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Alphabet profit miss sends stock down, but Google ad and cloud sales remain strong

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Former Stanford president and Silicon Valley champion John L. Hennessy is also named as Eric Schmidt’s replacement

Illustration by Alex Castro / The Verge

It’s business as usual at Google parent company Alphabet, despite a growing number of controversies surrounding the company’s firing of former employee James Damore and a reckoning over content policies at YouTube. Alphabet posted its 2017 fourth quarter earnings today, showing sales of $32.32 billion and profit of $9.70 per share, coming in under Wall Street expectations of $9.96 per share.

Wall Street reacted negatively to the profit miss, sending Alphabet stock down as much as 4 percent in after-hours trading. However, Google’s core ad business remains healthy, pulling in $27.27 billion in revenue and helping push Alphabet to a 24 percent year-over-year increase in sales.

Concerning some analysts and investors is Google’s TAC, or traffic acquisition costs. Those continue to grow and gobble up a larger percentage of advertising revenues as Google shifts more of its business to so-called programmatic advertising and mobile search ads, which inherently have higher TAC. In the quarter ending on December 31st, 2017, TAC was nearly $6.5 billion, up 33 percent from this time a year ago, and now comes in at 24 percent of ad revenues, a two percentage point uptick from the fourth quarter of 2016.

As for Other Bets — the collection of Alphabet-owned properties that exist outside Google like self-driving unit Waymo and smart home appliance maker Nest — costs are still running high and the divisions still run at a loss, but these figures are shrinking. In the fourth quarter, Other Bets units lost $916 million, down from just over $1 billion in the same quarter last year, while sales grew 56 percent to $409 million.

One notable stat, revealed by Google CEO Sundar Pichai on the company’s investor call this afternoon, is that Google’s cloud business now generates more than $1 billion in sales per quarter. That’s a significant milestone for the company as it tries to take on Microsoft, Amazon, and others in the cloud computing sector.

“We believe that Google Cloud Platform is the fastest growing major public cloud provider in the world,” Pichai said. Google’s cloud offering, which includes its G Suite collection of corporate office software and hosting, differs in key ways from Microsoft’s Azure and Office 365 platforms and Amazon’s AWS business, but it remains an integral part of Google’s long-term business by providing more stability and growth than web advertising. In addition to cloud computing, Google Chief Financial Officer Ruth Porat, speaking on the earnings call with Pichai, cited YouTube and Google’s Pixel and Home hardware offerings as promising revenue opportunities beyond advertising.

Following December’s news that longtime board chair Eric Schmidt would be stepping down, Alphabet (and Google) needed a new chairperson. In today’s earnings press release, the company announced that it would be John L. Hennessy, the former president of Stanford University who’s been on Google’s (and later Alphabet’s) board since 2004. He’ll officially take on the role on February 15th:

On January 31, 2018, the Board appointed John L. Hennessy to serve as Chair of Alphabet’s Board. Mr. Hennessy has served as a member of the Board since April 2004 and Lead Independent Director since April 2007.

Back in 2007, a Wall Street Journal profile detailed how Hennessy combined his job as university president with serving on corporate boards — and made quite a lot of money doing it. The profile also detailed how his connections to many of Silicon Valley’s high-profile millionaires helped lead to money for Stanford’s academic initiatives.

As president of Stanford and a member of Google’s board, Hennessy cultivated a close relationship between the two institutions, as the Financial Times noted in 2004:

Prof Hennessy sits at the centre of a powerful Silicon Valley network, close-knit enough to draw occasional criticism for potential conflicts of interest. His own experience as a director of Cisco and Google has taught him much about operational excellence, human resources, succession planning and innovation. “Google is the innovation machine and certainly that’s what universities want to be,” he says.