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Rising costs see Alphabet take earnings hit in Q4

Tim Maytom

Google parent company Alphabet saw lower than expected profits during Q4 2017 despite a big jump in advertising sales. The boost in revenue was offset by rising costs, leading the internet giant to miss its predicted profits for the quarter, and resulting in a share price drop of over five per cent.

Revenues for the quarter increased 24 per cent year-on-year to $32.3bn (£22.7bn), with advertising revenues alone up 21.6 per cent to $27.2bn. However, operating costs also climbed by 27 per cent as Alphabet attempted to expand beyond its core search business, and invested heavily in YouTube content to fight back against brand safety fears. Overall profits for the quarter were $6.8bn, just shy of the $7bn predicted by market analysts.

One of the key rising costs was traffic acquisition, which has been a growing concern for the firm as search shifts from desktop to mobile. These rose to $6.45bn, compared to $4.85bn in Q4 2016, and as a percentage of revenues, were the highest they've been in at least two years. The firm also pointed to a new Tax Act in the US, which it says caused a one-time $9.9bn expense during the quarter.

"Our business is driving great growth, with 2017 revenues of $110.9bn, up 23 per cent year-on-year, and fourth quarter revenues of $32.3bn, up 24 per cent year-on-year," said Ruth Porat, chief financial officer at Alphabet. "Our full year operating income growth continues to underscore our core strength, and on top of this, we continue to make substantial investments for the long-term in exciting new businesses."

As part of the earnings report, the firm announced plans to buy back up to $8.6bn worth of Class C stock, and also appointed John Hennessy as the new chairman of the board, following Eric Schmidt stepping down a few weeks ago.

During the earnings call, Alphabet confirmed that mobile search and YouTube remain the biggest contributors to revenue growth, with YouTube users now averaging an hour of viewing per day on mobile, and 1.5bn monthly viewers.

Google chief executive Sundar Pichai was optimistic about the company's prospects in 2018, putting particular focus on the firm's cloud computing investments, developments in machine learning and a renewed drive to improve YouTube for users and advertisers.

"We are focused on building a second wave of growth within Google over the medium and long-term," said Pichai.