Google profits drop on US$2.7 billion EU fine, but growth is steady

Profits at Google's parent company Alphabet took a hit on the back of a $2.7 billion fine. Photo / Bloomberg

Profits at Google's parent company, Alphabet, took a hit in its second quarter, as the company dealt with a US$2.7 billion ($3.6b) fine from the European Union levied for anti-competitive behaviour.

Lingering questions about future regulatory actions dogged company executives, even as the company reported it had made more money than analysts had expected.

The company reported US$26b in revenue and earnings of $5.01 per share, beating estimates - but perhaps not by enough. Shares were down 2.5 per cent after the report from the company's close at $998.31 per share, as it reported that profits had fallen more than 25 per cent as a result of the EU fine.

The company is still working with European regulators on the final consequences the decision, which came after a seven-year investigation into whether Google prioritises its own products in its search. Analysts asked Google chief executive Sundar Pichai how Google would operate if forced to change the way it distributes its products.

"If Google's forced to unbundle their own apps from Android in the future, what is the strategy to ensure that maps and YouTube and search get distribution?" asked Ross Sandler, an analyst at Barclays.

Pichai responded that "a lot of our products are successful on Android had happened to be successful outside of Android," and that he believes Google could continue to grow even if it couldn't promote apps on Android phones. But, he emphasised that Google sees the current market as "a very open market and open ecosystem; it works well for everyone involved."

There was a lot of anxiety headed into Google's earnings report this quarter. In addition to the fine's effect on Google's bottom line, many analysts also raised concerns about the impact of a widespread advertising boycott of YouTube. Several advertisers - including Wal-Mart, Starbucks and Pepsi - refused to place ads on the video site after it came to light that mainstream ads had appeared alongside violent or extremist content.

But some advertisers returned, and the boycott's impact seems to have been minimal. Analysts seemed content with the company's growth in several areas. Google reported that ad revenue was up 18 per cent from the same time last year, to US$22.7b. Chief financial officer Ruth Porat said on an earnings call that YouTube was one of the company's core revenue drivers, along with mobile search. Hardware products such as Google Home and Google WiFi were singled out as high performers for the company, though Porat did not share specific numbers.

Google's growing cloud business also performed well - an area that Porat said was a top priority for Google, as it is at arch-rivals Microsoft and Amazon. The segment that includes Google's cloud business reported US$3.09b in revenue, up from US$2.17b at the same time last year.

Meanwhile Alphabet's "Other Bets" - the firm's name for its non-search companies such as Nest, self-driving firm Waymo and Google Fiber - continue to lose money. While the unit made more (US$244 million) and lost less than it had at the same time last year, it still reported an overall loss of $772m.