Alphabet stock sinks on revenue miss 

  • Alphabet reported its Q3 earnings, missing revenue expectations but beating on the bottom line.
  • The stock sunk as much as 5.3 percent after hours.
  • It's closely-watched traffic acquisition costs remained stable.

Google-parent company Alphabet reported its third quarter earnings on Thursday. The company beat bottom line projections but whiffed on revenue expectations and the stock sunk as much as 5.3 percent in after-hours trading.

Here are the most important numbers:

  • Earnings per share: $13.06 versus $10.42 expected by a Refinitiv consensus estimate
  • Revenue: $33.7 billion versus $34.04 billion expected by a Refinitiv consensus estimate

Although Alphabet's overall revenues were up 21 percent year-over-year, chief financial officer Ruth Porat said on the company's earnings call that revenues were affected by the strength of the U.S. dollar in the third quarter.

As usual, Google's advertising business accounted for most of its revenue (85.8 percent, to be exact), hitting $28.95 billion in the third quarter, or a 20 percent increase year-over-year.

Its "other revenues" category, which includes its cloud business and hardware sales and is especially important to investors looking for Google's future beyond ads, hit $4.64 billion, up 29 percent year-over-year. That's a less dramatic acceleration than last quarter's 37 percent increase.

In an analyst note following earnings, Pivotal's Brian Wieser noted that Q2 represented the slowest pace of growth for this category since the first quarter of 2016.

CEO Sundar Pichai said on the earnings call that its cloud business has had "many important wins" recently, but he didn't provide any new revenue numbers to build on the $1 billion in revenue per quarter he announced in Q4 2017. Overall, Google cloud's market share is seen to be a distant third behind Amazon and Microsoft's. Pichai also said that he thinks companies will want a "multi-cloud" environment, and that the space isn't a "zero-sum game."

Alphabet also breaks out the revenues and losses for its longer-term "Other Bets," like healthcare company Verily, internet service provider Fiber, and self-driving car company Waymo. The Other Bets category posted Q3 revenue of $146 million, up from $117 million the same quarter last year. Operating losses also grew, with the company posting losses of $727 million up from losses of $650 million the year before. On the company's earnings call, chief financial officer Ruth Porat said that the revenues were primarily generated by Fiber and Verily.

Google's traffic acquisition costs (TAC), which includes the money it pays to phone manufactures, like Apple, to use its services, like search, was $6.58 billion, or 23 percent of its advertising revenues. Wall Street has been watching Google's rising TAC closely, as it's been squeezing the company's advertising margins, and Q3's TAC as a percentage of ad revenue was in-line with the previous quarter.

Spending continued to increase. The company's accrued capital expenditures were $5.6 billion, which Porat attributed largely to data center construction projects and machines to increase its own compute. Meanwhile, the company's tax rate was 9 percent in the third quarter, down from 16 percent in the same quarter in 2017.

Alphabet's operating expenses were $11.1 billion, up 26 percent year-over-year, primarily driven by R&D expenses.

The company's earnings report comes at a rocky time for the company.

Earlier on Thursday, a bombshell New York Times story that said that Google shielded a handful of executives, including Android creator Andy Rubin, from sexual misconduct allegations and offered massive payouts to leave the company.

Meanwhile, Google has faced criticism both internally and externally after The Intercept first reported in August that it planned to release a censored search app in China. On the earnings call, Pichai declined to expand on his past comments that Google cares about Chinese users, but that the company isn't close to launching a search app there.

Google also recently had to respond to the European Union's $5 billion antitrust ruling by changing the way that it bundles its apps on Android in the region. When asked during the company's earnings call how that remedy could affect Google's business, Pichai said that it was still "early to say."

"It's difficult to predict how the licensing model will be adopted," he said.

Correction: A previous version of this story misstated the year-over-year percentage change of Google's "other" revenues category.