle CEO Sundar Pichai
  • Google’s revenue was slightly stronger than expected during Q1.
  • The fees Google pays to partner web sites, known as TAC, continued to increase as a percentage of revenue.
  • Analysts on the conference call focused on regulatory risks and spending.

Google-parent company Alphabet topped Wall Street targets with 23% revenue growth in Q1, but the better-than-expected performance was not enough to dispel worries about rising expenses and the most significant risks of a regulatory clampdown the company has faced in years.

Shares of Alphabet initially jumped by more than 4 per cent in after-hours trading but quickly reversed course and fell back to around the price that the stock closed at during regular trading.

“While fundamental worries coupled by regulatory black clouds continue to be overhangs on the name, we believe 1Q advertising and ‘bread and butter’ search revenues were healthy and a good barometer of potential strength heading into the rest of 2018,” Dan Ives, an analyst at GBH Insights wrote in a note to investors following the earnings annoucnement on Monday.

Here are the key numbers:

  • Net Revenue (ex-traffic acquisition costs):Google reported $US24.8 billion, up 23.5% from the same period last year. Analysts polled by Bloomberg had expected $US24.5 billion.
  • Earnings per share (GAAP): Google reported $US13.33 while analysts had predicted $US9.30 (the difference owed to an accounting change in which Google now includes gains from invesments, such as its stake in Uber).
  • Traffic acquisition costs (TAC): $US6.288 billion, or 24% of ad revenue, compared to $US4.629 billion, or 22% of ad revenue.
  • Headcount: 85,050, up 15 per cent from the 73,992 workers reported in Q1 last year.
  • Capital expenditures: $US7.3 billion, up sharply from $US2.5 billion in the year ago quarter.

Google’s Q1 results contained a number of accounting and business structures changes that gave investors new insight into the tech giant.

Among the key changes was a shift in how Google reports results for Nest, the smart home appliances business that was folded back into Google earlier this year after operating as a separate “Other Bet” under the Alphabet umbrella.

A first peek into Nest

Although Google has never broken out Nest’s financial results, the change in Google’s reporting practices made it possible to tease out the business’ results last year. Nest appears to have generated $US112 million in revenue during the first quarter of 2017, with an operating loss of $US284 million.

Despite the red ink, Google CEO Sundar Pichai described Nest’s business in postitive terms during the conference call with analysts on Monday, noting that Nest sold more devices in 2017 than during the past two years combined.

Google now includes Nest’s results in the “other revenue” category, along with the rest of Google’s hardware products, such as the Pixel phone and Home smart speaker. This category reported $US4.3 billion, up from $US3.2 billion during the first quarter in 2017, or a 34 per cent increase.

What about the Other Bets?

  • Other Bets Revenue: $US150 million, up from $US132 million in the year ago period.
  • Other Bets operating loss: $US571 million, down from an operating loss of $US703 million a year ago.

The results come at a tricky period for Google, the world’s dominant search engine, as well as the owner of online video giant YouTube.

Shares of Googe-parent Alphabet Inc., have fallen about 9% over the past three months, as worries about online privacy and regulatory risks weigh on the stock. Google rival Facebook has been under the microscope following revelations that its user data was misapopriated by Cambridge Analytica, and there are worries that Google could get caught up in any resulting regulatory actions. And European privacy rules, which are set to take effect in May, could also impact Google’s business.

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