The Alphabet Growth Engine Is Still Humming In Q3 Earnings report

Alphabet's headlong revenue growth continues to prove durable in spite of brand safety concerns, EU regulatory pressure, Russian election meddling and other controversies.

The company reported total Q3 revenue of $27.7 billion, a 24% increase from the same period last year and beating analyst expectations by around $500 million.

But the raw revenue growth is shaded somewhat by increasing pressures on Google’s margins.

The company is dominant in mobile search as well as desktop, but mobile search ad margins are slimmer than their desktop forebears. The total number of paid clicks on Google sites or network sites was up 47% year-over-year, while the cost per click dropped 18%. Basically, the company makes less on more ads.

Traffic acquisition costs (TAC), the measure of spending from Google in order to acquire traffic, rose from $4.2 billion to more than $5.5 billion year-over-year.

Rising TAC costs are attributable in part to the consumer shift to mobile, where “more searches are channeled through paid access points,” responded CFO Ruth Porat to an investor’s question on rising rates. Google signed a deal with Apple, for instance, to be the default Siri search option during the past quarter, which was for undisclosed terms but may cost billions.

Voice search is both a challenge and an opportunity.

One investor asked whether the growth of voice search is additive to or replaces mobile searches.

“Based on every metric we see, the amount of information customers are using is increasing,” and with that searches are rising in total, said CEO Sundar Pichai.

Voice search also has strong marketing applications, Pichai said. For instance, retailers partnering with the company’s voice-based Google Express service provide live inventory feeds, loyalty programs and deals. People asking Google’s voice assistant can easily choose a store or place orders.

“It’s opening newer ways we’re working with partners,” Pichai said.

Asked about any surprise drivers of the company’s strong growth rate, Porat said gradual programmatic adoption had in previous quarters been a drag on earnings, but now “the pace of programmatic adoption is changing quarter-over-quarter."

 

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