Jack Clark
Even Google isn’t immune to technological change.
Ruth Porat, chief financial officer of Google parent
Alphabet Inc., said Thursday that profit margins could be pressured by
higher mobile phone use and growth in automated ads.
More smartphones mean Google gets its services in front of
more people. Over 1 billion people now access its Chrome web browser
each month on mobile devices. But the company has to pay more to
partners to reach people on their phones. That’s also the case as more
customers use a fast-growing technology known as programmatic
advertising.
"Certain costs associated with revenue are going up given
secular trends in the market," Porat said on a call discussing the
company’s first-quarter results with analysts. The result is more
revenue, "but at a lower margin," she added.
Earnings, before certain items, were $7.50 a share, the
company said in a statement. That was below analysts’ average projection
of $7.96, according to data compiled by Bloomberg. Revenue, excluding
payments to distribution partners, rose 18 percent to $16.47 billion,
just missing analysts’ forecasts of $16.59 billion.
Traffic acquisition costs, or TAC, paid to distribution
partners in the first quarter jumped 33 percent to $1.22 billion, versus
a year earlier. That compares to a 20 percent increase in revenue
generated from Google’s own websites.
For the company’s Network business, which runs ads for other
websites, TAC rose 5.7 percent to $2.57 billion, driven by programmatic
advertising. That compares to a 3.2 percent increase in Network ad
revenue.
"The TAC rate is higher on mobile. Mobile’s growing at a
faster rate so what you’re seeing here is a mix shift," Porat said.
"Trends driving revenue are accompanied by greater required investment
in our ecosystem to support that revenue growth."
First-quarter results were also dented by an unusual $213
million loss from the company’s "Other income" line, which included
losses recorded on some investments and the impact of currency
fluctuations.
Shares of Mountain View, California-based Alphabet dropped
5.8 percent in extended trading following the report. They rose less
than 1 percent to $780 at the close in New York.
Other Bets
There was better news from Alphabet’s Other Bets division, which include its Fiber Internet service, Verily health-care and Nest smart-home companies.
As Google’s ad businesses have expanded, growth has slowed,
and the company has sought to make up for that by turning to these new
businesses, along with subscriptions and cloud computing services. Last
year, Google reorganized into the Alphabet holding company to help it
create and build new ideas. So far, growth in further-afield bets have
failed to offset the deceleration in advertising growth.
First-quarter sales from Other Bets more than doubled to
$166 million. Operating losses excluding equity compensation, widened at
a much slower rate, coming in at $657 million compared with $516
million a year earlier.
These big bets, and new core businesses like cloud, will
probably lead to more capital expenditure, Porat has said. To
compensate. she’s putting in place more cost controls to make Google’s
existing money-making businesses more efficient. She’ll also need to
offset margin pressure from the new businesses, which will probably be
less profitable than search.
"Within Google, we are focused on managing the expenses we can actually control," Porat said.
Alphabet Profit and Sales Hit Speed Bump on Mobile Costs
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