Going into its first-quarter earnings report, there was a shadow over the proceedings for Google parent Alphabet (GOOGL 0.55%) (GOOG 0.74%). In mid-March, the search giant was hit with another fine by the European Commission, the rule-making body of the European Union. This enforcement alleges that Google used its market-leading position to keep AdSense customers from placing advertising with its competitors, leading to a fine of 1.49 billion euros ($1.7 billion).
Even excluding the impact of the massive fine, which Google intends to appeal, the results disappointed. Alphabet delivered revenue of $36.34 billion, up 17% year over year and 19% in constant currency, but it was more than $1 billion below analysts' consensus estimates of $37.34 billion.
Image source: Google.
Profits came in better than expected, with earnings per share of $11.90, down about 11% year over year, but still easily surpassing the $10.56 Wall Street expected. Unfortunately, investors seemed to focus on the company's declining profit margin of 23% excluding the fine, which fell from 25% in the prior-year quarter.
Excluding other revenue, sales of advertising on Google's platform grew just 15% year over year, down from 24% growth in the prior-year quarter. The decelerating growth is feeding investor fears that other digital platforms, including Amazon.com, are stealing digital ad market share at Google's expense.
Another area of investor focus is traffic acquisition costs (TAC), the payments Google makes to partners like Apple for directing users to its Web search. For the first quarter, TAC declined slightly to 22% of paid search, down from 24% in the year-ago quarter.
Paid clicks jumped 39% year over year but declined 9% sequentially. Cost per click -- the amount Google makes on each ad -- continues to be an area of concern, falling 19% year over year as more advertising moves to YouTube, which monetizes at a lower rate.
Google's "other revenue" segment, which includes the company's fast-growing segments including hardware sales, cloud computing, and Google Play, grew 25% year over year, but that was down from 36% growth this time last year, also contributing to investors' concerns.
"We delivered robust growth led by mobile search, YouTube, and Cloud, with Alphabet revenues of $36.3 billion, up 17% versus last year, or 19% on a constant currency basis," said Ruth Porat, chief financial officer of Alphabet and Google. "We remain focused on, and excited by, the significant growth opportunities across our businesses."
Alphabet's stock was down more than 7% in after-hours trading Monday, as investors digest the earnings report.
