Alphabet Signals More R&D Spending Restraint

Dow Jones Newswires

Alphabet Inc. signaled more restraint on spending, in its first quarterly regulatory filing as the restructured Google. In the filing late Thursday, Alphabet said it expects future research-and-development expenses to "fluctuate" as a percentage of revenue. That is a change from the previous quarterly filing, in which Google said R&D spending "may increase" as a percentage of revenue. Alphabet made the same change in its latest quarterly filing for sales and marketing expenses, signaling that spending is more likely to grow in line with revenue, rather than increase at a faster pace. R&D is one of Alphabet's largest expenses and is crucial to the company's attempts to build new businesses and stay ahead of emerging technology trends. In the third quarter, R&D expenses totaled $3.23 billion, or 17.3% of revenue. That was an increase from 16.1% of revenue a year earlier. As recently as 2012, research-and-development expenses consumed 13.5% of Alphabet's revenue. Through nine months this year, their share has risen to 16.3%. Sales and marketing expenses have been more stable relative to revenue, averaging around 12% in recent years. The disclosures are the latest signs of Alphabet's greater focus on controlling costs, which has coincided with the arrival in May of Ruth Porat as the company's new chief financial officer from Morgan Stanley. Ms. Porat told analysts on a conference call last week that Alphabet is "focused on managing expenses within our control." During another call earlier this year she said the company is trying to "manage the pace of expenses while still ensuring and supporting our growth." Alphabet said costs and expenses totaled $13.97 billion in the third quarter, up 9% from a year earlier. That compares to a 28% year-over-year surge in the third quarter of 2014. Investors who had been worried about Alphabet's spending have embraced the newfound restraint. Alphabet shares are up 33% in the past six months, outperforming the tech-heavy Nasdaq Composite Index, which has gained about 1% in the same period.

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