Google plays down talk of headwinds as revenue climbs 26% to hit $31bn

Alphabet CFO Ruth Porat said that mobile and programmatic are two of the biggest drivers of growth in Google revenues

Despite continued headlines over brands pulling the plug on spending over allegations of ad misplacement, Google’s revenues continue to thrive with its parent company Alphabet today (April 23) reporting revenues of $31.1bn for the opening quarter of the year.

Mobile search and programmatic remain strong drivers of growth for the business, with Alphabet leadership voicing their confidence over the opportunities ahead. This is despite mainstream headlines chronicling challenges such as growing scrutiny from marketers with concerns over brand safety, privacy regulations, as well as escalating traffic acquisition costs (TAC).

The figure represents a revenue increase of 26% year-over-year, versus 23% 12 months prior, with total advertising revenue numbering $26.6bn during the period, with a global breakdown revealing that North America revenues totaled $14.bn; $10.5bn in EMEA, and $4.8bn in APAC.

Alphabet’s financial press release also revealed that revenue earned from Google properties was $21.9bn, while those generated by Google Network Member properties amounted to $4.6bn.

Amid the heady revenue increase, Google's release also revealed that TAC continues to rise steeply – a 73% year-over-year for the first quarter, compared to 70% 12 months earlier. Total TAC amounted to $6.3bn in the first quarter, representing 24% of the online giant’s advertising revenues for the period, according to the statement.

Mobile search and programmatic are driving up Google's costs

Addressing financial analysts, Alphabet chief financial officer Ruth Porat said the increased growth of TAC reflected the increasing role played by mobile search and programmatic – both of which typically involve higher TAC – in its bottom line.

The reporting period also represented the first quarter where Alphabet introduced a new accounting standard affecting how Alphabet reports its Google Network Member properties as well as cost-per-click (see chart below).

On a call with investors, Porat said the numbers also reflect a meaningful mix in the business given the growth of programmatic, plus its attempts to clean up the user experience on its network member sites by removing the need for superfluous ad placements.

She also reported that Alphabet expected to see a "sizable opportunity" in terms of growth in its search business as well as its programmatic play, and also told analysts that she expects to see the growth of Google's TAC slow from this coming quarter.

Google's GDPR preparations

Also speaking with investors, Sundhar Pichai, Google chief executive officer, spoke of the company's preparations to future-proof the business from potential headwinds over privacy regulations, specifically the upcoming General Data Protection Regulations (GDPR) in the European Union.

He explained that Google had been working on shoring up its compliance policies for more than 18 months ago. "We are working very closely with advertisers, publishers and our partners ... and are very focused on getting it right by our users and partners."

Analysts later asked whether or not the introduction of the legislation, which many deem will be seen as a global template for online privacy across the globe post-May 25, will diminish Google's ability to target advertisers leading to a subsequent downturn in advertiser-spend.

He went on to explain how despite the rising importance of programmatic to its overall bottom line, search still accounts for the majority of Google's advertising, and that comparatively little user data is required for targeting search ads when compared to online display ads.

Google's attempts to clean up YouTube

Pichai also faced questions over its attempts to improve content monetization opportunities for publishers using its video-sharing network as well as its reactions to ongoing furor over brand safety.

The number of YouTube channels earning "six figures annually" increased by more than 40% in the early part of the year, according to Pichai who also hunted at beta tests to offer content sponsorship packages.

"We're also investing in new experiences like live content where we see tremendous momentum," he said. "Even as we invest in new experiences, we remain very focused on great content. We aggressively combating content that violates our strict policies through a combination of user and machine flags."

He went on to explain how this combination of humans using machine moderation tools saw YouTube remove more than 6 million pieces of content that contravened its content policies during the closing quarter of 2017. "Over 75% of those videos were removed before receiving a single view," he added.

Market reaction

The numbers initially impressed Wall Street with Alphabet beating analyst's earlier revenue forecasts by $870m, with the outfit's share price increasing 2.1% in the early period after the disclosure.

Although, in a note to investors, Brian Wieser, senior analyst at Pivotal Research, commented: "Alphabet reported a decent 1Q18, but worse-than-expected margin compression and capex levels have negative read-throughs for our model, causing us to alter our price target from $1040 previously to $970 now."

He went on to characterize the continuing rise in TAC, as well as its other increase in operating expenses as "the big story from the results" adding that the company's leadership expects to see its margins continue to be compressed.

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