Revenue Growth but Profit Decline, Has the Advertisement Been Taken Away by Google?

“Q3 is another good quarter for Google. Driven by mobile search, YouTube and cloud computing, revenue growth is strong”. Google CEO said on the conference call.

On October 28th, Beijing time, Alphabet released the third quarter financial report for the 2019 fiscal year ending September 30. The financial report showed that the total revenue in the third quarter was 40.499 billion US dollars. Up 20% from the 33.74 billion US dollars in the same period last year, and revenue exceeded expectations. In comparison, total revenues for the first quarter and second quarter were $36.34 billion and $38.94 billion, respectively, a year-on-year increase of 17% and 19%. According to US GAAP, net profit for the third quarter was $7.068 billion. Down 23% from $9.192 billion in the same period last year, and did not meet expectations.

As a pillar business, advertising revenue in the third quarter was US$33.916 billion. Accounting for 83.75% of total revenue, up 17.14% year-on-year. Advertising revenues for the first quarter and second quarter were $30.72 billion and $32.60 billion. A year-on-year increase of 15% and 16%, respectively.

However, the steady growth of advertising business at this stage is being “offset” by rising costs including R&D, sales and marketing costs and the weakness of long-term investment companies.

Steady revenue growth

Total revenue for the third quarter was $40.499 billion, of which advertising revenue was $33.916 billion. Other revenues, including cloud computing, consumer hardware, and Play Store, were $6.43 billion, up 38.5% year-on-year. Other bets including Waymo earned $155 million.

The advertising business developed relatively smoothly. Among them, Google’s own website’s advertising revenue was US$28.647 billion, up 19.09% from the same period last year of US$24.054 billion. The advertising revenue generated through the AdSense website on the partner website was US$5.269 billion, compared with last year. Same period of 4.90 billion US dollars increased by 7.5%

In the third quarter, Google also managed to control the TAC (traffic access cost). The cost of directing payments to partner sites, and the cost of mobile phone vendors using Google as their default search engine. The TAC for the third quarter was $7.49 billion, slightly higher than the expected $7.48 billion. The year-on-year growth rate was 14%, accounting for 22% of the advertising business revenue, and also decreased for the same period last year, 23%.

However, Google’s own site’s paid clicks increased 18% year-on-year, and growth slowed. With 39% and 28% growth in the first two quarters. Even if it is still firmly in the dominance of the search market. Google can’t ignore the advertising business challenges brought by Apple, Amazon and Facebook. In the first three quarters of 2019, the advertising business revenue increased by 15%, 16% and 17.14% respectively. However, compared with the first three quarters of 2018, 24%, 24% and 20% year-on-year growth narrowed a lot. .

As you can see from the conference call, Google hopes to expand its advertising business. YouTube and Maps are growing into important portals. According to Google CEO Sundar Pichai, “The use of YouTube Music and YouTube Premium continues to expand globally and has now covered 71. Countries”.

So, what comes with it is rising costs. According to the CFO’s conference call, the cost of revenue, including TAC, was $17.6 billion, up 23.01% year-on-year. Other revenue costs excluding TAC were $10.1 billion, an increase of 31% year-on-year. One of the main “contributors” is the new user acquisition costs for YouTube Premium and YouTube TV. As well as the increased content acquisition fees for YouTube to “resist” the erosion of Apple and Disney’s streaming media.

Alphabet has been trying to reduce its reliance on advertising business. Marching into the fields of cloud computing, smart hardware, autopilot, and more. Other revenues, including cloud computing, consumer hardware, and Play Store, were $6.43 billion. Although Google did not disclose the specific revenue of cloud computing. The business is considered to be the biggest opportunity to break through the bottleneck of advertising business. In July this year, Pichai said that cloud computing revenue will reach 8 billion US dollars this year.

On the conference call, Pichai also did not praise the cloud computing. He said that under the leadership of Thomas Curry (Google Cloud CEO), Google’s cloud computing has entered the momentum of multiple fields.

In addition, hardware devices are another way for Google to seek revenue growth. Some technical analysts said that Google’s Pixel 3a launched in May performed well, and in the quarter when sales were generally sluggish. Pixel 3a boosted Google’s overall smartphone sales.

Profit dragged down

From the perspective of revenue, Google’s book has not had much problems. But as the Wall Street Journal commented, the steady growth of advertising business at this stage is being “offset” by rising costs and the weak performance of long-term investment companies.

Total costs and expenses in the third quarter reached $31.3 billion, a 25% increase from last year’s $25.1 billion, which was higher than revenue growth, breaking the record high of $31.1 billion in the fourth quarter of fiscal 2018.

In addition to revenue costs, R&D costs were $6.554 billion, up 25.27% year-on-year; sales and marketing costs were $4.609 billion, up 19.75% year-on-year; regular and administrative costs were $2.591 billion, up 47.8% year-on-year.

CFO Ruth M. Porat said the company is investing in recruiting employees to build infrastructure in areas such as artificial intelligence and cloud computing to ensure growth. Not long ago, Google announced the announcement of new cloud service centers in Nevada and Poland as the seventh data center in the US and Europe. According to Porat, in the third quarter, Google recruited 6,450 employees, most of whom came from technology and sales people in the cloud computing field, and currently employs more than 110,000 people. At the same time, Porat also said that with the arrival of the holiday season, Google will increase sales and marketing costs.

In the third quarter, Alphabet’s operating profit was $9.177 billion, an increase of 6.4% year-on-year for $8.625 billion in the same period last year. Another important reason for the year-on-year decline in net profit is other income (expenditure). According to the earnings report, Google’s unrealized investment losses related to holding equity reached $1.53 billion, a figure of $1.38 billion in the same period last year. Google did not specify the source of this loss, but there is speculation that this is related to the stock price of Uber, Lyft and other companies that Google invested.

Another pressure comes from increasingly strict regulation. The third quarter regular and administrative costs were $2.591 billion, including a $548 million fine paid to France for a financial fraud investigation. Earlier this year, the FTC and the Justice Department began an antitrust investigation of large technology companies. The state attorney general who surveyed Google asked him to hand over a lot of information about the advertising business.

Despite this, Porat said on the conference call that rising costs will bring a reasonable return. “We are very focused on long-term investment.”

For example, Google announced in 2017 that it will spend $1.1 billion to acquire the HTC Pixel team. It had previously acquired smart home equipment maker Nest for $3.2 billion, and the third quarter earnings report revealed that Google plans to acquire smart wearable device manufacturer Fitbit. .

But Google has been criticized by investors and analysts because its business is not “transparent”. Senior analyst and portfolio manager Hari Srinivasan said, “We want to see a better cost predictability,” he said, lacking business. Disclosures in various parts (especially YouTube) have made it impossible for Alphabet to get the recognition it deserves on Wall Street.

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