Coverage: Alphabet earnings drop due to EU fine

Profits at Google’s parent company, Alphabet, took a hit in its second quarter, as the company dealt with a $2.7 billion fine from the European Union levied for anti-competitive behavior.

Hayley Tsukayama of The Washington Post had the news:

Lingering questions about future regulatory actions dogged company executives, even as the company reported it had made more money than analysts had expected.

The company reported $26 billion in revenue and earnings of $5.01 per share, beating estimates — but perhaps not by enough. Shares were down 2.5 percent after the report from the company’s close at $998.31 per share, as it reported that profits had fallen more than 25 percent as a result of the EU fine.

The company is still working with European regulators on the final consequences the decision, which came after a seven-year investigation into whether Google prioritizes its own products in its search. Analysts asked Google chief executive Sundar Pichai how Google would operate if forced to change the way it distributes its products.

“If Google’s forced to unbundle their own apps from Android in the future, what is the strategy to ensure that maps and YouTube and search get distribution?” asked Ross Sandler, an analyst at Barclays.

David Ingram and Rishika Sadam of Reuters reported that the company warned about rising costs:

The squeeze on expected future profit appeared to weigh on Alphabet’s share price, which fell about 3 percent to $967 after the bell. Shares had closed up in regular trading.

Revenue for Alphabet, the owner of Google and YouTube, rose 21 percent to $26.01 billion in the second quarter ended on June 30, beating analysts’ average estimate of $25.65 billion, according to Thomson Reuters I/B/E/S.

The growth in revenue, however, was slower than the 28 percent rise in the cost of revenue, a measure of how much money Alphabet must spend to keep its platforms running before added costs such as research.

The rising cost of revenue, including what Google pays to drive traffic to its search engine, hurt operating margins more than most people had expected, said Doug Kass, president of Seabreeze Partners Management.

“This could be problematic going forward,” Kass said.

Alphabet Chief Financial Officer Ruth Porat, asked about margins during a conference call with analysts, said the company was not focused on the metric.

John Shinal of CNBC.com reported that the company’s stock price fell on the results:

Shares fell as much as 3% in after hours trading as the company reported worse-than-expected performance on two key metrics: cost per click and traffic acquisition costs, or TAC.

Here are the numbers:

• EPS: $5.01 versus $4.49 expected
• Revenue: $26.01 billion, up from $21.5 billion a year ago
• Paid clicks: +52% from a year ago
• Cost per click: (23%) from a year ago

The drop in cost per click — the amount advertisers are paying each time a user clicks on an ad served by Google — was much higher than the 15% analysts expected, according to StreetAccount, due to more search traffic coming from mobile devices.

Traffic acquisition costs amounted to $5.09 billion, higher than analyst estimates of $4.75 billion.

Alphabet CFO Ruth Porat said on a conference call with analysts that the shift to mobile search traffic and automated purchases made by ad clients — better known as programmatic advertising — both carry higher costs.

“We do expect TAC costs to increase,” Porat said.

Still, the company said operating income excluding the EU fine rose 15 percent from a year earlier.