Alphabet Sales Growth Tops Forecasts, While Spending Surges

(Bloomberg) --Google parent Alphabet Inc. posted the strongest sales growth almost four years, indicating marketers kept flocking to its services even as lawmakers scrutinized how internet companies harness user data to sell ads.

Costs also surged as the company bought real estate and invested in new opportunities such as artificial intelligence, cloud computing, consumer devices and a voice-control digital assistant.

Chief Financial Officer Ruth Porat said demand for mobile search ads and a strong performance by the YouTube video service helped drive revenue growth. Google’s business of selling targeted ads on other sites across the web also contributed, Porat said on a conference call with analysts.

"We have a clear set of exciting opportunities ahead, and our strong growth enables us to invest in them with confidence," the executive said.

First-quarter sales came in at $24.9 billion, excluding payments to partners that distribute Google services and ads. That was up 24 percent from a year earlier and ahead of analysts’ forecasts, according to data compiled by Bloomberg. Alphabet shares slipped less than 1 percent in after-hours trading Monday.

UBS analyst Eric Sheridan said revenue growth from Google services was better than expected, given recent investor concern about a possible slowdown in the search business. Still, he warned that the company will keep spending heavily.

So far, Google has shrugged off a privacy backlash set off by disclosures about lapses in Facebook Inc.’s data-collection practices. Google is the world’s largest digital-ad provider, a business that relies on targeted messages based on users’ online information and behavior. While increased concern about privacy and new regulation may crimp Google’s ad business at some point, the company’s broad reach, vast resources and dominant market share mean smaller rivals may have more to lose.

Europe’s General Data Protection Regulation kicks in next month and changes how internet companies collect user data and targets ads. Google has been adjusting to the new law for about 18 months already.

"We feel well prepared to meet the requirements," Porat said. "We’ve changed our policy as needed. We are also providing users with strong user controls and privacy settings and privacy check-ups. This has been a very strong area, and we will continue to do a lot of work in this area."

Chief Executive Officer Sundar Pichai stressed that Google’s main money-maker, online search, relies on limited information -- essentially the keywords people type into the company’s homepage to find things online.

Alphabet gave investors several new metrics this quarter. It disclosed more details on its massive investments in private companies like Uber for the first time. The Mountain View, California-based company reported a $3 billion gain on equity securities in the first quarter. That boosted earnings by $3.40 a share. Excluding those gains, Alphabet would have made a profit of $9.93 per share.

Alphabet capital spending almost tripled to $7.7 billion. That reflected a large real-estate investment and investments in cloud, hardware and the Google Assistant. The higher spending shaved operating profit margins to 22 percent from 27 percent a year earlier.

Porat told analysts the spending was "almost equally split" between real estate and the computing power and networking needed to support internal operations and the cloud business, which rents capacity to other companies. Google is building new data centers and investing in undersea cables to connect them with customers, as well as the latest machines for its artificial intelligence work.

Another brake on earnings: Google payouts to distribution partners, known as Traffic Acquisition Costs, or TAC, which jumped 36 percent to $6.3 billion. Alphabet executives said last quarter that TAC growth would slow down after the first quarter.