Google parent Alphabet's profit up 29% on strong ad sales

Sundar Pichai speaks during the presentation of new Google hardware in San Francisco. Image Source: Reuters

Google parent Alphabet Inc posted a surge in profit and revenue on Thursday as its core advertising business continued to grow at an extraordinary rate and problems such as an advertiser boycott of YouTube had little impact.

Alphabet`s profit beat Wall Street estimates and rose 29 % to $5.43 billion, a performance that analysts called exceptional for a company so large.

"For a company of Google’s size to post the growth that it has is just a testament to the quality and usefulness of the products they make," said Colin Gillis, an analyst with BGC Partners. “They are the dominant force in digital advertising."

Shares of the company rose 2.8 % to $916.80 after the bell on Thursday.

Like its arch-rival Facebook Inc , Google has aggressively shifted the focus of its business to mobile advertising. The two companies accounted for 99 % of the industry growth in digital advertising in 2016, Pivotal Research said in a report this week, demonstrating market power that some advertisers complain amounts to a duopoly.

"It underscores a macro theme we are seeing in the internet space, which is that the bigger players are getting bigger and the smaller players are treading water or shrinking," said analyst James Wang of ARK Investment Management.

Google is expected to command a 61.6 % share of the search ad market worldwide in 2017, up from 60.6 % in 2016, according to research firm eMarketer. Mobile ads command lower prices than desktop ads, but growing volume is more than making up the difference, Wang said.

"Our great properties -- like Search, Maps, YouTube and Google Play -- are the `prime time` for the mobile world, where people are actively engaged and interested," Google Chief Executive Officer Sundar Pichai said during a call with analysts.

Google`s revenue rose 22.2 % to $24.75 billion from $20.26 billion in the quarter ended March 31.

Paid clicks, where an advertiser pays only if a user clicks on ads, rose 44 %. Analysts on average had expected a rise of 29.7 %, according to FactSet StreetAccount.

Net income rose to $5.43 billion, or $7.73 per share, from $4.21 billion, or $6.02 per share, a year earlier. Analysts on an average had expected a first-quarter profit of $7.34 per share, according to Thomson Reuters I/B/E/S.

Alphabet Chief Financial Officer Ruth Porat said during the earnings call that "YouTube revenues continue to grow at a significant rate," dispelling concerns about the possible impact of an advertiser boycott of the video service.

YouTube had come under fire for ads appearing alongside videos carrying homophobic or anti-Semitic messages, prompting a number of companies to suspend their digital ads on the video service.

“Advertisers can be fickle and certainly the approval of the advertiser is critical, but less so than the approval of the user," said Phil Bak, CEO of ACSI Funds, an asset manager.

CLOUD, HARDWARE REVENUES SOAR

Google`s non-advertising revenue, which consists mainly of the cloud computing business, the Pixel smartphones and the Play store, also grew dramatically in the quarter, jumping 49.4 % to $3.10 billion.

Google has long trailed Amazon.com Inc and Microsoft Corp in the burgeoning market for cloud computing. But since the arrival in late 2015 of veteran enterprise computing executive Diane Greene, who leads the business, Google has begun winning many more major deals, Pichai said during the call.

"We’re seeing a meaningful shift, and this momentum is resulting in a fast-growing business," Pichai said.

The strong growth in hardware and cloud computing helps assuage investors` concerns about Google`s dependence on search, Wang said.

"We have wanted to see Google be more than just an advertising company," he said. "That is quite an impressive achievement."

On the other hand, Alphabet`s "Other Bets"--separate business units including the Waymo self-driving car business, Google Fiber, thermostat-maker Nest and the life sciences firm Verily--continued to post large losses and modest revenues.

Revenues from Alphabet’s “Other Bets,” climbed to $244 million, up from $165 million in the year-ago quarter; Nest, Verily and Fiber accounted for the bulk of that, Porat said on the call.

But losses widened to $855 million from $774 million in the year-ago quarter.

Alphabet CEO Larry Page released a letter Thursday defending the two-year-old Alphabet structure, which he said had achieved its objective of giving investors greater visibility into Google’s performance while empowering entrepreneurs in other parts of the company.

“With the change to Alphabet, oversight has been easier because of increased visibility,” Page wrote. “We have streamlined efforts where it made sense and in other areas we have seen places to double down."

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