Alphabet reports disappointing Q4 profits while Google Cloud flourishes

2 Feb 2018

How did Alphabet do in Q4? Image: Africa Studio/Shutterstock

Alphabet stock takes a tumble as Q4 earnings are publicised.

Google parent company Alphabet has reported its financial results for the fourth quarter of 2017 and, while it beat Wall Street sales estimates, it wasn’t all smooth sailing.

Higher revenue

Alphabet generated $110.9bn in full-year revenue for 2017, up 23pc from 2016 and breaking the $100bn mark for the first time in the company’s history.

For Q4 2017, revenue was $32.32bn, up 24pc compared to the same period the year.

Although $32.32bn in sales is a tidy sum, narrowly pipping early estimates of $31.85bn, profit expectations landed a little wide of analysts’ mark at $9.70 per share, less than the projected $9.96.

Growing costs

According to Alphabet CFO Ruth Porat, growing partner payout costs means Google needs to pay more for mobile searches than those on desktop, with traffic acquisition costs rising 33pc from the same period in 2016.

Traffic acquisition costs are payments made by Alphabet to partners in order to keep Google as the default search engine on certain devices as mobile searches outstrip other avenues.

The EU antitrust fine of more than $2bn, and $9.9bn US tax charge stemming from legislation enacted last year, made a serious dent in the profits for the firm.

Porat also addressed the controversy last year around a number of advertisers pulling their campaigns from YouTube following a tumultuous period for the Google-owned platform. She told CNBC: “Overall on Youtube, we’re doing a lot to protect the ecosystem.”

Online advertising accounts for approximately 85pc of sales and Alphabet is looking to diversify its revenue streams.

Cost per click (CPC) is Google’s key metric and this decreased 16pc year on year, meaning ads were clicked on more often, leading to a drop in price for advertisers. There are some options here for the company, though.

Google CEO Sundar Pichai pegged Google Cloud, hardware and YouTube as key areas for the company. “These bets have enormous potential, and already they are showing real momentum and gaining traction,” he said on a conference call.

Google Cloud seems to be the jewel in the crown here, banking $1bn in sales for Q4 2017 alone. It’s also worth noting that this is the first time Google Cloud has been specified in a number of years; previously, it had often been grouped into ‘Google Other’ with Play Store and hardware sales. Google uses its focus on AI as a competitive edge to sell its cloud business to prospective customers.

Despite this growth, Google Cloud still sits very much in the shadow of Amazon Web Services, which logged a whopping $5.1bn in revenue in the same time period. Microsoft does not separate the cloud arm of its business out, but its intelligent cloud business unit recorded $7.2bn in its second fiscal quarter.

Projects such as Nest, Waymo and Verily are not yet turning a profit for Alphabet, but are losing less money compared to Q4 2016. Losses of $916m versus last year’s $1.09bn is an encouraging sign.

A changing of the guard is also underway at Alphabet, with former Stanford University chair John Hennessy becoming the new company chair. He replaces Eric Schmidt, who announced his departure from the role in December 2017.

Updated, 11.07am, 2 February 2018: This article was updated to correct mistaken figures.

Ellen Tannam was a journalist with Silicon Republic, covering all manner of business and tech subjects