Google parent Alphabet profits slip amid bigger investments

Google parent Alphabet reported a sharp drop in profits over the past quarter as it ramped up spending for the launch of a wide array of new gadgets and services.

The firm missed analysts’ estimates for quarterly profit as it reported its highest-ever quarterly expenses. Profit dipped 23 per cent from a year ago to $7.1 billion.

However revenue growth topped analysts’ expectations as it grew 20 per cent to $40.5 billion for the California tech giant and internet search leader.

The company, the world’s leading provider of internet search, advertising and video services, posted its highest-ever quarterly expenses. It missed analysts’ estimates for third-quarter profit by about $1.7 billion, though it beat revenue estimates by about $1.75 billion.

Citing sources, Reuters reported that Google had made an offer to acquire US wearable device maker Fitbit Inc.

Google has increased spending in recent years on areas including cloud computing and consumer electronics that it views as essential to maintaining its industry leadership in the face of stiff competition from Amazon.com Inc and Microsoft Corp.

The new businesses are pushing Google into sales of subscriptions, devices and technology licenses. But it has had to invest in people, facilities and content. Google is on track to hire more than 20,000 people this year, in large part to staff its newer units.

Nicholas Hyett, equity analyst at Hargreaves Lansdown, said he was not overly concerned by the spending.

“CEO Sundar Pichai can turn off the speculative spending at any time if he suddenly becomes more interested in profitability - but we suspect most investors would rather he stuck to the approach,” Hyett wrote in a note.

Alphabet provides limited product-level financial disclosures compared with some peers, leaving investors increasingly uncertain about how pressures including regulatory scrutiny, advertiser boycotts and global trade tensions are affecting operations.

For instance, Alphabet reported $1.5 billion in unrealized losses in the third quarter from shares held in other companies, helping negate about $1 billion in profit. But an Alphabet spokeswoman declined to disclose which investments lost money.

Profit also was hurt by a $554 million charge from a settlement with French tax authorities in September.

Alphabet’s chief financial officer, Ruth Porat, told financial analysts that the company’s revenue growth rates underscored “the strength and vibrancy” of the company.

“In the last 12 months, we’re generating over $150 billion in total revenues, that’s about $25 billion of growth in the last year,” she said.

Google has tried to demonstrate that its cloud-computing business is roaring, disclosing last quarter about $2 billion in revenue and saying that plans continued to hire thousands to stoke the unit’s growth.

In hardware, Google’s debut in May of the Pixel 3a, its most affordable smartphone yet, went well, according to technology analysts. It boosted Google’s overall smartphone sales this summer in a typically slow quarter.

Google also has tried to reassure investors that there is no weakness in its YouTube video unit, while expressing confidence in its business overall through share buybacks.

But spending has not been held back and higher costs loom as Google deals with clashes with regulators. Total quarterly expenses grew 25 per cent compared to a year ago - a similar rate to recent periods - to $31.3 billion. It topped the previous high of $31.1 billion in the 2018 fourth quarter.

Alphabet, which generates about 85 per cent of its revenue from sales of ad space and ad technology, reported total third-quarter revenue of $40.5 billion. In line with recent quarters, that was up 20 per cent over last year. Analysts on average estimated 19.52 per cent growth and $40.325 billion in revenue, according to IBES data from Refinitiv. Net income for the third quarter rose to $7.1 billion, or $10.12 per share, compared with analysts’ estimates of $8.811 billion, or $12.44 per share.

The operating margin was 23 per cent, down from 24 per cent in the second quarter.

Google in the third quarter acknowledged investigations by the US Congress, Department of Justice and 48 states into the company’s competitive practices. It settled a privacy investigation by the Federal Trade Commission. It also got an additional 90-day reprieve from an export ban that would restrict its relationship with Chinese smartphone maker Huawei, one of its top partners in distributing mobile apps.

Reuters