Alphabet beats Wall Street estimates, but spending worries investors

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Alphabet Inc's fourth-quarter revenue and profit beat Wall Street's expectations on Monday but sharply higher spending, as it added data centers, cloud engineers and marketed its services heavily during the holidays, worried investors.

The company's shares, which have risen by almost 17 percent over the past six weeks, fell by 2.3 percent to 1,114.60 U.S. dollars in after-hours trading.

Partly because of the higher spending, Alphabet reported an operating margin of 21 percent in the fourth quarter, down from 24 percent a year ago.

"Google saw a steep decline in operating margins," said Richard Kramer, an analyst at Arete Research "They have plenty of cash to invest, and seven billion U.S. dollars in capex is a huge spend."

Alphabet Chief Financial Officer Ruth Porat said capital expenditures this year would "moderate quite significantly," speaking to investors and analysts after results were announced.

The company has authorized a plan to buy back an additional 12.5-billion-U.S.-dollar worth of its shares, Porat also said.

Facebook Inc's better-than-expected fourth-quarter results last week had lifted expectations for Alphabet as they suggested that concerns about a global economic slowdown may be overblown.

Alphabet's fourth-quarter revenue rose by 22 percent from a year ago to 39.28 billion U.S. dollars, compared to the average expectation of 38.93 billion U.S. dollars among analysts tracked by Refinitiv. About 83 percent of the revenue came from Google's ad system, chiefly mobile search and YouTube, the company said on a call with analysts.

The company had 31.07 billion U.S. dollars in total fourth-quarter costs and expenses, up 26 percent from last year. Capital expenditures rose by 64 percent compared to last year, up to 7.08 billion U.S. dollars.

Porat said increased operating costs stemmed from licensing content for YouTube, expanded data center operations and Google's hardware business.

A run-up in spending has reflected Google's efforts to boost staffing on its cloud computing division, promote its consumer devices and YouTube subscription packages and acquire office buildings in Silicon Valley and New York.

Quarterly profit was 8.95 billion U.S. dollars, or 12.77 U.S. dollars per share, compared with a loss of three billion U.S. dollars a year ago. That compared to analyst estimates of 7.69 billion U.S. dollars, or 10.87 U.S. dollars per share.

The loss last year related to a one-time charge from new U.S. tax rules, while earnings since then have benefited from new rules about valuing Alphabet's dozens of investments in external startups. Fourth-quarter earnings also benefited from a 1.3-billion-U.S.-dollar unrealized gain related to a non-marketable debt, Alphabet said.

Source(s): Reuters