Google parent Alphabet reports incomes miss, shares fall

Alphabet shares drive after the Google parent company’s fourth-quarter incomes missed Wall Street estimates, prompting concern about incrementing expenses.

Analysts expected Alphabet (GOOGL, GOOG) to report incomes per share of $9.98, up from $7.56 a year ago. Instead, excluding a one-time $9.9 billion charge from the new tax law, it reported incomes per share of $9.70. Alphabet said the one-time tax hit caused a net loss of $3.02 billion in the fourth quarter.

Shares fell as much as 5% when Alphabet reported financial results after the market closed Thursday.

Personally, Alphabet also named John Hennessy, a board member since 2004, as the Internet giant’s new chairman, replacing Eric Schmidt, who said in December he would step down from that role. The board also authorized $8.6 billion in share repurchases.

“We have been making significant investments in our three largest bets — cloud, YouTube and hardware,” Google CEO Sundar Pichai told analysts Thursday. “These bets have excessive potential, and already they are displaying real momentum and gaining traction.”

Profit rose 24% to $32.32 billion from a year ago, higher than analyst expectations of $31.86 billion. Net revenue — Alphabet’s sales minus traffic purchase costs — was $25.9 billion. Analysts had expected profit excluding those payments to partners of $25.57 billion, up from $21.22 billion a year ago.

Traffic acquisition costs, known as TAC, were $6.45 billion, up from $4.85 billion a year ago. The developing fees Google pays to third party search partners such as phone makers and Web browsers is an incrementing concern for Google’s advertising business. Searches on mobile and YouTube need Google to pay out higher fees.

During a conference call with analysts, Alphabet’s chief financial officer Ruth Porat said to expect TAC to continue to increment as a percentage of revenue until after the first quarter.

“We expect the year-on-year increments to slow after first quarter (2018),” Porat said.

The revenue beat was driven by Google’s advertising business, which posted $27.27 billion in revenue. Google’s other businesses, which include its cloud business, hardware sales of the Pixel smartphone and Google Home, and its Google Play app store, reported $4.69 billion in revenue. Alphabet’s so-called “Other Bets,” reported fourth-quarter revenue of $409 million on operating losses of $916 million.

“The quarter featured important revenue growth offset by rising costs and reduced margins,” Pivotal Research analyst Brian Wieser said in a research note. “Overall, we are interpreting the quarter’s results favorably if only because they were ahead of our conservative expectations. Alphabet’s core Google division faces many longer-term headwinds (primarily related to the limits to growth of digital advertising at least in lieu of important investments in margin eroding content) that we don’t think are fully appreciated by investors.”

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