Shadow of Rising Costs Looming Over Google

Google parent Alphabet reports a 24% gain in Q4 revenue but the fees Google pays to third-party search partners jumped 33%.
Matthew HellerFebruary 2, 2018

Google parent Alphabet reported another strong gain in quarterly revenue, with other key metrics beating Wall Street estimates, but rising costs weighed on margins.

Revenue for the fourth quarter rose 24% to $32.32 billion, while, excluding a one-time $9.9 billion charge from the new tax law, Alphabet posted earnings per share of $9.70. Analysts had expected EPS of $9.98 on revenue of $31.86 billion.

Aggregate clicks on Google ads also beat estimates, rising 43%. And Google’s cost-per-click — a key metric that helps define how valuable its ads are — fell 14% year over year, slightly less than analysts expected.

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But on news of the earnings, Alphabet shares dropped as much as 5.6% to $1,181.59 in after-hours trading Thursday, with Google’s traffic acquisition costs (TAC) being a particular concern for investors.

The fees Google pays to third-party search partners such as phone makers increased 33% to $6.45 billion while TAC as a percentage of advertising revenue rose to 24% from 22%.

As TechCrunch reports, “Google’s last quarters have been marked with the creeping shadow of increasing costs for its traffic acquisition as a percentage of Google’s revenue, or TAC. While for the past several quarters it hasn’t raised any massive alarm bells, it could represent a potential problem for Google in the future as more and more activity shifts to mobile devices.”

Searches on mobile and YouTube require Google to pay out higher fees. “We expect the year-on-year increases [in TAC] to slow” after the first quarter of this year, CFO Ruth Porat said in an earnings call.

Google’s revenue beat was driven by the advertising business, which posted $27.27 billion in revenue. Revenue from “Other Bets” — the collection of startups that make up Alphabet outside of Google — rose 56% to $409 million and the segment’s operating loss narrowed to $916 million.

“The quarter featured significant revenue growth offset by rising costs and reduced margins,” Pivotal Research analyst Brian Wieser said in a research note. “Overall, we are interpreting the quarter’s results favorably if only because they were ahead of our conservative expectations.”