Google Parent Alphabet's Profit Grows 33% -- Update

By Jack Nicas Features Dow Jones Newswires

Google parent Alphabet Inc.'s third-quarter profit grew 33%, extending strong growth in the tech giant's advertising business as increased scale helped it overcome pressure from declining ad rates.

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Alphabet on Thursday said profit reached $6.73 billion in the quarter, compared with $5.06 billion a year earlier. Net revenue rose 24% to $27.77 billion.

Alphabet's earnings were $9.57 a share, beating Wall Street estimates of $8.31 a share.

Alphabet's shares rose 4.2% in after-hours trading. Its shares have risen 25% this year.

Aggregate cost-per-click, which is how much advertisers pay for user clicks on links, declined 18%.

Google is depending more on users clicking on ads in its mobile search results and before YouTube videos, clicks that carry lower margins than desktop search ads that drove its business for years. That is in part because of so-called traffic acquisition costs, or fees Google pays to smartphone makers to put its search engine and apps front and center on their devices, as well as to video creators and website owners whose content Google runs ads against. The more Google relies on mobile and YouTube ads, the more it pays in traffic-acquisition fees, putting pressure on its profit margins.

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Those fees increased 32% to $5.5 billion in the third quarter from a year ago. Alphabet's operating margin was 28% in the third quarter, compared with 26% a year prior.

Traffic-acquisition costs "have been increasing both in absolute terms and as a percentage of revenues...because of that you've seen margin compression," said Victor Anthony, internet analyst at Aegis Capital. "When that ends, it's unknown at this point, and that's some of the risk in the model and why the stock hasn't outperformed significantly compared to other" large tech companies. Mr. Anthony said the shift to mobile and YouTube has still been good for Google, extending its strong growth despite its age.

Meantime, Google is aiming to diversify from its advertising business, the largest in the world, by creating new revenue streams from sales of smartphones and cloud services. Its cloud and hardware sales are wrapped into a segment called "other revenues," which grew by 40% to $3.41 billion in the quarter.

Google is investing heavily in its cloud business of selling computing power and storage over the internet, and while the division is growing, it still lags behind market leaders Amazon.com Inc. and Microsoft Corp.

Google is also pushing new hardware, including its Pixel smartphones and Google Home speakers, though a test of that effort comes in the fourth quarter because it introduced new devices at the start of October.

Write to Jack Nicas at jack.nicas@wsj.com

Three of the world's biggest companies -- Google parent Alphabet Inc., Amazon.com Inc. and Microsoft Corp. -- reported booming quarterly growth, extending their reach in industries from advertising to retail to business software as they drive the economy's technological transformation.

Alphabet on Thursday said profits spiked 33% in the third quarter as users clicked on more ads on smartphones, atop search results and before YouTube videos. Amazon, meanwhile, said its revenue grew by 34% and profits inched up, shrugging off concerns that heavy investments in new warehouses and hiring workers would push it to a loss. And Microsoft reported a 12% revenue increase, capitalizing on a shift to cloud computing.

The technology industry's banner day underscored the dominance of a handful of companies in the internet age -- and foreshadowed more expansion, including into new businesses.

Alphabet reported a 40% increase in nonadvertising revenue to $3.41 billion, showing the strength of its relatively new cloud-computing business, which sells computing power to other companies over the internet. And pharmaceutical stocks fell Thursday after the St. Louis Post-Dispatch reported that Amazon had obtained licenses from several state pharmaceutical boards. The licenses are for Amazon to sell some medical wholesale equipment, according to a person familiar with the matter.

"The strong keep getting stronger," said Colin Sebastian, a Robert W. Baird & Co. analyst who covers Amazon, Google and Twitter Inc. "The bigger drivers of their operations -- secular growth trends in e-commerce and digital advertising -- are still very strong."

Shares in three tech giants jumped in after-hours trading, adding a combined $80 billion in market value in the first hour or so after results were announced. Alphabet and Amazon's stocks both surged past the $1,000 mark and approached all-time highs.

But their rising fortunes are also drawing new scrutiny and questions about whether they have grown too powerful.

Lawmakers have proposed new transparency rules for digital political ads after Google, Facebook Inc. and Twitter said Russian actors ran ads on their sites around the 2016 election. The platforms face wider criticism of their roles in spreading misinformation and hateful messages on the internet. European competition regulators in June fined Alphabet $2.7 billion for abusing its internet-search dominance, and they are investigating other aspects of its business. Alphabet denies the charges and has appealed the fine.

Advertisers, too, are wary of the increasing power of a few digital-ad businesses, amid allegations of ad fraud and shoddy metrics, and brands' ads running next to unsavory YouTube videos. On Thursday, Twitter said it mistakenly overstated its number of users for the past three years. Yet their businesses continue to flourish, in part because of one fundamental trend: surging internet usage world-wide.

"Are you going to use the internet less next year?" said Macquarie Capital analyst Ben Schachter. "These are already some of the largest companies in the world, and they are continuing to expand."

The tech-earnings triumph extended beyond the three giants. Chip maker Intel Corp. said its profits rose 34% to $4.52 billion and lifted its outlook for the year. Even Twitter, which has struggled for years, narrowed its quarterly loss to $21.1 million, from $103 million a year prior, and forecast that next quarter it could earn its first profit since going public in 2013. Twitter shares rose 18.5%. Two other tech giants -- Apple Inc. and Facebook -- are due to report earnings next week.

Amazon's quarterly revenue hit a new record in the third quarter at $43.74 billion, as it expanded into more corners of consumer spending. The third quarter for the first time included Amazon's $13.5 billion acquisition of Whole Foods Market Inc., which closed in late August.

The jump in revenue is but one measure of Amazon's scale. Marketing-research firm eMarketer estimates Amazon will command some 43.5% of e-commerce sales this year, compared with 38.1% last year.

Amazon's profit increased 1.6% to $256 million, even though the third quarter is typically a period of heavy spending, when Amazon opens new warehouses to get them up and running in time for the holidays. The company's total number of employees increased to 541,900 from 382,400 in the second quarter, including roughly 87,000 Whole Foods employees.

Alphabet, with 78,100 employees, said its quarterly profit grew to $6.73 billion on revenue of $27.77 billion. The company's core business of selling ads in search results and on YouTube grew at its fastest rate in a year, 22.6%. "The core search business is just super-strong," said JMP Securities analyst Ron Josey. Google's search ads "continue to be a must buy for advertisers."

The amount advertisers paid Google per ad click rose by 1% from the second quarter, the first such increase since the first quarter of 2016. Advertisers' cost per click has been dropping for years as they bought more mobile ads, which are generally cheaper than those on desktop computers. Analysts said this quarter's increase suggests advertisers are willing to pay more for mobile ads, which could be another boon for Google's business.

Microsoft's revenue surged on the strength of its emerging business of selling web-based, on-demand computing services. In the fiscal first quarter, the two biggest pieces of Microsoft's cloud-computing operations -- its Azure infrastructure services and Office 365 online-productivity business saw revenues soar 90% and 42%, respectively. Overall, Microsoft's profits increased 16% to $6.58 billion. Revenue reached $24.54 billion.

"The secular shift from off-line to online is continuing to gain steam and gather momentum," Mr. Josey said. "You're seeing that every single quarter, and I don't know what gets in its way."

--Jay Greene, Ted Greenwald and Georgia Wells contributed to this article.

Write to Jack Nicas at jack.nicas@wsj.com and Laura Stevens at laura.stevens@wsj.com

(END) Dow Jones Newswires

October 26, 2017 20:24 ET (00:24 GMT)