Google's parent company Alphabet share price drops after profit targets are missed

Revenues rose thanks to an increase in YouTube advertising but the company paid a higher rate of tax than a year earlier

Profit per-share is slightly lower than analysts’ expectations (Reuters)

Alphabet, the parent company of Google, reported better-than-expected revenue thanks to a fast-growing cloud-computing business and booming YouTube video advertising, but profits were hit by a one-off tax payment.

Fourth-quarter revenue, after payments for online traffic from distribution partners, was $21.2 billion, up 23 percent from a year earlier, the company said in a statement Thursday. Profit before certain items was $9.36 a share. Analysts on average expected sales of $20.6 billion and profit per-share of $9.63, according to data compiled by Bloomberg.

Alphabet shares fell 2.2 percent in extended trading, after declining 0.2 percent in New York.

The earnings miss was mostly caused by a one-time tax payment that pushed the tax rate to 22 per cent from a 5 percent rate a year earlier. Chief financial officer Ruth Porat called it a “discrete item”, but didn’t elaborate during a conference call.

Excluding that, Google would have reported $10.13 a share in the latest period, according to Ken Sena, an analyst at Evercore ISI. Alphabet shares still fell in extended trading, which Ms Sena attributed to high expectations and gross profit margins that slipped to 76 percent from 78 percent. The stock touched a record $861 on Thursday before closing at $856.98.

“It was a good quarter revenue wise, but margins were a little light because some of the strongest revenue growth came from licensing and other business that are less profitable,” Ms Sena said.

Alphabet’s Google unit has been investing heavily in its cloud business, trying to catch market leaders Amazon and Microsoft. All three are investing heavily in what is a booming trade. On Thursday, Microsoft said cloud revenue almost doubled in its latest quarter.

Alphabet’s capital expenditure reached $3.1bn during the quarter, a 46 percent increase from a year earlier. Executives said some of this went toward facilities and infrastructure, including computer servers and data centres to support the company’s online advertising business and cloud services.

This spending paid off. Google’s “other revenue” line, which includes cloud computing, jumped 62 per cent to $3.4bn. This category of the business also includes sales from its app store and hardware devices.

During the conference call, Alphabet said more investment in cloud is coming this year. Ms Porat said most of the 2,100 additional employees hired in the fourth quarter joined the cloud business.

“Everywhere I look at, we are establishing a world-class enterprise team,” Google chief executive, Sundar Pichai, said during the call. “I definitely think we’re going to have a great year.”

The executives also highlighted YouTube, with Mr Pichai saying revenue from the online video service continues to grow at “a very significant rate”, driven primarily by skippable TrueView ads, which marketers only pay for if viewers keep watching.

While spending rose during the quarter, Alphabet was more frugal with the more experimental “Other Bets” category of its business, like self-driving cars and health care. These businesses generated $262m in fourth-quarter revenue, up from $150m a year earlier. The operating loss was $1.1bn, down from $1.2bn.

Bloomberg