Tech

Alphabet drops after revealing declining advertising prices and rising costs

Key Points
  • Traffic acquisition costs as a percent of advertising revenue came in at 23 percent, matching analyst estimates and falling right in line with previous quarters.
  • Meanwhile, Google continues to grow its "other revenues" segment, which includes its cloud business and hardware sales.
  • Alphabet's "Other Bets" category, which houses Alphabet's other companies, like health venture Verily and self-driving start-up Waymo, came in shy of revenue estimates. 
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Alphabet reported fourth-quarter results Monday that beat expectations across the board. Still, the stock fell 3 percent in extended trading, on continuing pressure on advertising prices and decreasing margins.

Here's how the company did compared with Wall Street estimates:

  • Earnings: $12.77 per share vs. $10.82 according to Refinitiv consensus estimates
  • Revenue: $39.28 billion vs. $38.93 billion according to Refinitiv consensus estimates
  • Traffic acquisition costs: $7.44 billion vs. $7.62 billion according to StreetAccount

Cost per click on Google properties — which roughly measures the amount Alphabet charges advertisers for each ad served on its web sites — dropped 29 percent from last year and 9 percent from last quarter, which might be alarming investors concerned that Google's pricing power for ads is eroding.

Alphabet-owned Google is facing new pressure in digital advertising from Amazon's rising presence in the market and seeing heightened pricing pressure, at the same time its costs of doing business are rising.

Alphabet reported capital expenditures just north of $7 billion for the period, posting a much more expensive quarter than the $5.63 billion in capex that was projected.

The company reported an operating margin of 21 percent for the fourth quarter, lower than the 22 percent margin that was expected and the 23 percent margin it reported this time last year.

Full-year operating margin for Alphabet's core Google segment fell by more than 2 percentage points from the previous year, representing a more drastic decline than the overall business.

"Everything we do at Google is united by the mission of making information accessible and useful for everyone. Providing accurate and trusted information at the scale the Internet has reached is an extremely complex challenge and one that is constantly getting harder," CEO Sundar Pichai said on the company's earnings call.

The company's core advertising business has hit something of a plateau. Advertising revenue grew 20 percent from last year's fourth quarter, to $32.6 billion, the same rate of growth as last quarter.

Traffic acquisition costs — the fees Google pays to companies like Apple to be the default search engine — rang in at $7.44 billion, up 13 percent from $6.58 billion during the third quarter of this year and up 15 percent from $6.45 billion during the year-ago quarter.

TAC as a percent of advertising revenue came in at 23 percent, matching analyst estimates and falling right in line with previous quarters.

Growth segments

Google continues to grow its "other revenues" segment, which includes its cloud business and hardware sales. The division accounted for $6.49 billion during the quarter, narrowly beating Wall Street estimates of $6.43 billion.

That marks a 31 percent increase year over year. The company declined to break out Cloud revenues for the quarter, but said it remains "one of the fastest growing businesses across Alphabet."

"Last year we more than doubled both the number of Google Cloud Platform deals over 1 million as well as the number of multiyear contracts signed," Pichai said. "We also ended the year with another milestone passing 5 million paying customers for our Cloud collaboration and productivity solution G Suite."

Google announced in November it was replacing its head of Cloud, Diane Greene, with former Oracle executive Thomas Kurian.

"One of the things that was evident towards end of last year is now our ability to win very large customers, global 5000 companies with multiyear contracts. And so that's definitely something we want to focus on," Pichai said. "I think Diane and Thomas have been working closely under transition with a lot of continuity."

Alphabet's "Other Bets" category, which houses Alphabet's other companies, like health venture Verily and self-driving start-up Waymo, came in shy of revenue estimates at $154 million in revenue. Wall Street had been looking for $187.4 million, according to StreetAccount.

Still, the segment posted an 18 percent year-over-year increase.

Alphabet is now just 2,000 employees of 100,000-person headcount, up from 80,000 employees at the same time last year. Headcount grew primarily in the company's cloud segment, Chief Financial Officer Ruth Porat said on the company's earnings call.

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