Alphabet, the holding company that houses Google and its many wild moonshots, reported its first quarter earnings today. The company has been trimming back on some of its crazier ventures, recently putting robot builder Boston Dynamics up for sale. The move to break out the earnings of the core Google business from its more risky projects — known as "Other Bets" — was also meant to ease investors concerns.
Even though it lost $802 million on its Other Bets this quarter, Alphabet continued to show double-digit growth in key financial metrics, with $20.25 billion in revenue and $5.35 billion in operating income. That's a growth of 17 percent and 20 percent on a year-over-year basis. Ruth Porat, Alphabet's chief financial officer, said on the earnings call that this growth was driven by mobile search, which is what investors want to hear, but didn't offer a breakout on how mobile revenue compared to desktop or tablet. Google CEO Sundar Pichai cited the development of machine learning and artificial intelligence as one of the key factors driving the company's growth.
YouTube is bigger than any TV network
The company has nearly 10,000 more employees than it did this time last year, with most new hires dedicated to apps and cloud services. While advertising made up the bulk of Google's revenue, it made over $2 billion from its App Store and hardware sales, and this is now the fastest growing segment of its revenue. Pichai gave YouTube a shoutout, noting that it now reaches more viewers each month, in key advertising demographics, than any television network in the US.
For Other Bets — which houses divisions like driverless cars, life sciences, and Google Fiber — doubled its revenue over last year, growing from $80 million in 2015 to $166 million this year. That means Other Bets revenue is expanding faster than losses, which grew from $633 million to $802 million. But of course, Other Bets is far from profitable. The majority of those costs, according to Porat, are driven by the expense of building out Google Fiber. Alphabet plans to increase spending on bets that show promise, ask outside investors to contribute where it makes sense, perhaps around driverless cars, and cut down on bets where multiple teams are pursuing a similar objective.
Google is betting strong AI will be its key advantage
Like all American tech companies for the last year and a half, Alphabet highlighted the rapidly shifting currency markets as a drag on earnings. "Our Q1 results represent a tremendous start to the year with 17% revenue growth year on year and 23% growth on a constant currency basis," Porat said. She also tried to emphasize Alphabet's ability to sustain financial growth while spending heavily on its more risky but ambitious programs. "We’re thoughtfully pursuing big bets and building exciting new technologies, in Google and our Other Bets, that position us well for long term growth." Investors seem a little less sanguine, pushing the stock down 4 percent in after-hours trading.
The biggest theme from the investor call today was Pichai's emphasis on machine learning and artificial intelligence. He repeatedly emphasized that Google is on the forefront of this technology, name dropping its recent breakthroughs with AlphaGo. He said that this technology was at the heart of Google's success in optimizing its advertising and growing its cloud services. And he even positioned it as the next big wave, saying computing "will evolve from mobile first to AI first, and I think we are on the forefront" of this trend.