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Oct 29, 2020

Google beats sales estimates with rebound in ad spending

Analyst outlook on tech earnings

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Alphabet Inc. returned to growth in the third quarter after a decline in the previous period, fueled by digital advertising that has rebounded along with the American economy. The shares rose about 6 per cent in extended trading in New York.

The Google parent reported third-quarter revenue, minus the cost of distribution deals for its search engine, rose 15 per cent to US$38 billion. While that was slower than the pace of growth a year ago, it marked a turnaround from the previous quarter’s drop. Analysts had estimated sales of US$35.4 billion in the quarter. YouTube, the fastest-growing part of Google’s ad business, brought in US$5 billion, 32 per cent more than last year.

About 90 per cent of Google’s revenue stems from advertising, much of it linked to search results. That business ground to a halt in the second quarter, as the pandemic decimated its biggest clients, travel and tourism companies. But as lockdowns wore on and people adjusted to spending more time at home, e-commerce has boomed and people have spent more time watching YouTube, helping the search giant business get going again. The U.S. economy also bounced back, notching record growth in the third quarter.

Evan as Alphabet stages a financial comeback, the company is bracing for its most serious regulatory challenge yet: an antitrust lawsuit by the U.S. Department of Justice, which accuses the company of abusing its dominant position in online search. Google has issued a lengthy rebuttal to the suit, which it calls “deeply flawed.” One of the government’s arguments takes aim at Google’s agreements with Apple Inc. to prioritize its search engine in the iPhone maker’s products. Google pays an estimated US$8 billion to US$12 billion for the privilege, and as a result the DOJ said nearly half of Google’s search traffic in 2019 came from Apple products.

Google has packed the top of search results with advertising in recent years, increasing its ability to profit from users’ hunts for information.

The second quarter was Google’s first without revenue growth in its two-decade history. The decline was even more concerning to investors because digital advertising rival Facebook Inc. kept growing during the period. Alphabet Chief Financial Officer Ruth Porat assured investors at the time that things were beginning to look up at the beginning of the third quarter. Recently Snap Inc. and Pinterest Inc., which also rely on advertising, reported strong results.

Cloud revenue was up 45 per cent to US$3.4 billion. Analysts expected to see gains in that category due to higher demand for collaboration software with more people working from home. A drop in capital spending helped push Google’s margins and profit up too. Google reported earnings per share of US$16.40, beating analysts’ estimates for US$11.42.