Alphabet’s Revenue In Q3 2017 Grew By 24% YoY, Profits Up 33% Despite Ever Increasing Acquisition Costs And Reducing Cost Per Click

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Alphabet Inc (NASDAQ: GOOG, GOOGL), the parent company of Google, recently announced their Q3 2017 earnings report, and once again the search giant beat industry expectations to register 24% YoY growth in revenue compared to Q3 2016. This means the revenue went up from $22.451 billion in Q3 2016 to $27.772 billion in Q3 2017.

These revenue numbers mean Alphabet beat several industry estimates as well, including one from Thomson Reuters which predicted revenue to be around $27.2 billion mark. Adjusted Earnings Per Share (EPS) were also up from $7.25 in the third quarter last year to $9.57 this quarter, all while beating the forecast estimate of $8.33. Looking at net income levels, we find that the growth is even more impressive. Net income rose from $5.061 billion in Q3 2016 to $6.732 billion in Q3 2017. This represents a YoY growth rate of over 33%.

So what are the biggest contributors to Alphabet’s revenue?

Once again the single biggest contributor was Google’s advertising revenue, specifically from its own properties. In fact, ad revenue from Google’s properties reached $19.723 billion, or say 71% of total revenue. This falls roughly in line with Q3 2016, when this number was also around 71% and is indicative of standard growth in this segment.

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The Google ‘Other’ revenue category also experienced significant growth to the tune of nearly 40%, raking in $3.405 billion in Q3 2017. The ‘Other’ category includes Play Store revenues, enterprise revenues and hardware sales (in particular, the Pixel line of smartphones and the Google Home smart speaker).

However, since the scope of this report is only Q3 2017, it does not include data of Google’s October 4 event and the launch of the Google Pixel 2/Pixel 2 XL. According to Google CEO Sundar Pichai, the Pixel 2 enjoyed twice as many pre-orders during the first day than its predecessor. This would indicate that this category should continue to grow at an even more accelerated rate in the upcoming quarters.

However, there were also some less pleasing statistics in the report. Firstly, Google continues to lose money from its ‘Other Bets’ segment, despite a 65.2% increase in revenue to $302 million. Google’s net operating loss from this segment was $812 million in Q3 2017, slightly below Q3 2016’s $861 million. This segment includes several in the work projects such as Waymo self-driving cars, Verily Life Sciences, Nest smart home devices and other investments in startups. However, the only real revenue-generating operations in this segment are Google Fiber Internet, Nest, and Verily’s licenses.

Google’s total traffic acquisition costs (TAC) also went up from $4.182 billion in Q3 2016 to $5.502 in Q3 2017. This is even higher than early industry estimates of $5.24 billion. This increased cost was also coupled with a significant decline of 18% in cost per click, further eating into revenues. However, both of these were somewhat offset by a rise in aggregate paid clicks, which rose by 47% compared to last year.

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