Google’s Alphabet reports earnings today: Here are four things to watch
Google parent company Alphabet will report its financial results tonight just days after the search giant was slapped with a record €4.34bn (£3.9bn) fine by the European Commission.
The US search giant is expected to report the regulator's fine in its quarterly results, which could see a dent in its overall profits. However, so far Google's share price has largely shrugged off news of the fine and is up 12pc since the start of the year. Many observers are expecting another positive reception again from investors.
Strong mobile advertising revenue growth is likely to keep Google's profits ticking along, while investors will be hoping to see more news from Alphabet's coveted "other bets" division, which includes its self-driving car company Waymo and other experimental business ventures.
1. The impact of European fines
Google's record fine from European Commissioner Margrethe Vestager is still fresh in the mind. It is likely to provoke fresh questions over how Google plans to respond to rising regulatory pressure on its activities. Analysts will also want to know whether the company will make changes to its Android business and contracts and the broader impact on its profits.
Android is the operating system developed by Google which is used in 80 per cent of the world's smartphones.
The fine of €4.34bn for anti-competitive practices designed to secure the dominance of its apps will make a dent in the search giant's profit margin when it is reflected in its results. Alphabet said late last week that the fine will be accounted for in its earnings. While Google is highly likely to appeal against the fine, investors will want answers to what steps executives are taking to reduce the impact on the business.
There may also be concerns over the long-term future of Android. The European ruling means that Google could be forced to stop making developers who use its Android smartphone operating system from installing its main apps, such as Chrome, the Internet browser. This may mean that in future, different operating systems from rivals like Amazon become more common on smartphones. A longer term worry would be if rival voice-search tools like Alexa become commonplace for internet search.
2. Mobile revenues continue to surge
The majority of Google's revenue is driven by advertising, with search making up a large proportion of this. Its search advertising business is still its heftiest profit generator. Advertising revenue on Google's own websites increased 26pc in the first quarter of the year, when the company beat expectations, and most analysts are not predicting much of a slowdown.
Analysts at Baird predict that Google's core revenues will grow to $31bn, up 21pc since last year. It also predicts Google will see net profits continue to soar to $10.7bn, a 43pc profit margin.
Last quarter, Google investors were buoyed by a 73pc boost to advertising profits. While Google may not match this stellar form, a continued healthy margin would put paid to fears that the ongoing data scandal around Cambridge Analytica or strict new European data privacy rules under the General Data Protection Regulation are sapping its growth.
3. Self-driving car progress
One positive investors will be hoping to see is progress on Google's self-driving car business Waymo. Waymo is part of Google's "other bets" division which has been slowly adding to its revenue over recent years, although is largely a research division.
This year, Waymo is hoping to begin a full scale launch of its self-driving car business, which will allow customers in the US to hire an autonomous taxi using its app. The service is already being tested and investors will be hoping for an update.
Waymo alone has been valued at anywhere between $40bn and $125bn. A recent UBS study suggested the company could be raking in $114bn in revenue by 2030.
4. The rising price of success
Google's bottom line is mainly affected by traffic acquisition costs. This is how much Google has to spend to acquire new searches on its websites. The cost of this has slowly been increasing. Google joined a new revenue sharing deal with Apple's over its search engine results, which has added to costs. Overall these payments were up to 24pc of Google's ad revenue last year.
Over the coming months these costs could rise further if Google begins to implement changes to its Android smartphone operating system.
According to a report in Bloomberg, Google has already discussed with the EU the possibility of loosening its restrictions on Android smartphone makers. If Google has to stop pre-installing Chrome and Google Search on phones, it will cost more to garner those downloads. Alternatively, Android smartphone makers may ask for more money to keep their deals in place.
Meanwhile, last week Ms Vestager said the European Commission will "continue to investigate Google’s search practices".
Google was valued at $828bn on Monday morning. Any major share price moves could see Google continue to grow towards being a trillion dollar company and challenging Apple and Amazon for the position as the world's most valuable technology firm.
