Google Profits Dip, But The Cash Machine Is Still Roaring Along

Alphabet continued its long run of revenue growth, earning $40.5 billion in Q3, up from $33.7 billion in the same period last year. But its profitability dropped by almost a quarter to $7.1 billion as the company’s expenses increased, according to its quarterly report.

The biggest cost center is headcount growth. The company has added more than 6,000 people since Q2, most of them product managers or engineers, and its cloud business is particularly costly due to new hires and expensive data centers.

But the company doesn’t invest with a quarterly mentality, CEO Sundar Pichai told investors on the call.

Aside from investments in the Google Cloud Platform, products such as Maps and the Google shopping hub, which it launched in May, are still in the early stages of monetization, Pichai said. Also in May, Google Maps started selling search ad placements in results, as its query box becomes a portal for much more than just driving directions.

“These are long-term opportunities,” he said.

Google doesn’t have to dust off its classics either. Desktop search remains a “solid contributor to revenue growth,” as CFO Ruth Porat put it to one investor who expressed surprise that desktop traffic, which isn’t broken out in earnings results, could still account for so much growth in the overall business.

Google also fares better as more business moves to its owned-and-operated media assets relative to its network members.

Revenue for Google properties increased $4.6 billion from Q3 last year. The combined earnings of publishers in its ad network grew by $369 million. Google’s own channels also have stronger ad rates, with the cost per click actually going up, compared to networks, which sell based on ad impressions and have seen those impression rates plateau.

Google’s traffic acquisition costs (TAC), which is the margin of search budgets it pays to distribution platforms – such as for queries sent through Mozilla’s or Safari’s default Google search – are high for network traffic but disappear for a channel like YouTube.

Google’s total TAC as a percent of ad revenue ticked down from 23% to 22% in the past year. Porat described it as a “favorable network mix shift from network to owned sites.”

In other words, Google is channeling users more effectively between its own properties and relying less on publishers and other audience gatekeepers.

 

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