Alphabet is best known as the holding company that owns Google, but its focus is increasingly on all of the other bets it has made in addition to the search engine — whether it’s a bet on the future of home automation, with products like the Nest thermostat and the Google Home smart assistant, or bets on mobile hardware like its new Pixel line of smartphones.
That doesn’t mean anything is wrong with Google itself. Far from it, in fact. The search engine continues to be a giant cash-spewing machine at the center of the Alphabet universe, providing the never-ending stream of money that has allowed it to branch out in many different directions.
Google’s overall revenue climbed 25% in the most recent quarter to $25.8 billion. Not surprisingly, that made up the vast majority of Alphabet’s revenue, which grew 22% year over year to $26.1 billion.
However, the company’s earnings of $9.36 per share (excluding certain items) were well below the consensus estimate of $9.64, which helped push the stock down (GOOG) by more than 3% in after-hours trading on Thursday.
Note: This was originally published at Fortune, where I was a senior writer from 2015 to 2017
One of the culprits behind those weak earnings was rising costs. According to Alphabet chief financial officer Ruth Porat, traffic-acquisition costs—the commissions Google pays to partner sites that run its ads and drive users to its search engine—rose to 22% of revenues in the latest quarter, primarily because such costs are higher for mobile and programmatic ads.
However, the company also noted that revenues from things other than advertising—a category that includes the YouTube Red video-subscription service, Google Play, Google’s cloud services and the new Pixel smartphones—climbed 62% in the latest quarter. There wasn’t a lot of detail given about the new Pixel phones, except to say that the market’s response was “promising.”
For Alphabet itself, revenue for the “Other Bets” category, which includes Nest, Google Fiber and the life-sciences unit Verily, climbed 82% to $809 million, although the group had an operating loss of $3.6 billion.
Alphabet spent much of the past year narrowing the number of those bets, including shelving a delivery-drone project, scaling back its Google Fiber Internet-access service, and spinning its self-driving car technology off as a separate entity called Waymo.
Google CEO Sundar Pichai said on the company’s conference call on Thursday that he believes one of the keys to the future is machine learning and artificial intelligence, which the company hopes will drive everything from home automation platforms like Nest and Google Home to mobile smart assistants, and even smarter recommendations on YouTube.
So in a sense, Alphabet and Google still plan to be focused on search—but they want to do it in your car and on your phone and in your house through voice recognition, instead of just through a toolbar in your web browser or a standalone website.
One of the culprits behind those weak earnings was a rise in costs. According to chief financial officer Ruth Porat, traffic-acquisition costs — money that Google spends on marketing deals and other partnerships in order to drive traffic to its search engine — climbed by 20% in the latest quarter, primarily because such costs are higher for mobile and programmatic ads.
But the Alphabet CFO and Sundar Pichai spent very little time talking about Google on the company’s earnings conference call. Instead, they wanted to talk about all of the other things that Alphabet is working, which they hope contain the seeds for the company’s future growth.
For the full year last year, Porat said that revenue from its Other Bets category — including Nest, Google Fiber and Verily — climbed by 82% to $809 million. The group recorded an operating loss of $3.6 billion, if you include stock-based compensation costs.
Alphabet spent much of the past year narrowing down the number of bets it is putting money into, including scaling back some of the more ambitious efforts such as Project Loon (which is working on delivering Internet access to remote areas using balloons) and even Google Fiber. The company’s self-driving car technology was recently spun off as a separate entity called Waymo.
Pichai said one of the keys to the future for Alphabet is machine learning and artificial intelligence, which the company hopes will drive everything from home automation platforms like Nest and Google Home to mobile smart assistants, and even smarter recommendations on YouTube.
So in a sense, Alphabet still plans to be a search company, but it wants to power voice search in your car and on your phone and through smart devices in your home, instead of just doing it through a toolbar on your web browser.