Record year for Alphabet but risky projects cost $3.6bn
Alphabet has surpassed Apple as world biggest companies on the back of its Q4 earnings but the Google parent company also managed to rack up $3.6 billion in losses last year through investments in big bets such as self-driving cars and Internet balloons.
Alphabet was known to be spending heavily on these items but revealed actual figures for the first time Monday when it broke out results separately for its core Google business and for big bet investments, which it also calls moonshots.
The losses for those items were much higher in 2015 than in 2014, when they totaled $1.9 billion. And they brought in just $448 million in revenue last year.
Still, Alphabet says it stands to reap rich rewards in the long term if any of those bets pay off. They also include its investments in smart thermostat company Nest, Google Fiber, and medical science, including efforts to build a smart contact lens that measures glucose levels (pictured).
The losses from Alphabet’s big bets were more than offset by the profits made by Google and its core advertising and search businesses. Google generated $23.4 billion in operating income last year, on $74.5 billion in revenue.
Google reorganised itself last year under a holding company called Alphabet, which consists of Google and then other business units that place long-term bets on emerging areas. It said the move would provide investors with more visibility into its finances.
That’s somewhat true, though the big bets are still presented as a single line item, so we don’t get to see how much Alphabet is investing in self-driving cars, for example, versus beaming the Internet to remote areas via high-altitude balloons.
It did say that most of the revenue generated by its moonshot projects is coming from Google Fiber, Verily (its life sciences division), Calico (its biotech division) and Nest – though not necessarily in that order.
Strength in numbers
Alphabet as a whole reported strong results. Revenue for the quarter ended 31 December was $21.3 billion, up 18% from the year before and higher than the $20.8 billion analysts had been expecting, according to a poll by Thomson Reuters.
Net profit for the quarter rose to $4.9 billion. On an adjusted basis, net earnings per share was $8.67, up 28% and much better than the $8.10 analysts had forecast.
Those results pushed Alphabet’s stock price 5% higher in after-hours trading, which according to some reports means Alphabet has now passed Apple to become the world’s most valuable publicly traded US company.
Founders Larry Page and Sergey Brin have long held that the company needs to invest in emerging technologies to keep ahead in the long run. That requires the type of heavy spending seen last year from Alphabet.
Ruth Porat, Alphabet’s CFO, reminded investors Monday of something the founders said in a letter to investors a few years ago: “Incrementalism in technology leads to irrelevance over time, because change tends to be revolutionary, not evolutionary.”
For now, at least, Alphabet is able to fund those other investments through Google. Google’s growth last quarter came mostly from the increased use of mobile search, Porat said, along with gains from YouTube and programmatic advertising.
In October, Google said it had six products that reach more than a billion users each month: search, Android, Maps, Chrome, YouTube and Google Play. This past quarter it added a seventh – Gmail, said Sundar Pichai, Google’s CEO.
Porat said results from those efforts are bound to be “uneven” and “lumpy” in the near term, and she said more than once that Alphabet made some “tough choices” recently about how it allocates resources across its moonshot projects. She didn’t say what those tough choices were.
James Niccolai, IDG News Service
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