GOOG Alphabet Inc

By Jack Nicas 

Investors once feared that the rise of mobile devices would cripple Google. Instead, smartphones are giving the search giant second life.

Google parent Alphabet Inc. reported a 27% surge in third-quarter profit Thursday, extending a strong streak as users spend more time on smartphones and advertisers spend more dollars to reach them there.

Alphabet -- the world's No. 2 company by market value, after Apple Inc. -- continues to grow at a steady clip largely because billions of people now carry these handheld computers almost everywhere they go.

Clicks on Google ads rose 33% in the quarter over a year prior, the fastest increase in four years. That growth is fueled by Google's strong position on smartphones across the world, as well as its control over a series of other products increasingly central to many users' lives, from email to maps to YouTube.

Google's pitch to advertisers "is simple and is resonating: our mobile properties like search, YouTube, maps and Google Play are where people turn when they're actively interested in something," said Google Chief Executive Sundar Pichai to analysts. Comparing Google's online role to the heyday of prime-time television, he added, "Our services are prime time for the mobile world."

Indeed, Google is at the center of most smartphones. It pre-installs its services on phones that use its Android mobile operating system, which backs roughly 87% of the world's smartphones, according to IDC.

Google controls 95% of the mobile-search market, compared with 78% on personal computers, according to digital-marketing firm Merkle Inc., because it is the default search engine on both Apple's iPhones and Android devices.

Mobile users click on search ads at a higher rate than desktop users, Merkle said, in part because mobile ads take up virtually the entire screen for some searches.

Some analysts now estimate more than half of Alphabet's revenue comes from ads on mobile devices. Google executives said last year that search traffic on mobile phones had surpassed traffic from personal computers.

The rise of smartphones also poses challenges for Google. Mobile ads -- and ads for YouTube, which is viewed largely on mobile devices -- are generally cheaper than desktop ads. That is reducing the average price advertisers pay Google. In the third quarter, Google said the average cost per click fell 11%, faster than the 7% decline in the second quarter.

For the quarter, Alphabet said net income rose to $5.06 billion, or $7.25 a share, from $3.98 billion, or $5.73 a share, in the same quarter a year ago. Excluding certain expenses, Alphabet said it would have earned $9.06 a share, beating analysts' estimates of $8.62 a share on that basis, according to FactSet.

Alphabet revenue, driven almost entirely by its advertising business, rose 20% to $22.45 billion. Factoring out payments to advertising partners, total revenue was $18.27 billion. In after-hours trading, Alphabet shares rose 1%.

Alphabet shares have risen just 5% this year, lagging rivals Facebook Inc. and Apple Inc. Facebook, in particular, is proving to be a tough competitor for digital ads; its profit nearly tripled to $2.1 billion in the second quarter, with 84% of its $6.2 billion in ad revenue coming from mobile. Facebook reports third-quarter earnings next week.

There also has been tumult outside of Alphabet's core Google business, in the company's "other bets."

On Tuesday, the head of Alphabet's high-speed internet business, Google Fiber, stepped down as the service suspended expansion plans for 11 cities and said it would lay off 9% of staff. Executives have also recently departed from Alphabet's home-automation firm Nest and projects to build self-driving cars, delivery drones and internet-beaming balloons.

Alphabet executives have said Chief Financial Officer Ruth Porat, who joined the company in May 2015 from Morgan Stanley, has helped lead an effort to rein in costs.

Operating loss in the other-bets unit narrowed to $865 million from $980 million a year prior, while revenues increased to $197 million from $141 million. Google Fiber, Nest and life-sciences unit Verily account for most of the revenue. Ms. Porat cautioned against examining the other bets units on a quarterly basis because their results are volatile. Google's non-advertising revenue increased 39% to $2.43 billion over a year prior. Ms. Porat attributed much of that increase to "substantial revenue growth" in Google's business of hosting other companies' data and systems on its computers, known as the cloud. Google is making a push into the cloud industry, hoping to steal market share from leaders Amazon.com Inc. and Microsoft Corp.

Alphabet said it would repurchase roughly $7 billion in shares, though it didn't specify a time period for the program. Alphabet reported holding about $83 billion in cash and investments.

Thursday's results also showed success in Google's efforts to diversify from being a pure advertising company.

Write to Jack Nicas at jack.nicas@wsj.com

(END) Dow Jones Newswires

October 28, 2016 02:48 ET (06:48 GMT)

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