Alphabet optimistic on data regulations as profits benefit from one-offs

Google’s parent company Alphabet results overnight for the first quarter of 2018 impressed analysts as profits rose 84% to $9.4bn in the first three months of the year.

Alphabet’s stock rose 1% in after-hours trading to cap a 6% rise since the start of the month.

Total revenue rose 26% to $31.15bn from the $24.75bn the internet colossus earned in the same period the previous year, which beat the Wall Street average estimate of $24.4bn as per FactSet. Google’s operations accounted for $30.99bn of sales and 85% of total revenues were derived from online advertising.

Despite operating profit margin being squeezed to 22% from 27% a year earlier because of growth in expenses, net income rose 73% to $9.4bn from $5.4bn thanks to a $3bn boost from changes to accounting rules over unrealised gains in investments in startups such as Uber and Airbnb, and a $1.1bn uplift from currency exchange movements.

Earnings of $13.33 per share came down to an adjusted EPS figure of $9.93 when excluding the investment-related gains, though this was still in excess of the $9.28 forecast.

Alphabet said paid clicks on Google properties rose 59pc year on year in the first quarter, while cost-per-click, meaning how much it can charge for its adverts, was down 19pc.

Capital expenditure of $7.6bn was much higher than Street's expectations of $3.5bn.

Alphabet continued to grow throughout the quarter despite having to face privacy and security challenges. It has been the focus of new political measures to control the negative use of consumer data by giant online companies like Google or Facebook.

Alphabet said it had already implemented changes in their advertising policies to ban cryptocurrency ads and was still fighting to control malicious apps.

Ahead of the imposition of the European Union's General Data Protection Regulation on 25 May, which is expected to affect how online advertisers use data and could even see many users refuse to receive personalised ads, Google chief executive Sundar Pichai said GDPR compliance preparations began "over 18 months ago".

"We are working very closely with our publishers and our partners," he said. "It is a big effort, we are very committed to it and to getting it right."

He was sanguine about GDPR, telling analysts: "It's important to understand that most of our ad business is search, where we rely on very limited information, essentially what is in the keywords to show a relevant ad."

Analyst Ivan Feinseth at Tigress Financial Partners, was also bullish on medium-term prospects despite the furore over use of user data. "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," he said, adding that "Google continues to dominate both mobile and desktop search" and predicting there will be "very little effect" from Facebook fallout.

Deutsche Bank said it was a "strong" update, with Google sites revenue growth excluding-FX "nicely ahead" of expectations, "though the cost growth continues to surprise in excess of revenue".

"While sentiment heading into the quarter was low and revenue outperformance continues to be impressive, we think it's easier for investors to see gravity pulling down revenue growth than it is to see operating margin leverage, and until we see more signs of stabilizing margins (and capex), we think it will be volatile for Alphabet shares in the near term."

DB cut its target price to $1,225 from $1,375 but maintained its 'buy' rating given meaningful upside to the TP.

Naeem Aslam, analyst at Think Markets, said the amount of capital expenditure was key: “You have to spend money to make money," he said, with the firm surprising the street with a capex number that "looks bananas" compared to the last year’s $2.4bn but is needed to fuel growth.