Alphabet’s Q1 Spells S-l-o-w-d-o-w-n As Paid Clicks, Hardware Disappoint

The stock price was down about six percent after hours.

The revenues missed expectations.

And for Google parent Alphabet, both puts and takes showed that most segments are showing signs of a slowdown, below a 20 percent benchmark that once seemed easily hurdled.

In terms of headline numbers, first quarter top line came in at $29.4 billion, which excludes traffic acquisition costs and was below the consensus of $30 billion, and up 19 percent from a year ago.  Earnings per share, adjusted for the $1.7 billion fine levied by the European Union fine, was better than consensus of $10.60, but it should be noted that at least some analysts on Wall Street did not include the fine, so the estimate may not have been an apples-to-apples comparison. Notably, the growth rate for the top line showed some slippage from rates seen last year when 2018 comps showed firm traction at 20 percent or above.

Drilling down a bit, the implication is that growth will face further headwinds, as described by CFO Ruth Porat, tied in part to the stronger U.S. dollar. And yet the company will continue to spend on expansion.

The main driver of results, the advertising business, factoring in traffic acquisition costs, was $27 .2 billion, showing a growth rate of 15.3 percent, off from the end-of-year growth rate of 20 percent. Against that slowdown, CEO Sundar Pichai and CFO Porat said that there were some changes in how some ads have been presented across both search and YouTube – and these changes (though not traced to mobile or the older desktop business) were behind at least part of the slowdown.

In addition, ad clicks across the Google sites also decelerated to 39 percent (Porat said clicks on YouTube also showed a slowdown in growth), as measured in terms of paid clicks.  At the same time, cost per click was down 19 percent.  The slowdown stood starkly against the 66 percent paid clicks growth seen during the fourth quarter of 2014, where costs were down 29 percent.

Beyond search, hardware also saw headwinds. Within Google Other, which contains those (and other) offerings, revenues were $5.4 billion, up 25 percent, but lagging the $5.7 billion that had been expected by the Street.  Management said the Pixel phone contribution suffered from the general pressures seen by higher-end smartphones.

Porat said, however, there had been “momentum” in Google Play and the speaker segments, marked by Google Hub.  Pichai said spending on hardware, especially for distribution, will continue.  The company’s “Other Bets” which also have units that include Waymo and Fiber offerings, posted an accelerating loss, to the tune of $868 million, which shows a significant red ink boost above $571 million last year – and in this case revenues were up only 13 percent to a recent $170 million.