Google Misses Fourth-Quarter Earnings Despite Increased Advertising Revenue

Growth led by mobile and YouTube

Google's parent company Alphabet reported lower than expected earnings growth for the fourth quarter of 2016, hurt in part by a lower cost per click on advertising, even while the total volume of clicks grew.

According to the company's earnings released today, net revenue increased to $26.1 billion, up from $21.3 billion in the fourth quarter of 2015. Earnings per share increased to $9.36 from the $8.67 reported during the same period a year earlier. Analysts had expected earnings of $25.26 billion, or $9.64 on an earnings-per-share basis, according to Thomson Reuters.

Growth was driven by revenue from the company's mobile search business as well as YouTube, according to Alphabet. 

Quarterly advertising revenue grew by 17 percent over the same period in 2015, from $19.1 billion to $22.4 billion. Revenue from so-called "other bets," businesses made up of everything from cloud computing and hardware to self-driving cars, increased to $262 million from $150 million. Operating losses for other bets decreased slightly, costing the company $1.1 billion in the quarter compared with $1.2 billion during the same period in 2015.

"We're seeing great momentum in Google's newer investment areas and ongoing strong progress in Other Bets," Alphabet chief financial officer Ruth Porat said a statement.

Aggregate paid clicks in the fourth quarter grew 36 percent, even while cost per click fell 15 percent. Between the third quarter and the fourth quarter of 2016, aggregate paid clicks increased by 20 percent while falling on a cost-per-click basis by 9 percent.

Peter Reinhardt, CEO of customer data platform Segment, said that despite the lower numbers, Google and its rival Facebook are still at the top.

"We can expect to start seeing the smaller networks scramble in order to keep up with Google and Facebook, who are clearly at the top while the rest are falling behind," Reinhardt wrote in an email. "As this trend continues, this will lead to a significant decrease in relevance for these other ad networks, and companies will start to figure out new ways to cope with a new landscape."

Google doesn't differentiate how YouTube's earnings factor into the company's overall revenue. However, according to a Google rep cited by CNBC, YouTube has been "slower to pick up the slack" from the company's other advertising revenue generators that have seen slower growth.

In a statement to Adweek about Alphabet's earnings, Forrester analyst Thomas Husson said the stability of Google's revenue over the next few years will depend on maintaining momentum from mobile revenue.

"While there might be slower growth, the midterm prospect looks good given the fact that advertisers will wake up to the mobile web opportunity after having focused too much on mobile apps," he said.

Husson also noted that Google, like Apple, has been diversifying its core business. While Apple is beginning to move away from relying so heavily on hardware and growing its service business, Google has been leaning more into hardware. Last summer, Google announced its first self-branded hardware products, including a smartphone, a virtual-reality headset and a voice-assistant speaker.

"Both are now the most valued brands globally, according to Interbrand, and their role in the economy is much bigger than what Wintel used to represent 15 or 20 years ago," Husson said, using the monicker to describe Windows and Intel products during the personal computer era's first big boom.

On an earnings call Thursday, Google CEO Sundar Pichai said the company is planning to invest "a lot" in Google Home, the company's voice-assistant speaker. In December, Google opened Home's software to third-party developers, which could help it catch up with the vast capabilities of Amazon's own voice assistant, Alexa.

"We think of this as an end-to-end thing, and all of this means users engage more with us," he said.