By Paresh Dave and Arjun Panchadar
SAN FRANCISCO (Reuters) - Google owner Alphabet Inc reported first-quarter sales and profit Monday that topped financial analysts' estimates due to strong ad sales and a change in accounting for investments in startups, sending its shares up about 1 percent after hours.
The results eased concerns that investment in new ventures beyond its core search business was undermining Alphabet's outlook. There also were no immediate signs that rising global privacy concerns would affect profits.
"The strong economy has companies spending more on advertising and we have an ongoing migration from traditional types of media advertising to greater online and social media-based advertising," said analyst Ivan Feinseth from Tigress Financial Partners. "Google continues to dominate both mobile and desktop search," he added.
Worldwide sales increased to $31.1 billion, above the average analysts' estimate of $30.3 billion, according to Thomson Reuters I/B/E/S. Still, operating income margins dropped to 22 percent from 27 percent a year ago.
Alphabet's profit margins have fallen in recent quarters as it ramps up costly new projects in cloud computing and hardware at its core Google unit, and despite spending cuts on an unprofitable set of ancillary initiatives known as "other bets."
Overall, quarterly profit of $9.4 billion, or $13.33 per share, exceeded estimates of $6.56 billion, or $9.28 per share, according to Thomson Reuters I/B/E/S. About $3.40 of the earnings per share were attributable to a new accounting method for unrealized gains in Alphabet's investments in startups such as Uber Technologies Inc [UBER.UL].
Excluding the investment-related gains and other items, adjusted earnings were $9.93 per share, topping the $9.28 per share consensus. Alphabet's effective tax rate dropped to 11 percent from 20 percent a year earlier.
Revenue from ads sold by Google rose as advertisers pursued slots on its search engine, YouTube video service and millions of partner apps and websites.
Investor appetite for Alphabet has been weakened by a combination of cost and regulatory concerns as officials across the world seek to force changes in Google's business practices, such as giving customers more control over privacy of their data. Shares had fallen nearly 3.5 percent this year until a swift pre-earnings rebound last week.
U.S. lawmakers initially sought to question Google alongside rival Facebook Inc at a hearing this month on how British data analysis firm Cambridge Analytica was able to acquire data on unwitting Facebook users.
Google was later excused. But analysts who follow the company have said Google may not escape European Union regulators, which plan to begin enforcing a new data privacy law next month. It could prompt more users to reject receiving personalized ads online, costing Google a few billion dollars in annual sales, said Brian Wieser, a senior analyst at Pivotal Research.
Advertisers also may limit ad-buying this year while sorting out their own compliance with the new European policy, known as General Data Protection Regulation, he said.
Still, any pullback would be temporary because of the effectiveness of Internet advertising compared with declining media such as print and broadcast, analysts say. Alphabet's first-quarter results again showed that advertisers' attraction to Google's powerful systems in particular is strong, which could help it rebound from any privacy setbacks.
Google also revealed smart thermostat maker Nest generated about $726 million in revenue in 2017. Financial results for the Alphabet division had not been released since its acquisition in 2014, but they were provided to investors Monday as it integrates into the Google unit.
UBS analyst Eric Sheridan estimated last week that Nest would contribute $490 million in revenue this year to Google.
Revenue from Google's mobile app store and growth priorities such as cloud computing services and consumer devices was $4.4 billion in the first quarter.
The operating income margin fall reflected the acquisition of 2,000 employees in Taiwan for $1.1 billion from HTC Corp.
Google also saw cost increases from moving up when it awards equity to employees and acquiring streaming rights for its YouTube TV offering.
Executives have said some costs will moderate this year.
Alphabet’s non-operating income jumped in the first quarter compared with a year ago because of new accounting rules that require it to record estimates of the value of its investments in startups such as Uber and Airbnb Inc. Previously, Alphabet reported income from startup investments once it had opportunity to sell them.
(Reporting by Paresh Dave and Arjun Panchadar; Editing by Lisa Shumaker and Peter Henderson)