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Alphabet results show Google making turn in mobile ads

Jessica Guynn
USA TODAY
Google's Mountain View, Calif., campus

SAN FRANCISCO — Surging mobile usage drove robust advertising growth at Google in the second quarter, showing the tech giant making substantial headway getting the attention and budgets of users and advertisers as they shift to mobile devices from desktop computers.

Shares (GOOGL) of Google parent company Alphabet jumped 5% to $804 on Friday after Google reported its advertising business' fastest growth rate in two years.

Topping Wall Street estimates on Thursday, Alphabet had second-quarter earnings of $8.42 a share, excluding certain items, on revenue of $21.5 billion, which rose 21% year-over-year. Wall Street expected earnings of $8.04 a share on $20.76 billion in revenue. Excluding payments to advertising partners, revenue was $17.5 billion, topping analysts' estimate of $16.86 billion.

Net profit for Alphabet rose 24% to $4.88 billion, or $7 a share. Before Thursday's results, Alphabet had missed Wall Street consensus estimates in eight of the past 12 quarters.

'Other bets' in the red

Landing the day after Facebook crushed Wall Street estimates, the results overshadowed widening losses from Alphabet's "other bets," separate divisions working on everything from driverless cars to speedy Internet service Fiber as Alphabet hunts for its next big thing.

"Other bets" had an operating loss of $859 million, far greater than the $660 million it lost a year ago, marking the second straight quarter in which losses deepened. They generated $185 million in sales in the second quarter.

Astro Teller runs the X lab that incubates these costly gambles that Google calls "moonshots." In an essay published online Thursday, Teller said X tries to be "responsibly irresponsible" as it develops new products.

Finance chief Ruth Porat, who has instilled greater fiscal discipline at Alphabet, says the tech giant is investing in speculative research that could pay off down the road, while setting reasonable limits on spending. Second-quarter total expenses rose 20% to $15.53 billion, growing slightly slower than revenue.

"The majority of these efforts are pre-revenue," Porat said during an earnings call with analysts. "We continue to invest across these opportunities, and are doing so in a disciplined way."

After Facebook beat, all eyes on Alphabet earnings

Google has other irons in the fire. "Other revenues," which includes its enterprise cloud and apps business and the Play store, contributed $2.17 billion to the quarter, up 33% from the year before. Porat said the cloud and apps business drove most of the revenue growth.

Alphabet can afford these kinds of investments because Google, with its namesake search engine, runs the world's most profitable advertising business. But Google, which competes mano a mano with the other dominant digital advertising giant Facebook, has been under pressure to show it can generate more advertising revenue from mobile.

Google does not make as much money from ads shown to mobile users as it does from ads shown on desktop computers. But, says BGC Financial analyst Colin Gillis, Google has made progress in recent quarters. Google says more than half of its searches are now on mobile devices. And Google has created new ad formats that work on mobile, helping the company generate more of its revenue from those devices.

The number of times people clicked on its ads — making money for Google — rose 29% from the year before, better than the 27% analysts expected. At the same time, cost per click was down 7% from the year before, an improvement from the 9% decline in the first quarter.

"Marketers are flooding into mobile because they are seeing a more effective return. The clicks are cheaper and they are starting to work. You are seeing the declines in cost per clicks abating," Gillis said. "We are going to get to a spot where both levers, paid clicks and cost per clicks, turn positive again. And that's the road to a trillion-dollar company."

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