Alphabet earns record $26b quarterly profit on Google ad surge

BENGALURU • Google owner Alphabet on Tuesday reported higher-than-expected third-quarter advertisement sales, a sign that the business is overcoming new limits on tracking mobile users and that online shopping is as popular as ever heading into the holiday season.

Through its search engine, the YouTube video service and partnerships across the Web, Google sells more Internet ads than any other company.

Demand for its services surged in the past year as the coronavirus pandemic forced people to spend more time online, and their new habits have persisted.

Google advertising revenue rose 41 per cent to US$53.1 billion (S$72 billion) during the third quarter. Alphabet's overall sales jumped to US$65.1 billion, above the average estimate of US$63.3 billion among analysts tracked by Refinitiv.

"The consumer shift to digital is real and will continue even as we start seeing people return to stores," said Google's chief business officer Philipp Schindler.

"The underlying takeaway is that people want more choice, more information, more flexibility, and we don't see this reversing."

Alphabet's shares fell 0.93 per cent to US$2,760.19 following the after-hours release of the financial results.

Quarterly profit was US$18.94 billion (S$26 billion), or US$27.99 a share, beating expectations of US$24.08 a share and marking a third straight quarter of record profit.

Alphabet's profit is subject to wide fluctuations because accounting rules require the company to measure unrealised gains from its investments in start-ups as income.

Investors had braced themselves for sales challenges for Google.

Anxiety from consumers over how Google and other firms use their browsing behaviour to profile them and then pick which ads to show has become widespread.

In the latest challenge, Apple, whose iPhones account for half of the smartphones in the US, gave its users more control to stop tracking over the past few months. The change led advertisers to recalibrate their spending in ways that Google rivals Snap and Facebook said hurt their third-quarter sales.

Alphabet's chief financial officer Ruth Porat reported "modest impact" on YouTube ad sales from Apple's efforts.

But analysts said Google overall was less affected than its peers because its search engine collects data on user interests that is valuable to advertisers and is unmatched in the industry.

"(It is) almost completely immune to Apple's changes," said analyst Collin Colburn from technology consultancy Forrester.

Other companies also faced slowdowns because advertisers cut spending as they struggled to staff up and keep shelves stocked amid hiring and supply chain issues brought on by the pandemic.

Mr Schindler said supply chain challenges affected only Google's sales of automotive ads.

Google Cloud, which trails Amazon.com and Microsoft in cloud services market share, increased revenue by 45 per cent to US$4.99 billion, slightly below an estimate of US$5.2 billion.

Alphabet's total costs increased 26 per cent to US$44.1 billion in the third quarter and the company's workforce size passed 150,000 employees.

Alphabet shares have outperformed those of many big peers since the end of last year, rising about 57 per cent. Microsoft is up 39 per cent, Facebook 20 per cent and Amazon 2 per cent over the same period.

But shares of Alphabet trade at a slight discount to those of Facebook, the Internet's No. 2 seller of online ads. Facebook trades at 6.8 times expected revenue over the next 12 months compared with 6.4 times for Alphabet.

In recent weeks, Facebook has been swamped with accusations from a former employee who leaked thousands of confidential company files to the media and filed complaints with the US securities regulator over alleged misrepresentations by the company about its risks from hosting inappropriate content.

Google has been caught up in some of the fallout. A YouTube policy official testified to US Congress on Tuesday, alongside representative of other companies, about the harms of social media to young users.

Investors also await further changes to Google's businesses as a result of regulatory scrutiny.

The US and other authorities have alleged that some of the company's practices in advertising and search are anti-competitive, though the company argues they are to benefit users.

In a concession to critics last week, Google said it would cut some of the fees it collects from apps on its Play app store starting next year.

But the move could end up generating new revenue for Google if it leads companies such as music streamer Spotify Technology to start selling subscriptions through their apps and giving Google 10 per cent to 15 per cent of the sum.

REUTERS