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Alphabet Q4 Earnings Come in Below Expectations, Company Has $10 Billion Tax Charge

Google corporate parent Alphabet didn’t quite meet analyst expectations for its fiscal fourth quarter of 2017, leading investors to send the stock down as much as 6% in after-hours trading.

Alphabet generated revenue of $32.32 billion during the holiday quarter, compared to $26.06 billion during the same quarter in 2016. Alphabet’s adjusted net income for the quarter was $6.84 billion, compared to $5.33 billion during the same quarter the year before. This translated to diluted earnings of $9.70 per share, compared to earnings of $7.06 for Q4 of 2016.

Google’s revenue, minus its traffic acquisition costs — the money it has to pay other companies as referral fees to get users to its sites and products — was $25.87 billion. Analysts had expected this to come in at $26.23 billion, and earnings of $10.04 per share. However, Google’s traffic acquisition costs grew from 22% to 24% of its advertising revenue year-over-year — a key number that added to investors’ sour mood.

The company’s earnings are significantly impacted by the recently-passed tax bill. The company’s effective tax rate shot up from 22% to 138% for Q4 of 2017, thanks to a one-time charge of $9.9 billion for repatriating foreign earnings. Including this one-time charge, Alphabet actually lost $3 billion in Q4. That being said, Alphabet is going to be just fine under the new tax rules going forward: Without the one-time charge, the company’s effective tax rate would have actually declined to 15%.

Alphabet’s balance sheets show growing income from the company’s hardware business, which includes its Pixel phones as well as devices like the Google Home line of smart speakers. “Other revenues,” a category that includes both Google’s cloud business as well as its hardware revenue, grew to $4.69 billion, from $3.4 billion in Q4 of 2016.

“We are pleased about the momentum in our hardware business,” said Alphabet and Google CFO Ruth Porat during the company’s earnings call. Google CEO Sundar Pichai added that device shipments during the fourth quarter had more than doubled year-over-year, and that the company sold “tens of millions” of Chromecast and Google Home devices in 2017.

Executives also once again called out YouTube as a key contributor to Google advertising revenue. That’s despite a renewed backlash over inappropriate content and brand safety, which dogged the video service in late 2017. “There have been concerns, and we are working really hard to address them,” acknowledged Pichai in a reference to recent changes to YouTube’s advertising policies. “The feedback we have received from advertisers and creators so far has been really positive,” he said about these changes.

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