Earnings

Alphabet Hit Hard By EU Fine And Falling Cost Per Click Figures

In an outcome that surprised nearly no one, the massive $2.74 billion fine that European Union antitrust regulators handed down to Google for favoring its own commerce listings in search results took a fairly big bite out of Google parent company Alphabet’s profits during Q2.

And Wall Street was less than thrilled — despite the fact that Alphabet did manage to notch a beat on earnings during the quarter, the drop in profit combined with rising costs per click and traffic acquisition costs (TAC) in mobile advertising have some investors a bit concerned, and Alphabet’s share price overnight reflected those fears. Google stock was down 3 percent in after hours trading.

So what was particularly notable?

By The Numbers

Alphabet’s revenue during Q2 was $26.01 billion — a 21 percent pickup from $21.5 billion reported a year ago at this time, and better than the 19 percent growth analysts were looking for.  Earnings per share beat on analysts’ expectations, coming in at $5.01 instead of the forecasted $4.49. Paid clicks were up 52 percent from a year ago. Cost per clicks (the amount advertisers are paying every time a user clicks an add), however, were down 23 percent from a year ago, a much steeper drop-off than the 15 percent analysts were calling for ahead of the figures release. That big drop comes care of a switch among users, who are doing more searches from mobile devices.

Traffic acquisition costs were also higher than anticipated at $5.09 billion as opposed to the $4.75 billion.

“We do expect TAC costs to increase,” Alphabet CFO Ruth Porat noted on a conference call with investors after results were made public, noting that the shift to mobile and automated purchasing by ad clients (programmatic advertising) is a higher-cost endeavor.

The company also noted that excluding the EU fine, operating income was up 15 percent from this time in 2016.

Of Note

Alphabet is focused on “dollar growth” in revenue and operating income, “not margins,” Porat said in her remarks to investors.

Also quite a standout was YouTube performance and mobile search ads. CEO Sundar Pichai noted during his remarks that that 1.5 billion people visit YouTube each month and that each on average spends around 60 minutes a day watching videos on the platform. Pichai also noted YouTube was seeing “strong growth” in emerging markets, with mobile users and on “large screens,” meaning TVs.

YouTube may not yet have 2 billion users like Facebook, but it has some pretty impressive engagement.

“YouTube is scaling really well globally,” Pichai said. “Just like search did.”

How well exactly? Alphabet didn’t break out and specific figures.

Alphabet also reported making updates to its core search product as more consumers use its service via smartphones.

The company also expects marketing costs to be higher in the second half of this year than in the first, Porat told analysts, due to spending on its cloud business and to promote its hardware products.

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