Alphabet Soars to Record After Earnings Wallop Expectations

(Bloomberg) -- Google executives projected confidence in Android and other businesses, giving investors no signal that a costly regulatory crackdown in Europe would curb sales and profit anytime soon. The shares surged to a record high.

Parent company Alphabet Inc. posted second-quarter results that walloped Wall Street expectations, while Chief Executive Officer Sundar Pichai hinted at new untapped advertising opportunities and highlighted growth at video service YouTube and the cloud arm. The shares rose as much as 5.3 percent, the most in almost nine months, to $1,275 at the market open in New York Tuesday. Several analysts lifted their price target on the stock.

The monster quarter came despite a regulatory backlash in Europe, rising questions about Google’s massive data collection and clashes with advertisers over inappropriate content on YouTube. That had quelled analysts’ expectations ahead of the results on Monday.

Alphabet reported two different profit figures to account for a record $5 billion fine Europe imposed last week for violating competition law with Google’s Android mobile software. Excluding that, Alphabet said profit was $11.75 a share. Google plans to contest the ruling. Even including the record fine, the company generated $3.2 billion in net income during the second quarter.

On the earnings call, Pichai suggested the company wouldn’t dramatically alter its Android strategy. "I’m confident that we can find a way to make sure Android is available at scale to users everywhere," he said. Google gives Android to smartphone makers for free, part of the reason it’s the most popular mobile operating system. Pichai’s comments suggest the company will continue the approach.

Google also shrugged off the General Data Protection Regulation, a European privacy law that started in May and limits targeted advertising.

"There do not appear to be any signs that should cause a meaningful slowdown any time soon, as fines from the European Commission are not likely to hamper Alphabet’s growth rate," Brian Wieser, an analyst at Pivotal Research Group, wrote in a note to investors. "Conversely, regulatory changes such as GDPR in Europe (and similar laws implemented elsewhere) could have the effect of reinforcing Alphabet’s growth."

Google has continued to give search ads more prominent space on mobile phones and bundle more of its ads products together, helping to fuel the brisk sales growth. Chief Financial Officer Ruth Porat suggested that the company would not sacrifice investment in its cash cow of advertising in favor of other bets like autonomous cars and delivery drones.

"One of the biggest opportunities for investment continues to be in our ads business," Porat told analysts on the earnings call. "I don’t want to leave you with the notion that the investment is just going to the new businesses."

Google’s advertising business grew 24 percent, pushing total Alphabet revenue, minus partner payouts, to $26.24 billion during the second quarter. Analysts were expecting $25.55 billion, according to data compiled by Bloomberg. Those gains came even as Amazon.com Inc. revs up its own ads business.

Pichai highlighted rising use of the company’s digital maps, particularly in emerging markets. He said Google is exploring more ways to insert promoted slots and ads into its Maps service, which has had limited commercial applications to date.

A larger share of Google’s ad dollars went to its own digital properties, including the search engine and YouTube, rather than outside websites that run its ads. Google properties revenue jumped 26 percent to $23.3 billion. That leap reflects a recent push by Google to get marketers buying across more of its advertising channels. "They’re using the packaged deal, with all their properties, with a much stronger sell," said Marco Rimini, chief development officer at WPP Plc’s Mindshare media agency.

While second-quarter sales jumped, so did costs for the technology giant. Google’s capital spending climbed to $5.3 billion, up 87 percent from the same period in 2017. Porat highlighted spending on sales and marketing for Google’s cloud division, which is hosting its marquee conference later this week.

The sums Google pays out to websites and mobile partners to distribute its search engine and ads -- called Traffic Acquisition Costs -- also rose to $6.4 billion for the quarter. Still, that was 23 percent of ad revenue, down from 24 percent in the first quarter of 2018.

"TAC came in lower than expectations which is a clear positive takeaway from the quarter," Dan Ives, head of technology research at GBH Insights, wrote in a note to investors.

Investors are also looking for signs of growth beyond advertising, such as Google’s cloud-computing business. The company’s other revenue bucket, which includes cloud, hardware and app sales, grew 37 percent to $4.4 billion in the second quarter.

Pichai mentioned new cloud customers including Domino’s Pizza Inc., SoundCloud Ltd. and PricewaterhouseCoopers LLP, during the call with analysts.

Other Bets, the home of Google’s riskier, experimental businesses, lost $732 million in the quarter, versus a loss of $633 million in the same period a year earlier.

--With assistance from Brandon Kochkodin.

To contact the reporter on this story: Mark Bergen in San Francisco at mbergen10@bloomberg.net

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Alistair Barr, Andrew Pollack

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