Alphabet drops despite earnings beat expectations

Alphabet beat Wall Street earnings and revenue estimates for the fourth quarter, but the company’s stock fell about 2.9% in after-hours trading Monday.

The search giant reported fourth-quarter net income of $8.95 billion, or $12.77 a share, compared with losses of $3.02 billion, or $4.35 a share, in the year-ago period. Changes to the U.S. tax code resulted in a $9.9 billion expense in the fourth quarter of 2017. Adjusted for the tax costs, Alphabet logged earnings of $9.70 a share.

Alphabet’s bottom line benefited from a $1.3 billion unrealized gain from a non-marketable debt security in held. Without that benefit, Alphabet earnings were $10.91 a share, just above the FactSet consensus estimate of $10.86 a share. The company has started reporting gains and losses in outside investments under new accounting rules that took effect last year.

Overall Alphabet revenue rose to $39.28 billion from $32.32 billion in the year-ago period while analysts surveyed by FactSet had estimated revenue of $38.9 billion. The vast majority of Alphabet’s sales are from Google and its various advertising units, which brought in $32.64 billion in the fourth quarter. Traffic acquisition costs — the fees Alphabet pays other companies, such as Apple, to keep Google as the default search engine — rose to $7.44 billion from $6.45 billion in the year-earlier quarter. However, traffic acquisition costs declined to 23% of total ad revenue from 24% in the year-ago quarter.

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 non-advertising businesses captured in the “other revenues” segment — which includes the Play Store, cloud computing and the company’s hardware sales — brought in $6.49 billion. Alphabet does not disclose how much each of the segments within “other revenues” contributes, but the company did say a year ago that its cloud unit brought in $1 billion for the fourth quarter.

Alphabet’s “other bets” unit, where it runs experimental businesses, lost $1.33 billion on sales of $154 million.

In the fourth quarter, Alphabet used $6.85 billion for Google’s capital expenditures, up from $3.81 billion in the year-earlier period. Overall in 2018, Google’s capital expenditures nearly doubled to $25.46 billion. The company’s operating margin also slimmed to 21% from 24% in the year-ago period.

“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.”