The Three A’s Of Alphabet’s Q3: Advertising, AI And Ambient Computing

The penultimate quarter of 2019 has been difficult for Google’s parent firm Alphabet. Like many names in big tech, it finds itself swept up in a wave of increased regulatory interest in the U.S. and around the world as well as in a host of controversies over things like its data collection practices and use of artificial intelligence — and attempting at various points to defend its path forward.

And yesterday, as the cherry on top of a long and at times difficult Q3, Alphabet’s share price is down 2 percent, as the rare earnings miss has apparently displeased investors. For their part, Google representatives remained upbeat on the results — and on the company’s evolution.

“We’ve evolved from a company that helps people find answers to a company that helps you get things done,” Google CEO Sundar Pichai said on a call with analysts.

By the numbers, Google’s biggest and most notable miss was on its net income, which logged in at $7.07 billion or $10.12 a share. That was well below both the $12.42 per share expected and a drop from the $13.06 Alphabet was reporting at this time last year. Revenue was $40.5 billion, up 20 percent from the same quarter a year ago and slightly ahead of the $40.3 billion predicted by analysts pre-release.

In other notable figures, Google’s traffic acquisition costs were up — TAC came in at $7.49 billion vs. $7.48 billion and were up 14 percent when compared to this time last year.  Cost per click on Google properties was down 2 percent between 2018 and 2019.  Those figures did start to fall during Q3, “primarily due to a favorable product mix shift” according to Pinchai.

And there were a few favorable shifts on the table during yesterday’s earnings call, though they perhaps got a bit less press than the misses.  Google’s advertising revenue — far and away its most profitable and core business line — hit $33.92 billion in Q3, compared to $28.95 billion in Q3 of last year.  Pichai said that growth has been driven by the expansion of automated bidding among advertisers.

“In fact, more than half of advertisers’ search spend is now optimized via full automated bidding. We now have more than 1 million advertisers using responsive search apps, an ad format we launched a year ago that uses machine learning to create the right ad for each search query,” he noted.

Pinchai further noted Google would be standardizing its results measurements for the firm’s next generation of Google Analytics such that web and app measurement will be unified so that, according to Pinchai, businesses will be better able to understand which channel is driving the best result.

Also making a strong showing was Google’s “other revenue,” category, home of its hardware offers like Pixel phones and smart speakers and its cloud products, which logged in at $6.43 billion, surpassing expectations of $6.32 billion. The company earned $6.18 billion last quarter and $4.64 billion in last year’s Q3.  The proliferation of hardware products, and connections between them, are part and parcel to the “ambient computing” concept Google first began expounding at its device event two weeks ago.  Pinchai flushed it out a bit more fully when asked about it by UBS analyst Eric Sheridan.

“We are very excited by the vision of ambient computing and evolving that. I think, it’s a continuity in the sense that over time computing should be more intuitive to users and computing should adapt to users, not the other way around … That’s what the Made by Google family is focused on, products in your home with our Nest family of products, and wearables which we do with Wear OS and so on,” Pinchai said, noting that the investments Google has made thus far in AI and its virtual assistant will “end up playing a key role.”

Google also announced some leaps forward for its AWS- and Microsoft-rivaling cloud-computing business. Though Google is a distant third in that race thus far, it says it pulled in $8 billion in revenue in the last year and is poised to be the beneficiary of recent advances it has made in quantum computing.

Google did not have anything to say on reports that emerged shortly before the earnings release saying the firm has put in an offer to buy Fitbit, and the CFO specifically declined comment.

The big earnings miss was enough to send Google’s share price down 4 percent as the market closed, though things started to turn around in after-hours trading.  It looks like when the market opens Tuesday morning, Google’s losses will be below 1 percent.