Financial Performance

Alphabet Beats Estimates With 21% Sales Rise

The 28% increase in Q2 cost of sales concerns analysts but CFO Ruth Porat says the company is not focused on operating margins.
Matthew HellerJuly 25, 2017

Google-parent Alphabet Inc. reported a better-than-expected increases in revenue and profit but its cost of sales rose faster as it spent heavily to deliver mobile traffic to its search engine.

For the second quarter, the company said late Monday it earned $5.01 per share on revenues of $26.06 billion, up from $21.5 billion a year ago. Analysts had expected earnings of $4.46 per share on $25.64 billion in revenue.

Revenue growth was fueled mainly by YouTube ads and mobile search ads. YouTube said in June that it now reaches 1.5 billion monthly users.

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“We’re delivering strong growth with great underlying momentum, while continuing to make focused investments in new revenue streams,” Alphabet CFO Ruth Porat said in a news release.

But in after-hours trading Monday, investors, who had bid up Alphabet nearly 30% this year, drove the stock down nearly 3% to $969. “I think people were hoping for a bigger beat on the top line, and we didn’t get that,” Ben Schachter, an analyst at Macquarie, told Business Insider.

The website noted that “the rising numbers of searches from smartphones in particular, which require Google to share ad revenue with partners, appear to be eating into Google’s revenue and crimping its growth.”

Alphabet’s cost of revenue rose 28% in the second quarter, hurting its operating margins more than most people had expected. “This could be problematic going forward,” Doug Kass, president of Seabreeze Partners Management, told Reuters.

Asked about margins during a conference call with analysts, Porat said the company was focused on getting bigger. “As we’ve often said, we’re focused on revenue and operating income dollar growth and not on operating margins,” she said.

Alphabet also said it made $3.5 billion in net income, a profit that would have been much larger but for a record $2.7 billion European Union antitrust fine. Earnings per share would have been $8.90 without the penalty.

At Other Bets, the collection of startups that make up Alphabet outside of Google, losses narrowed to $772 million from $855 million a year earlier.