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Alphabet reports strong Q2, tainted somewhat by massive EU fine

The company reported an overall earnings drop of 9.3% after taking a charge of $5 billion to cover the fine.

Alphabet reports strong Q2, tainted somewhat by massive EU fine
[Photo: brionv/Wikimedia Commons]

Google’s parent company, Alphabet, reported a 9.3% drop in earnings in the June-ending quarter, resulting mainly from the unprecedented $5.1 billion fine imposed on it by European Union antitrust regulators last Wednesday. The company delivered earnings of $4.54 per share compared to analyst expectations of $9.66.

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Alphabet set aside $5 billion in the quarter to pay for the EU fine. As a result, the company reported $3.2 billion in net profit for the quarter, down substantially from the $3.5 billion in reported in last year’s second quarter.

But Wall Street was far more interested in the numbers that excluded the fine and portrayed the current health of the core Google advertising business. They saw a healthy beast.

Alphabet stock was up as much as 5% in after-hours trading after the company reported $32.7 billion in revenue–up 26% versus the second quarter of 2017. Thomson Reuters analysts expected $32.17 billion. The main part of the revenue, 86%, came from the Google advertising business. The revenue growth was driven by substantial contributions from Google’s mobile search business, YouTube, and desktop search, said Alphabet CTO Ruth Porat during a conference call with analysts Monday.

Investors were also feeling good about improvement in one closely-watched metric in Google’s business–traffic acquisition costs. This improved profit margins, which (excluding fines) Alphabet reported as 24%, up  from the year-ago quarter’s 22.5%. Part of the traffic acquisition expense came from a (costly) deal with Apple that made Google the default search on iPhones.

The quarter was also the first full reporting period after General Data Protection Regulation (GDPR) rules went into effect in Europe. The rules require that internet advertisers like Google get consent from consumers before using their personal data to target ads. The rules also require companies to make it possible for consumers to easily quit a given platform and take all their data with them. Obviously the new rules didn’t slow down Google’s advertising business. In fact, it may have helped. Google CEO Sundar Pichai said during today’s conference call that he thinks it’s still too early for his company to fully understand the impact of GDPR.

The EU regulators imposed the fine because it believes Google leveraged the popularity of its Android mobile operating system to get device makers to install Google’s search and browser products on the devices. Google says it’ll appeal the ruling. But the fact that Alphabet chose to put the charge on the books in the second quarter suggests that management doesn’t believe its appeal with the EU is exactly a slam dunk.

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If Google ends up paying this single fine, large as it is, it wouldn’t impact it very much. The company held almost $103 billion in cash as of March. If such fines become commonplace in an increasingly scrutinized tech industry, it could have lasting effects. A handful of analysts saw the fine as serious enough to alter their models and earnings estimates on the company.

After closing at $1,211, Alphabet stock climbed more than 5% before receding slightly. It was trading at $1,257 as of 5:45 Eastern.

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