Alphabet, whose principal business is Google, fell short on the top line in the third quarter of 2018 but dramatically exceeded earnings per share expectations, turning in a net profit of $9.19 billion.
Alphabet Q3 revenue was $33.7 billion, up 21% year over year but below Wall Street consensus estimate of $34.04 billion. Earnings per share of $13.06 widely beat analysts’ EPS forecast of $10.42.
Alphabet stock dropped 3.5% in after-hours trading on the revenue miss. Analysts said Google’s slowing hardware sales in the quarter — ahead of the launch the new Pixel 3 line of smartphones and other products in Q4 — was the key source of pressure on the company’s Q3 revenue.
“Our business continues to have strong momentum globally, led by mobile search and our many products that help billions of people every day,” Ruth Porat, CFO of Alphabet and Google, said in announcing the financial results.
Google ad revenue climbed 20%, to $28.95 billion for the third quarter, and operating income rose 10.6%, to $9.49 billion.
Alphabet’s cost of revenues increased 28% year over year, to $14.82 billion for Q3. Excluding traffic acquisition costs, cost of revenues was $7.7 billion, up 36% year over year, primarily driven by costs associated with Google data centers and content-acquisition costs primarily for YouTube, Porat said on Alphabet’s earnings call.
The company’s R&D expense for the quarter was $5.23 billion, an increase of 24%, and general and administrative costs jumped 30% to $2.07 billion.
On the earnings call with analysts, Google CEO Sundar Pichai didn’t address (nor was he asked about) Thursday’s New York Times report about how the company protected and paid execs who were investigated for sexual misconduct, including Android creator Andy Rubin. Earlier in the day, he sent a memo to staff that expressed zero tolerance for such conduct and said 48 employees were fired in the past two years for sexual harassment.
In his opening remarks, Pichai started out by mentioning the celebration of Google’s 20th anniversary and recapping the tech giant’s recent hardware announcements. He also called out YouTube’s announcement earlier this week to set aside $20 million for educational initiatives and cited “momentum” in the Google Cloud Platform business.
Alphabet’s employee base was 94,372 as of the end of September, up 21% year over year from 78,101 in Q3 2017. Hiring growth was seasonally higher in Q3 as the company brings on recent college grads, Porat said.
The company ended the quarter with $106.4 billion in cash and equivalents and marketable securities, and $3.99 billion in long-term debt.