Google Q3 Earnings: Capitalizing on Today’s World and Investing Heavily for What’s Next

October 30, 2017

Digital Marketing Link Walls By Link Walls

Alphabet (Google’s parent company) announced very strong earnings results last night with continued growth in mobile search and video leading the charge. From a geographic perspective, Asia Pacific was called out as a contributor to growth with strong performance across that region. In e-commerce news, Google made several announcements in the past quarter that signals a greater investment in e-commerce than in previous years (more on that below)

Some of the quantitative highlights from Q3:

  • Revenue increased 24% to $27.8 billion
  • Operating income increased 35% to $7.8 billion
  • Paid clicks increased 47%, slightly down from last quarter’s record growth of 52%
  • Average CPC was down 18%, slight uptick from last quarter which was -23%
  • Other revenues were up 40% which is Cloud, Play and hardware (Home, Pixel, etc)

Mobile search, desktop search and YouTube continued to be the main areas that drove revenue growth. The continued shift to mobile is both driving increased clicks as well as a decrease in CPC as advertisers’ account for poorer ROI from mobile ads. You can see that dynamic in the chart below — while the data points converged a bit in Q3 they still show a significant difference.

Google revenue Q317
Sundar Pichai, Google’s CEO, effectively addressed this in the earnings call, talking about making shopping more seamless across both mobile and platforms such as voice.  Clearly, as more traffic shifts to mobile (I expect it to top 80% over Cyber Five) this is all the more critical for Google to get right, especially for e-commerce.

Focus on E-Commerce

Google has made several important announcements in the past two months signaling just how important this is to Google.

Google Express and Voice

Google Express started way back in the spring of 2013 as Google Shopping Express.  Back then the model was same day delivery using couriers that picked up the products from local retailers and delivered them within hours. A lot has changed over the last few years and Google Express now effectively is a combined retail marketplace featuring a number of retailers offering same-day, next-day and 2-day delivery. Google has now dropped the membership requirement (which was $99 per year, similar to Prime) and positioned it as a key element of its voice search strategy.  

This quarter saw Google announce a partnership with both Walmart and Target. These announcements focused on the ease of ordering using voice via Google Home and Google Assistant. Clearly, alliances are being formed to combat Amazon’s continued growth, particularly in the voice field. Google’s vision is that Assistant will connect you to the retailers you know and love — making your life easier. Retailers should fully expect that advertising options won’t be far behind.

New Hardware

Google had a busy couple months rolling out the new Pixel 2 phone as well as a broadened line of digital assistants. The Google Home now has both a little sibling (the Google “Mini”) as well as a big one (Google “Max”) coming soon. Essentially, the Mini competes with the Echo Dot while the Max is intended to be a full-featured speaker, likely in the class of Apple’s Homepod which comes out in December. All of these devices are really designed to further integrate the Internet into every aspect and location of our lives. Ultimately, consumers will decide the utility of these devices, and new usage patterns and applications will emerge. Pichai mentioned that there will be increased sales and marketing expense in Q4, so expect to see much heavier promotion of these devices.

During the earnings call, Alphabet’s CFO Ruth Porat talked about their continued “relentless focus on innovation” which is driving growth in advertising revenues. Clearly they are doing that but also investing in things like Cloud and Assistant to drive the next wave of growth.  And if you had any doubt that Google can make the needed investments here, their cash balance tipped over $100 billion (!!) at the end of Q3.  As we head into the all-important holiday season we will be keeping a close eye on CPC trends, as those typically increase as retailers vie for the holiday shopper.