Google's parent Alphabet results hit by rising traffic costs, strong dollar

Thu Apr 21, 2016 9:36pm EDT
 
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By Deborah M. Todd and Narottam Medhora

(Reuters) - Google's parent Alphabet Inc (GOOGL.O: Quote) missed Wall Street targets for first-quarter profit and revenue on Thursday as it spent more money to build traffic for its mobile advertising services.

The results, which were also hit by the strong dollar, drove shares of the Web search company down 6 percent in late trading Thursday.

Alphabet's consolidated revenue rose to $20.26 billion from $17.26 billion, slightly below the $20.37 billion analyst consensus, according to Thomson Reuters I/B/E/S. Non-GAAP earnings per share of $7.50, excluding one-time items, missed analysts' expectations of $7.97.

Chief Financial Officer Ruth Porat said on a conference call with investors that payments to other web sites, known as traffic acquisition costs (TAC), totaled $3.8 billion and accounted for 21 percent of advertising revenues. The percentage of ad revenues spent on TAC grew 13 percent year-over-year.

That reflects the ongoing shift to mobile advertising and the growing importance of programmatic advertising, in which ads are bought, sold and displayed by automated systems.

Investors should get used to seeing increased TAC as "the cost of doing business," said Sameet Sinha, B. Riley & Co. analyst.

"If you're getting mobile searches from Apple devices you have to pay Apple for traffic so that revenue can happen," Sinha said. "The same thing on the programmatic side, when you end up representing more people and selling their ad space or buying their ad space, you have to pay somebody else."

Porat said spending on traffic acquisition is expected to keep rising as the shift to mobile continues - pressuring the company's traditionally robust margins on its advertising business.   Continued...

 
The Alphabet Inc. campus, also known as Googleplex, is shown in this aerial photo in Mountain View, California  April 6, 2016. REUTERS/Noah Berger