Alphabet, the parent company of Google, reported third-quarter sales of USD 33.7 billion, up 21 percent, or 22 percent more excluding currency effects. The growth was slightly less than in the previous four quarters. However, the high growth at the 'Google Other' activities was encouraging, as there lies the key to diversifying the company's business.
Alphabet breaks down its results in a number of ways:
- On a geographical basis, growth was highest in Asia Pacific (+29%), followed by EMEA (+20%), the US (+20%) and Latin America (+19%).
- The Google division grew revenues 21 percent, while the company's 'Other Bets' (Google Fiber, Verily, licensing, Loon, Wing, Waymo, etc.) increased sales 29 percent.
- Within the Google division, advertising revenues were up 20 percent, while Google Other (Cloud, Play, hardware, etc.) increased 29 percent.
- Google advertising can be further split in own sites (+22%) and third parties (+13%).
The result is that advertising makes up 85.8 percent of Alphabet's revenues, down slightly from 86.7 percent a year ago. Google Other accounts for 13.8 percent, and Other Bets is stable at just 0.4 percent. One could say Alphabet is just about Google. At Google, it's mainly about advertising, but Google Other is growing at a structurally higher rate. This shows the company's attempt at diversification is gradually taking shape. What's encouraging is the many projects at Google Other that could drive further growth, especially the hardware portfolio, which was recently expanded ahead of the year-end holiday season. Also promising are the Google Cloud Platform, which is challenging Amazon Web Services and Microsoft Azure, and other services such as Project Stream, to develop game streaming.
In terms of profitability, Google's results showed a small drop in the gross margin, to 57.7 percent. Traffic acquisition costs (TAC) are stable, but the shift from advertising to Google Other is likely putting pressure on the margin.
Operating profit is strongly affected by the loss-making Other Bets, which were deeper in the red in Q3. The operating margin at Google alone fell slightly on an annual basis to 22.1 percent, but was up compared to the previous three quarters. Operational costs (mainly personnel) grew at a faster rate than revenues (+26%). Google ended the quarter with 94,372 employees, up 21 percent from a year ago.
Investments (mainly data centres) totaled USD 5.28 billion, almost matching the record of the previous quarter. As a result, the cash position shrunk by around USD 700 million to USD 13.4 billion. Total liquidity still increased, by USD 4 billion to USD 106 billion.
