Google parent's profit jumps 24% in quarter, driven by consumers
making a fast shift
By Jack Nicas
Google parent Alphabet Inc. said quarterly profit soared 24%,
the second internet giant in two days to report blockbuster
earnings driven by consumers' rapid shift to mobile devices.
Alphabet said growth continued as companies bought more ads on
its search engine and other products, while users increasingly
clicked on those ads. Revenue, fueled by Google's advertising
business, rose 21% to $21.5 billion in the second quarter from a
year ago, beating analysts' average estimate of $20.76 billion.
The rise of smartphones has put internet-connected computers in
the pockets of more than a billion people world-wide, leading to a
surge in internet use -- and a major boost to the bottom lines of
tech giants such as Google and Facebook Inc. As consumers use the
companies' wildly popular free services more, Google and Facebook
can sell more ads to companies trying to reach those users.
"The strength of the quarter is about mobile," Google Chief
Executive Sundar Pichai said Thursday. "Our investment in mobile
now underlines everything that we do today, from search and YouTube
to Android and advertising."
Alphabet stock, which had slid 1.6% in 2016 through Thursday's
close, jumped 4% in after-hours trading. The company had recently
struggled to meet investor expectations, with earnings missing
analysts' estimates in eight of the past 12 quarters.
"The big overhang of concern on Wall Street was that Google's
best days are behind it and that search is a dramatically maturing
business. I think they just proved that's not the case," said Mark
Mahaney, an analyst with RBC Capital Markets. The shift to mobile
phones has revitalized Google's business, he said. "More
smartphones means more use of Google, and YouTube, too."
Facebook, Google's chief rival, also is gaining strength from
mobile. Facebook said Wednesday that its second-quarter profit
nearly tripled from a year earlier to $2.1 billion, easily beating
Wall Street estimates. Mobile accounted for 84% of its $6.2 billion
in second-quarter advertising sales.
While Google still controls about 31% of the roughly $187
billion world-wide digital-ad market, Facebook's market share has
risen to 12% from 8.6% in 2014, according to research firm
eMarketer.
Google's success capturing advertisers and users as they shift
to mobile devices from traditional personal computers is helped by
its Android smartphone software, which gives its search engine and
other services top billing on more than a billion devices. Google
also pays Apple Inc. to make Google the default search engine on
iPhones.
Google said last year that more than half of its searches now
come on mobile devices, and some analysts estimate more than half
of its revenue comes from mobile. Advertisers' spending on mobile
search ads increased 63% in the second quarter over a year prior,
while overall search-ad spending rose just 10% over the period,
according to marketing-technology firm Kenshoo Ltd.
Alphabet on Thursday said net profit in the quarter that ended
June 30 rose to $4.88 billion, or $7 a share, from $3.93 billion,
or $4.93 a share, a year earlier. Excluding certain items, Alphabet
earned $8.42 a share, beating analysts' estimates of $8.04 a
share.
Clicks on ads that Google shows users increased 29% in the
second quarter over a year prior, the fourth consecutive quarter
with growth above 22% after a year of slower growth.
Google said it is now reaping the rewards from the shift to
mobile because companies are increasingly willing to advertise on
smartphones. That is in part because Google is adding new mobile ad
formats and better measuring the efficacy of such ads, including
tracking users' locations to see if they visit a physical store
after seeing an ad for the store on their phones, Google said.
One downside to mobile's rise for Google has been a simultaneous
decline in the average amount that advertisers pay Google per ad
click. Mobile ads are generally less expensive than desktop ads, so
as the number of mobile ads has increased, advertisers' overall
cost per click has declined.
But analysts say there are some signs ad buyers are bidding more
for mobile ads, and on Thursday Google said advertisers' cost per
click decreased 7% in the second quarter over a year prior,
compared with a 9% decline in the first quarter and steeper
declines before that.
Google's 19% growth in advertising revenues was outpaced by
nonadvertising sales, which grew 33% to $2.17 billion over a year
prior. That jump was an acceleration for Google's nonadvertising
business, which executives said was primarily driven by its cloud
business of hosting other companies' data and processing on its
servers.
Google is betting the cloud can become a major revenue driver
over the next several years and is investing hundreds of millions
of dollars in building new data centers. Other nonadvertising
businesses include hardware sales and Google's share of app sales
in its Play Store.
Thursday's results are the third time the firm reported as
Alphabet, a parent company created in October to house Google and a
series of "other bets," from home-automation firm Nest to the
research lab X, which is working on long-term projects such as
self-driving cars, internet-beaming balloons and delivery
drones.
While the Google unit accounts for virtually all of Alphabet's
revenue, analysts and investors have closely watched financial
results of the other initiatives for a sense of how much money they
are losing. Revenue for those other bets increased to $185 million
from $74 million a year ago, and the operating loss widened to $859
million from $660 million.
Cost controls have also been a recent focus since the arrival of
former Morgan Stanley executive Ruth Porat as finance chief last
year. Investors cheered Ms. Porat's hire, hoping she would step up
scrutiny of Alphabet's costs. Second-quarter total expenses
increased 20% to $15.53 billion, a slightly slower pace than
revenue grew.
Write to Jack Nicas at jack.nicas@wsj.com
(END) Dow Jones Newswires
July 29, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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