Google recently said that its parent company, Alphabet, registered quarterly profits 24 percent higher than last year in the wake of increased demand for mobile advertisements.
Alphabet pointed out that the joined effect of businesses purchasing more ads with high customer engagement led to the unexpectedly positive Q2 earnings report.
The company's revenue spiked 21 percent, reaching $21.5 billion in the second quarter and overpassing the estimation from experts that gauged it at $20.76 billion. In the wake of the earnings call, the value of Alphabet's shares rose by more than 5 percent and reached $809 per share in after-hours trading.
Great news, but why?
Thanks to a rapid expansion of smartphones connected to the internet, businesses that rely on ads, such as Facebook and Google, had a lot to win. As more consumers are engaged in the free services of the two firms, both enterprises were able to sell a large number of ads to the companies that want to reach said users.
Facebook also banked a lot in Q2 because of mobile ads. At its own quarterly earnings report, the social media company said that its profit of $2.1 billion is almost three times larger than the one from one year prior, and is largely due to revenue from mobile ads.
Mark Mahaney, a financial expert with RBC Capital Markets, points out that more handsets means more searches in Facebook, Google and extra YouTube views. He notes that upward trends in profitability for the companies have everything to do with the widespread access to internet-connected smartphones.
"The strength of the quarter is about mobile," confirms Sundar Pichai, CEO at Google.
Google has an ace up its sleeve that helps it lure additional advertisers and users from desktops or laptops to the mobile version of its search engine. The company's Android smartphone software helps it promote its search engine and various other services on more than a billion mobile gadgets. Google also struck a deal with Apple to make Google the standard search engine on iPhones.
In 2015, Google stated that more than 50 percent of its searches were made on mobile devices, and some marketing experts think that more than half of the enterprise's revenue can be traced to mobile ads. During Q2, advertisers invested 63 percent more in mobile search ads. For comparison, all-platform search-ad spending jumped only 10 percent over the period.
At its earnings report, Alphabet noted a net profit in the last quarter of $4.88 billion, up from last year's $3.93 billion. The number of user clicks on ads that Google displays spiked 29 percent, on a year-over-year comparison. Also, the company registered the fourth consecutive quarter with a growth of more than 22 percent.
One drawback to the increased appeal of mobile ads is that Google recorded a decrease in the sums that advertisers pay Google for each clicked ad. As mobile ads pay less than their desktop counterparts, this meant that the revenue per clicked ad declined, despite the boost in clicked mobile ads.
Non-advertising sales also up
Non-advertising sales also rose, overpassing the company's 19 percent growth in advertising revenues. The former reached $2.17 billion over the previous year, scoring a neat 33 percent increase. The spike marks a progress for Google's non-advertising business, which consists largely of its cloud business of hosting other companies' data and processing on its servers.
Google is confident that the cloud will be the next big provider of revenue and it invests millions into new data centers to make itself future-proof. Other examples of non-advertising arms of Google's business include app sales in Play Store or hardware sales.
While Google may report for pretty much all of Alphabet's revenue, analysts and investors had been keeping an eye on the financial evolution of Google's parent company. This way, experts were able to gauge the ins and outs of the company, and what they found was that Alphabet also made some unlucky investments. Revenue for the unsuccessful plans rose to $185 million in 2016, with 2015 showing only $74 million in fluked bets. The operating loss also increased, from $660 million one year ago to $859 million.
Last year, Alphabet boosted its team by making Ruth Porat CFO. Porat, an ex-Morgan Stanley executive, is in charge of making sure Alphabet keeps its spending in check: in Q2 2016, total expenses surged by 20 percent and reached $15.53 billion.
