Alphabet profit margins slide due to rising Google costs

Andrew Cummings
February 5, 2019

Alphabet Inc's fourth-quarter revenue and profit beat Wall Street's expectations on Monday but sharply higher spending, as it added data centres, cloud engineers and marketed its services heavily during the holidays, anxious investors.

Alphabet's Other Bets business, which includes its self-driving auto company Waymo and health-tech venture Verily, saw revenue rise to $154 million, up from $131 million in the year-ago period.

Its revenue grew this quarter to $39.3 billion, up more than 21 percent from $32.3 billion previous year. Including money spent to become the default search engine on iOS devices, the company paid out $7.45 billion to acquire traffic during the quarter.

"With great opportunities ahead, we continue to make focused investments in the talent and infrastructure needed to bring exceptional products and experiences to our users, advertisers and partners around the globe", said Ruth Porat, Alphabet's CFO, in the same February 4th media release.

Revenues increased 22 percent year-over-year and operating margin of 21 percent, but Alphabet's share price dropped 3.3% at one point. Capital expenditures rose 64 percent compared to a year ago, up to $7.08 billion.

Alphabet is expected to report its most recent quarterly results Monday afternoon.

Costs were also pushed higher by hiring, mostly for the cloud business, she added during a conference call with analysts.

Late a year ago, Google brought in former Oracle Corp. executive Thomas Kurian to lead its cloud business into what it hopes to be a rapid growth stage.

Online commerce grew quickly in the final quarter of 2018, helping Google's ad business. Last week, Alphabet shares rose to the highest levels since October after scandal-plagued rival Facebook Inc.

In addition, Google continues to spend big on cloud data centers, helping drive a 64 percent jump in fourth-quarter capital spending, to $7.1 billion. Alphabet's profits were thinner because of its investment in cloud services.

The company's "other bets", including its autonomous driving division Waymo and its life sciences and cybersecurity units, took in $154 million in revenue.

The yearly numbers are remarkable as well - there were more expenses in R&D, Sales and marketing, administration and even fines by the European Commission, but the total net income skyrocketed to $30 billion from $12.6 billion in 2017s.

How well Google fares with investors will depend on how aggressively the tech giant tackles cloud computing services in the next year, either organically or through acquisitions.

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