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Alphabet profit falls short as Google’s ad and marketing costs rise

Sundar Pichai
Sundar Pichai is the chief executive of Google, a division of Alphabet.
(Eric Risberg / Associated Press)
Bloomberg

Google parent Alphabet Inc.’s fourth-quarter profit missed analysts’ estimates, hobbled by rising payments to web-search partners, higher marketing expenses and troubles at YouTube that weighed on its advertising business during the holiday quarter.

Alphabet reported a hit to earnings related to taxes owed on overseas cash after recent changes to U.S. law. This $9.9-billion tax expense resulted in a net loss of $3.02 billion, or $4.35 a share, the company said Thursday. Excluding this cost, profit was $9.70 a share, falling short of the average analysts’ projection of $10.04 a share. Alphabet shares slipped about 3% in extended trading.

Traffic acquisition costs and payments to phone makers and web browsers rose to $6.45 billion, or 24% of Google’s overall ad revenue. Google has attributed the surge in that expense to the rising number of ads it runs on YouTube, mobile devices and automated systems, which require sharing more money with partners. Alphabet’s total sales, minus traffic acquisition costs, rose to $25.9 billion. Analysts on average expected revenue of $25.6 billion, according to data gathered by Bloomberg.

Investors have been watching for answers about the effect of turbulence at YouTube on Google’s growth. Advertiser outcry over offensive content on the massive video site started in early 2017 and then resurfaced in the fall, after grotesque videos were spotted on YouTube’s channels for children. Several marketers paused spending to avoid having their spots run alongside the content in question. Google doesn’t break out YouTube sales.

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YouTube introduced a series of policies to assuage these concerns in January, including the manual vetting of videos in the premium package for advertisers. Those measures may spell further expenses for Google, Colin Sebastian, an analyst at Robert W. Baird & Co., wrote in a note before earnings were announced.

“Overall on YouTube, we are doing a lot to protect the ecosystem,” Chief Financial Officer Ruth Porat said in an interview after the report.

Google’s historically fat margins are also under threat. The amount Google makes per ad has steadily fallen as mobile phones rise in popularity, but sales on Google’s own properties, such as search and YouTube, kept growing. During the fourth quarter, that cost per click fell 14%. Some analysts suggested this drop reflects a slowdown in the number of ads Google can cram onto mobile devices’ smaller screens.

Another weight on margins comes from the amount Google has poured into hawking its Pixel phones, smart speakers and other devices. Sales and marketing expenses rose to $4.3 billion, or 13% of overall sales.

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Beyond ads, Alphabet posted some strength in its other divisions — although not yet from its more ambitious units such as self-driving cars. The company doesn’t disclose figures from cloud-computing or hardware sales, but those divisions, lumped into Google’s Other Revenue category, grew 38% to $4.69 billion in the fourth quarter.

During the quarter, Google’s cloud arm announced two major partnerships, with Salesforce.com Inc. and Cisco Systems Inc., to spread the search company’s data storage and apps services to more customers. Those efforts are attempts to catch Amazon.com Inc. and Microsoft Corp., the cloud market leaders. Microsoft posted cloud sales of $5.3 billion during the latest quarter.

Alphabet’s Other Bets category, which includes its Fiber internet and Nest home devices, posted $409 million in revenue.

The company also named director John Hennessy as chairman, replacing Eric Schmidt, who said in December that he would step down from the role. Schmidt remains on the board.

Bergen writes for Bloomberg.


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