Alphabet revenue falls US$1b short of forecasts, blames strong US dollar

San Francisco

FOR the past three years, Google's parent company, Alphabet, has defied what financial analysts call the law of large numbers.

That streak may be coming to an end. On Monday, Alphabet said revenue in its most recent quarter increased 17 per cent from the same period last year, to US$36.3 billion. That was about US$1 billion short of Wall Street's expectations.

The Silicon Valley company's revenue had grown more than 20 per cent every quarter since 2016.

The law of large numbers is simple: As a company gets bigger, it becomes difficult to find new ways to make money and maintain rapid growth. The issue has dogged other big tech companies such as Apple in recent years.

Alphabet explained the revenue shortfall with a very big-company answer. It said the strong United States dollar dented revenue by US$1.2 billion. Google executives rattled off a long list of currencies weakening against the dollar, including the euro, the British pound, Brazilian real and Indian rupee. The company said it expected foreign currency to be an issue again in the current quarter.

Shares of Alphabet fell about 7 per cent in after-hours trading.

In a conference call with Sundar Pichai, Google's chief executive, and Ruth Porat, Alphabet's chief financial officer, analysts tried to find another explanation for the revenue shortfall with little success.

They asked about seasonal patterns in search advertisements. They asked about a slowdown in growth on clicks on ads placed on Google and YouTube. They asked about "go-to-market strategies".

"I guess I'll beat the dead horse on the revenue deceleration," said Ross Sandler, an analyst at Barclays who follows the company. He asked whether there was an issue in Asia, where revenue grew 1 per cent from the previous quarter.

But Mr Porat and Mr Pichai did not offer much detail. Alphabet does not employ a quarter-by-quarter strategy, they said, and it invests for the long term. Alphabet said clicks on advertisements on sites such as Google and YouTube grew 39 per cent - a notch below increases of 50 per cent to 60 per cent in recent quarters. Mr Porat said the rate at which consumers are clicking on YouTube ads is not increasing as fast as before.

Concern about 17 per cent growth - Wall Street had estimated a 19 per cent increase - was a shift from usual scrutiny of how well Alphabet keeps its spending under control. But not all analysts were wringing their hands.

"So long as they're growing, I don't have a problem with the rate being 17 per cent versus 19 per cent," Michael Pachter, an analyst at Wedbush Securities, said in an email. "We're all just guessing at growth rates, and to be honest, currency explains it all." Net profit fell 29 per cent during the quarter to US$6.7 billion, from US$9.4 billion a year earlier.

In March, the European Union levied a 1.5 billion-euro (S$1.52 billion) fine against Google. The fine, worth about US$1.7 billion, hit Alphabet's bottom line. Google has not paid it yet, but it sets aside the money from its earnings as a one-time expense. The company also noted that it had a large, one-time tax gain in the first quarter of 2018, inflating the figures from last year.

It was the third penalty handed down by European authorities since 2017, totalling 8.2 billion euros in fines. Europe has also demanded that Google adjust some of its business practices to fall in line with European law. NYTIMES