Sundar Pichai argued Google’s bets in hardware, cloud and YouTube are paying off, as rising costs associated with the diversification strategy failed to take the gloss off another solid quarter for parent Alphabet.
In an earnings statement for Q4 2017, Alphabet reported a 24 per cent uplift in revenue to $32.3 billion. Sales were again fuelled by Google’s flourishing advertising business, which brought in $27.2 billion in revenue, up from $22.4 billion in Q4 2016, as total revenue generated by Google reached $31.9 billion, up 24 per cent year-on-year.
Google’s operating income totalled $8.8 billion, up from $7.8 billion in the 2016 quarter. Revenue from its Other Bets division (which includes Project Loon, hardware maker Nest and car division Waymo among others) rose from $262 million in Q4 2016 to $409 million in the recent quarter. Operating loss from the unit narrowed from $1.1 billion to $916 million.
Overall Alphabet slipped to a loss of $3 billion in Q4 2017, which the company said was mainly due to a one-off charge of $9.9 billion related to US tax reforms which increased the burden on much of corporate America in the period. Without the charge, Alphabet would have reported net income of $6.8 billion, up from $5.3 billion in the 2016 quarter.
Three big bets
In an earnings call, Pichai said its investments in cloud, YouTube and hardware, along with its ongoing “pivot” to an artificial intelligence (AI)-driven company, are crucial to its long term strategy.
He revealed Google Cloud for example, which includes its G-Suite range of enterprise services, had reached “meaningful scale” and was now a $1 billion per quarter business. The number of deals worth more than $1 million across all cloud products more than tripled from 2016 to 2017.
Pichai also discussed growing momentum in the number of people watching YouTube on their TVs, while device shipments for its hardware products “more than doubled year-over-year” in Q4 2017.
But the push to diversify and lessen its reliance on mobile search and advertising came at a price: Alphabet’s margins were notably hit by rising costs associated with a spend in promoting all three of these areas, as well as rising Traffic Acquisition Costs (TACs).
Total costs and expenses for the period jumped 24 per cent to $24.7 billion, with total TACs (money paid to Google partners for carrying its adverts) climbed 33 per cent to $6.5 billion.
During the period, Google heavily marketed its Pixel 2 smartphone and YouTube TV channel, while also slashing prices on hardware. Google also spent big on establishing its search engine as the default option on other devices, including Apple’s iPhone.
On rising TACs, Alphabet CFO Ruth Porat said she expected higher costs up until Q1 2018, and explained the holiday season resulted in an increase in payments to partners during Q4 2017.
She also reiterated the costs were not a concern, as they reflect “the ongoing momentum” in a shift to mobile.