Alphabet, Google’s parent, said its profits fell after a sharp increase in spending for research and development.
SEATTLE — Alphabet, the parent company of Google, said on Monday that its quarterly profit fell 23 percent after it sharply increased spending, in a rare financial stumble by the tech giant.
Alphabet reported that its revenue rose 20 percent to $40.5 billion for the third quarter, but that profit dropped to $7.07 billion. Profit, which missed Wall Street forecasts, was hurt by rising costs for research and development and marketing, the company said.
In after-hours trading, Alphabet’s stock declined 2 percent.
The performance demonstrated the challenges of trying to maintain growth at the company and showed how Google must invest to keep that up. While advertising, rooted in the dominance of Google’s internet search engine, has sustained Alphabet’s bottom line in recent years, that business isn’t growing as fast as it once did. Google is also facing new competition for marketing dollars from Amazon and others.
Alphabet faces other challenges. Google is squarely in the sights of regulators and politicians who want to take down a monopoly. Its employees have been unhappy with management, political conservatives accuse the company of bias and YouTube has been under attack for spreading misinformation.
For the last few years, Google has worked to reduce its reliance on advertising dollars. It has invested in wooing corporate customers to its cloud computing services, branched into hardware with new smartphones, smart speakers and computers, and has continued to plow money into so-called moonshot investments like self-driving cars and cellular connectivity from hot-air balloons.
To build out these new businesses, Google is spending heavily to hire employees, invest in data centers and pay for marketing of new products like its Pixel smartphones.
Those investments have not yet paid off. Google Cloud is growing rapidly, but remains behind Amazon and Microsoft and it is unclear whether the business is profitable. Google’s smartphones are an afterthought to Apple and Samsung.
The most notable financial gains from Alphabet’s moonshot investments — which it calls “Other Bets” — are that they aren’t burning as much money as before.
Ruth Porat, Alphabet and Google’s chief financial officer, said the company was spending to hire and also to add infrastructure in areas like development of artificial intelligence and cloud computing “to support our growth.”
Alphabet is also looking to extend its advertising stronghold by pumping more advertising into other online properties like YouTube and Google Maps. One-third of all global digital advertising spending flows through the company, according to the research firm eMarketer.
In addition to rising expenses, Alphabet said it incurred a $1.5 billion loss after writing down its investments in the ride-hailing companies Uber and Lyft. The company had made those investments through its various venture capital arms. It also took a $550 million charge to settle a legal investigation in France over its tax practices.
Michael Pachter, an analyst at Wedbush Securities, said Alphabet’s results were “still bad” since profits fell even without factoring in the investment losses.
In total, Alphabet’s expenses grew 25 percent, outpacing revenue growth.
Ms. Porat said Alphabet’s increase in hiring was “unusually high” during the quarter because it brought on a lot of recent college graduates. Alphabet said it added about 6,500 employees in the quarter, for a total work force of about 114,000 people.
The company also said its tax rate doubled to 18 percent from 9 percent a year ago.
Even though Google is facing regulatory scrutiny, Sundar Pichai, the company’s chief executive, said on a conference call that he sees opportunities to pursue new business areas or make acquisitions.
“There are many new areas of opportunities available for us. In many of these new areas, we are the new entrant and we create competition,” he said, without disclosing any specifics.
Author: Daisuke Wakabayashi
Source: N Y Times: Google, in Rare Stumble, Posts 23% Decline in Profit