Google beat revenue targets but didn’t ease Wall Street’s biggest worries

Google CEO Sundar Pichai

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Google CEO Sundar Pichai
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Justin Sullivan/Getty Images

  • Google’s revenue was slightly stronger than expected during Q1.
  • The fees Google pays to partner web sites, known as TAC, continued to increase as a percentage of revenue.
  • Analysts on the conference call focused on regulatory risks and spending.

Google-parent company Alphabet topped Wall Street targets with 23% revenue growth in Q1, but the better-than-expected performance was not enough to allay worries about rising expenses and the most significant risks of a regulatory clampdown the company has faced in years.

Shares of Alphabet initially jumped by more than 4 percent in after-hours trading on Monday but quickly reversed course and fell back to around the price that the stock closed at during regular trading.

Google executives said that mobile search and strength in the YouTube video streaming business continued to drive the company’s growth. Alphabet finance chief Ruth Porat told investors during a conference call that the company has “business confidence” and “clarity” to invest in “extraordinary” revenue opportunties.

The optimistic comments came ahead of earnings quarterly report cards from rivals such as Facebook, Twitter and Snapchat. As the first of the large internet advertising companies to report Q1 results, Alphabet gave Wall Street a look into how the online ad business performed during a particularly turbulent period marked by controversies about user privacy and the spread of fake news.

“While fundamental worries coupled by regulatory black clouds continue to be overhangs on the name, we believe 1Q advertising and ‘bread and butter’ search revenues were healthy and a good barometer of potential strength heading into the rest of 2018,” Dan Ives, an analyst at GBH Insights wrote in a note to investors following the earnings annoucnement on Monday.

Here are the key numbers:

  • Net Revenue (ex-traffic acquisition costs): Google reported $24.8 billion, up 23.5% from the same period last year. Analysts polled by Bloomberg had expected $24.5 billion.
  • Earnings per share (GAAP): Google reported $13.33 while analysts had predicted $9.30 (the difference owed to an accounting change in which Google now includes gains from invesments, such as its stake in Uber).
  • Traffic acquisition costs (TAC): $6.288 billion, or 24% of ad revenue, compared to $4.629 billion, or 22% of ad revenue.
  • Headcount: 85,050, up 15 percent from the 73,992 workers reported in Q1 last year.
  • Capital expenditures: $7.3 billion, up sharply from $2.5 billion in the year ago quarter.

Google’s Q1 results contained a number of accounting and business structures changes that gave investors new insight into the tech giant.

Among the key changes was a shift in how Google reports results for Nest, the smart home appliances business that was folded back into Google earlier this year after operating as a separate “Other Bet” under the Alphabet umbrella.

A first peek into Nest

A Nest thermostat

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A Nest thermostat
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Thomson Reuters

Although Google has never broken out Nest’s financial results, the change in Google’s reporting practices made it possible to tease out the business’ results last year. Nest appears to have generated $112 million in revenue during the first quarter of 2017, with an operating loss of $284 million.

Despite the red ink, Google CEO Sundar Pichai described Nest’s business in postitive terms during the conference call with analysts on Monday, noting that Nest sold more devices in 2017 than during the past two years combined.

Google now includes Nest’s results in the “other revenue” category, along with the rest of Google’s hardware products, such as the Pixel phone and Home smart speaker. This category reported $4.3 billion, up from $3.2 billion during the first quarter in 2017, or a 34 percent increase.

What about the Other Bets?

Because Alphabet shifted Nest around, that business is no longer included in Other Bets — the collection of standalone companies that includes Waymo (self driving cars) and Verily (healthcare technology).

Google CFO Ruth Porat said the main driver of Other Bets revenue is now generated by Verily and by Google Fiber, the high-speed internet access service.

  • Other Bets Revenue: $150 million, up from $132 million in the year ago period.
  • Other Bets operating loss: $571 million, down from an operating loss of $703 million a year ago.

The results come at a tricky period for Google, the world’s dominant search engine, as well as the owner of online video giant YouTube.

Shares of Googe-parent Alphabet Inc., have fallen about 9% over the past three months, as worries about online privacy and regulatory risks weigh on the stock. Google rival Facebook has been under the microscope following revelations that its user data was misapopriated by Cambridge Analytica, and there are worries that Google could get caught up in any resulting regulatory actions. And European privacy rules, which are set to take effect in May, could also impact Google’s business.