A Google sign is seen during the WAIC (World Artificial Intelligence Conference) in Shanghai, China, in this file photo taken on September 17 2018. Picture: REUTERS/ALY SONG
A Google sign is seen during the WAIC (World Artificial Intelligence Conference) in Shanghai, China, in this file photo taken on September 17 2018. Picture: REUTERS/ALY SONG

Bengaluru/San Francisco — Google parent Alphabet missed analysts’ quarterly revenue estimates for the first time in at least two years and reported continuing erosion of its operating margin, sending its shares down almost 7% in after-hours trading.

The tech company’s third-quarter results, released late on Thursday, fanned investor concern that big investments in new businesses, increasing regulatory scrutiny and emerging competition are producing slow and unpredictable returns.

Alphabet disclosed, for example, that passengers of its self-driving Waymo minivans are now paying for rides, but the offering remains limited to the Phoenix, Arizona region and Waymo’s finances are not broken out.

Overall revenue rose 21% to $33.74bn, missing analysts’ estimate by about $310m, according to Refinitiv data.

Google ad sales contributed 86% of revenue, but growth slowed to 20% from nearly 24% last quarter.

“Google’s earnings momentum remains strong,” said Haris Anwar, senior analyst at Investing.com. “But if you dig in a little deeper, there are cost pressures which are building up and are mainly responsible for this period’s disappointment.”

The company attributed much of the slower revenue growth to unfavorable currency exchange rates.

Lower ad pricing to contend with anti-trust concerns, new privacy rules in Europe and increased competition from Amazon.com may have played a role too, financial analysts said.

Non-advertising revenue, such as from sales of mobile apps and cloud computing services, also came in slightly below expectations.

Those results, combined with rising expenses, brought down the company’s operating margin to 25% from 28% a year ago.

After falling as low $1,028.77, Shares of Alphabet were down about 3% to $1,071.01 after hours, from their close at $1,103.59.

Alphabet reported net profit of $9.2bn, or $13.06 per share, compared with $6.7bn, or $9.57 per share in the year-ago quarter. That beat the average analyst estimate of $10.45.

Earnings were boosted by a lower tax rate and favorable valuation of the firm’s investments in startups such as Uber Technologies.

New business

Alphabet has committed to providing cloud computing services and selling hardware over the past few years. It has also ventured into areas where commercial opportunities are nascent, including regions such as India and Nigeria, and businesses such as self-driving cars.

The Waymo operation in Phoenix is in the early stages of testing pricing, Alphabet CFO Ruth Porat said on a conference call on Thursday, noting that some employers were sponsoring workers’ rides.

Priming Alphabet’s newer ventures has been costly in terms of marketing and hiring, with about 5,300 employees added in the third quarter.

Alphabet’s cost of revenue was $14.3bn in the third quarter, up 28% from a year ago. Capital expenditure soared to $5.3bn from $3.5bn last year, with 20 data centre sites in development, Porat said.

Google has posted strong revenue growth for several years as retailers flock to buy product image ads on Google’s search engine and commercials on YouTube.

But Google’s cost structure has been disrupted by surges in usage of its services on smartphones, where the company splits ad revenue with technology makers such as Apple, and smart speakers, where ads do not appear.

Google has been fined $7.7bn for antitrust violations in Europe over the past two years, and heightened attention on privacy, security, competition and the rise of artificial intelligence tools has led investors to fret about potentially costly regulatory scrutiny in the US and elsewhere.

The steady revenue growth had helped Alphabet weather an otherwise bruising last few months on the stock market for big technology and communications companies.

Alphabet had gained 5.8% this year before Thursday and traded at 24 times expected earnings over the next year.

Shares of number two online ad firm Facebook, which faces questions about flattening usage limiting revenue growth, had fallen 12.5% and were trading at 19 times future earnings.