Alphabet (Google Parent) drops after reporting ad revenue slowdown
Alphabet drops after reporting ad revenue slowdown
KEY
POINTS
· Alphabet
shares are up 24% this year, but the stock fell after hours Monday following
disappointing revenue.
· Ad
sales growth is decelerating at Google.
· The
company was hit with a $1.7 billion fine from the European Commission in the
quarter.
shares
fell about 7% after Google’s parent company reported
revenue that fell below analyst estimates for its first-quarter 2019. The drop
wiped more than $60 billion off Alphabet’s market cap.
Here’s what Alphabet reported compared to Wall
Street’s expectations:
· Earnings per share: $11.90 per share, ex-items, vs.
$10.61 expected, per Refinitiv survey of analysts
· Revenue: $36.34 billion, vs. $37.33
billion expected, per Refinitiv survey
· Traffic acquisition costs: $6.86 billion, vs. $7.26
billion expected, according to FactSet
· Paid clicks on Google properties: +39%
· Cost-per-click on Google properties: -19%
Google is seeing decelerating growth after
consistently expanding at 20% or more in prior periods. Revenue increased 17%,
down from growth of 28% a year earlier, and ad sales rose 15%, down from 24% a
year ago.
Paid clicks on Google properties grew only 39% from the year-ago quarter.
That’s a sharp drop from the fourth quarter or 2018 (up 66%) and third quarter
(up 62%). It means that Google properties are not growing traffic volumes as
quickly to make up for declines in advertising prices.
Ruth Porat, Alphabet’s finance chief, said on the
earnings call with analysts that most of the deceleration is related to
YouTube, which “represents the vast majority of total clicks.”
Porat said, “While YouTube clicks continue[d] to
grow at a substantial pace in the first quarter, the rate of YouTube click
growth decelerated versus what was a strong Q1 last year reflecting changes we
made in early 2018, which we believe are overall additive to the user and
advertiser experience.”
Investors had high hopes coming into the report
with the stock surging 24% for the year and closing at a record on Monday. The
stock has joined a broader rally across the tech industry.
Traffic acquisition costs (TAC) in the period were
$6.86 billion, while analysts expected $7.26 billion. This metric represents
the payments Google pays to companies like Apple to be the default search engine on their
browser.
Alphabet recorded a European Commission fine of
$1.7 billion in the quarter as a settlement for stifling competition in the
online ad sector. Excluding the fine, the company’s operating income rose 26%
to $8.31 billion. Total cash and marketable securities rose 4% to $113.5
billion.
Google has pinned much of its future growth on the
emerging areas of its business as cost per clicks (CPC) decline. The company’s
hardware and cloud businesses are included in Google’s “other revenues”
segment, which saw a 25% increase to $5.45 billion.
He said at a conference in February
that Google’s cloud business will “accelerate the growth even faster than we
have to date.” Porat said on Monday that capital expenditures will increase
this year but “at a meaningfully lower rate than in 2018.”
Alphabet’s so-called “Other Bets,” which include
its self-driving startup Waymo and health venture Verily, remain very small,
with revenue of $170 million, up from $150 million a year ago.
It’s the second straight disappointing quarterly
report for Alphabet. After fourth-quarter numbers were
released, shares of Alphabet fell because of higher-than-expected capital expenditures and a lower
operating margin.
Separately, Alphabet stands to gain billions of
dollars from its investments in two of biggest tech IPOs this year: Uber and Lyft. It owns about 5% of each company.
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