Google's parent company Alphabet posted lower-than-expected profits as the high cost of launching its new Pixel phone and investing in cloud services took the shine off a leap in advertising income.

The company's shares fell slightly in closed-market trading after it published fourth-quarter results as investors balked at an increase in spending.

Alphabet reported a 22pc increase in quarterly revenue to $26.1b (NZ$36b), which the company said was down to growing advertising income from mobile searches and its YouTube video service.

Sundar Pichai, Google's chief executive, said the Christmas season had seen a big rise in mobile shopping compared to the previous year.


Profits grew 8pc to $5.3b (NZ$7.3b), but missed forecasts. In October, Google released its first smartphone in an attempt to challenge Apple's iPhone, as well as its Google Home smart speaker as part of a new push into hardware.

Though Pichai said he had been "thrilled" with the reception for the company's new devices, Google has spent heavily on an advertising blitz to support them.

Capital expenditure also rose by 46pc as the company invested heavily to challenge Microsoft and Amazon in the fast-growing market for cloud computing, in which businesses rent remote computing capacity from providers.

Google restructured itself into the new Alphabet company in 2015, separating the core business of its search engine and Android operating system from other divisions such as its self-driving car project, its healthcare arm Verily and the DeepMind artificial intelligence division.

Google's co-founder Larry Page became chief executive of Alphabet under the new structure, with Pichai put in charge of the day-to-day running of the internet business.

Despite the changes, Google is by far Alphabet's biggest money maker.

It reported $25.8b (NZ$35.6b) in revenue and an operating profit of $7.9b (NZ$10.9b) in the quarter, while the remaining businesses known as "other bets" had revenues of just $262m and made a yawning $1.1b (NZ$1.5b) loss, although this was slightly narrower than a year ago.

Alphabet shares, which were trading at an all-time high, fell by around 3pc this evening. Microsoft also reported quarterly results tonight, posting a rise in sales and profit thanks to the growth of its cloud services.


The Seattle-based company's Azure cloud computing business and its Office 365 subscription service both grew strongly, while the slowing decline in PC sales also helped to support revenues.

PC sales, from which Microsoft makes money by selling licences to Windows, have slumped in recent years, but the decline appeared to tail off last year.

The company's revenue grew 1pc to $24b and profits were up 3.6pc to $5.2b (NZ$7.1b). Shares rose slightly in after-hours trading. The company's market value recently surpassed $500bn.