GOOG Alphabet Inc

By Douglas MacMillan 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 26, 2018).

Google's parent reported surging profit on slightly slower growth in revenue, signaling uncertainty in its core business at a time when it is also dealing with a growing backlash from regulators and turmoil in its own corporate culture.

Alphabet Inc. on Thursday said net profit jumped nearly 37% to $9.19 billion in the three months through September, from $6.7 billion in the same period last year. That growth surpassed analysts' estimates.

Overall revenue, however, grew 21% to $33.74 billion, versus 24% growth in the same period a year ago. Ad revenue, which accounts for the vast majority of sales, rose 20% to $28.95 billion.

The results come after a period in which Alphabet lost more than one-sixth of its market capitalization in the span of three months. The Google parent has been dragged down by an October stock-market retreat. Its shares on Wednesday reaching their lowest point in five months, before rebounding 4.4% on Thursday ahead of the quarterly report to close at $1,097.18. Shares slipped more than 3% after the close when results were issued.

Google has been fielding questions from lawmakers in Washington and Europe since The Wall Street Journal reported earlier this month the company never told users about a software bug that exposed the privacy data of hundreds of thousands of users. That incident led the company to shutter the consumer functionality of its Google+ social site.

Google has been racked by internal turmoil over the past year on issues ranging from its work with the U.S. military to its China plans to its handling of gender issues in its workforce.

In a memo to employees on Thursday, Google Chief Executive Sundar Pichai said the company has fired 48 staff members for sexual harassment over the past two years, according to a copy of the memo reviewed by The Wall Street Journal.

Alphabet had 80,110 full-time employees as of the end of last year.

Mr. Pichai's memo came in response to a New York Times story saying that Google protected three senior executives over the past decade after they were accused of sexual misconduct, including one whom it gave a $90 million exit package when he left in 2014. Google declined to comment on details in the Times story.

Mr. Pichai said in the memo that none of those fired in the past two years received an exit package. Google is "dead serious about making sure we provide a safe and inclusive workplace," he wrote.

Google said Thursday that its non-advertising businesses overall grew more quickly. Sales in its "other" revenue category, which includes cloud-computing services and hardware devices like its Pixel smartphones, rose 29% to $4.6 billion compared with $3.6 billion.

Growth in Google's core advertising business remains rapid for such a huge company, but it faces several challenges.

Google is experiencing greater competition in its online ad business from Amazon.com Inc., which accounts for a growing number of product searches by U.S. users, said eMarketer Inc. analyst Andrew Lipsman. Google's share of U.S. digital ad spending is expected to fall to 37% this year, down from 39% last year, according to eMarketer. Amazon's share jumped to more than 4%, from 2% last year.

And Google has faced rising costs. Its payments to distribution partners accounted for 13.1% of revenue generated by the company's website traffic, a higher amount than the company spent a year ago and in the second quarter of this year. That figure is closely watched by investors who are concerned Google is buying some of its growth through costly deals with Apple Inc. and others.

Revenue excluding payments to advertising partners was $27.1 billion, an increase of 22% from a year earlier but slightly lower than the $27.3 billion predicted by analysts.

The company's capital expenditures grew 49% to $5.2 billion as it continues to spend heavily hiring employees and developing futuristic technologies.

"They are plowing all their cash into reinforcing their dominant position," said Brian Wieser, senior research analyst at Pivotal Research Group. "The question is, are they going invest in products that sell more ads or build flying cars which may never take off?"

On a call with analysts, finance chief Ruth Porat said the bulk of capital expenditure increases were due to hiring technical talent, with the company's cloud computing unit seeing the largest increase in staff.

Mr. Pichai fielded analyst questions about Google's exploration of a China expansion, which has raised concerns the company would have to comply with the country's strict internet censors. The CEO said Google is "constantly looking for ways by which we can better serve Chinese users" but declined to offer any specifics on the plan.

Write to Douglas MacMillan at douglas.macmillan@wsj.com

(END) Dow Jones Newswires

October 26, 2018 02:47 ET (06:47 GMT)

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