by Mark Bergen
(Bloomberg) – Alphabet Inc. reported better-than-expected revenue thanks to a fast-growing cloud-computing business and booming YouTube video advertising, but the taxman spoiled the party.
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.
The earnings miss was mostly caused by a one-time tax payment that pushed the tax rate to 22 percent from a 5 percent rate a year earlier. Chief Financial Officer Ruth Porat called it a “discrete item,” but didn’t elaborate on 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 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,” Sena said.
Alphabet’s Google unit has been investing heavily in its cloud offerings, trying to catch market leaders Amazon.com Inc. and Microsoft Corp. All three are investing heavily in what is a booming business. On Thursday, Microsoft said cloud revenue almost doubled in its latest quarter.
Alphabet’s capital expenditure reached $3.1 billion during a quarter, a 46 percent increase from a year earlier. Executives said some of this went toward facilities and infrastructure, including computer servers and data centers 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 percent to $3.4 billion. This segment also includes sales from its app store and hardware devices.
On the conference call, Alphabet said more investment in cloud is coming this year. Porat said most of the 2,100 additional employees hired in the fourth quarter joined the cloud business.
Alphabet/Google Annual Revenue
2016: $90 billion
2015: $75 billion
2014: $66 billion
2013: $56 billion
2012: $50 billion
2011: $38 billion— Jon Erlichman (@JonErlichman) January 26, 2017
“Everywhere I look at, we are establishing a world-class enterprise team,” Google Chief Executive Officer Sundar Pichai said on the call. “I definitely think we’re going to have a great year.”
The executives also highlighted YouTube, with 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 its more experimental Other Bets, like self-driving cars and health care. These businesses generated $262 million in fourth-quarter revenue, up from $150 million a year earlier. The operating loss was $1.1 billion, down from $1.2 billion.
Alphabet shares fell 2.2 percent in extended trading, after declining 0.2 percent in New York.
