Google financial results mixed, but Wall Street disappointed

Alphabet's quarterly revenue misses expectations and its growth rate slows even as profit soars.

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The earnings come amid a rough patch for Google and parent company Alphabet. 

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Google may have faced the toughest stretch in its 20-year history this past quarter.

The search giant fended off accusations of conservative bias from prominent Republicans, including President Donald Trump. CEO Sundar Pichai faced intense scrutiny over reports of Project Dragonfly, a secretive initiative aimed at building a censored search engine for China. And the company was criticized for its handling of data, security and privacy -- and said it's shutting down the Google+ social network -- after it was forced to disclose that a bug had exposed user information for two years.

Add one more thing to the list: Alphabet, Google's parent company, didn't pull in as much revenue as expected, according to its latest earnings report Thursday. Third-quarter profit of $9.19 billion outdid expectations -- but Wall Street saw the glass as half empty.

Alphabet tallied $33.74 billion in sales, a 21 percent increase that nevertheless missed analyst estimates of $34.05 billion for the third quarter. By comparison, Google reported 26 percent revenue growth in the second quarter.

"We're seeing a larger than expected slowdown in Google properties' revenue," eMarketer analyst Monica Peart said in a statement. People are likely more often turning directly to Amazon for product searches, she said. 

Earnings per share were $13.06. Analysts on average had expected $10.40 per share.

The company's stock fell 3.3 percent to $1,060 in after-hours trading. 

"Our revenues continued to benefit from ongoing strength in mobile search with important contributions from YouTube, cloud, and desktop search," said Ruth Porat, Alphabet's chief financial officer, on a conference call with financial analysts. Revenue was lowered by unfavorable foreign currency exchange rates, a reversal from helpful effects in the first half of the year, Porat said.

The earnings come amid a rough patch as Google grapples with repercussions from its scale and influence two decades after Sergey Brin and Larry Page founded the company. Most recently, Google has been roiled by reports about Dragonfly, eight years after initially pulling its search engine out of China. At the time of its departure, Brin, who grew up in the Soviet Union, cited the "totalitarianism" of Chinese policies.

The search service has also faced allegations of political bias. In August, Trump accused Google of having a liberal bent. He tweeted, without offering any evidence, that Google's search results are "RIGGED," saying the company is "suppressing voices of Conservatives." Google rejected the president's claim.

Google's China challenges

Google's workforce has criticized the rumored Dragonfly search project. A handful of employees reportedly quit over the initiative and about 1,000 workers signed an open letter asking the company to be transparent about the project. That includes creating an ethics review process for its efforts in China that involves rank-and-file employees, not just high-level executives.

Watch this: Google says China is important to explore -- even if it means censorship

Google has been mostly quiet about the project. Last month, Keith Enright, Google's chief privacy officer, confirmed during a hearing with the Senate Commerce Committee that there's indeed a Project Dragonfly, but he wouldn't elaborate.

On its conference call, Google Chief Executive Sundar Pichai also didn't add details but made it clear China is important to Google.

"We deeply care about serving Chinese users," investing for example in Android and Google Translate, Pichai said. "We are constantly looking for ways we can better serve Chinese users."

Privacy and competition in Europe

In the past quarter, Google has also worked to comply with a record $5 billion fine from the European Commission levied in July after Europe's antitrust watchdogs ruled the company's business practices around its Android operating system hurt competition in the region.

In response, the company last week said it won't bundle its suite of Android apps for phone makers in Europe anymore. Instead, it'll offer new paid licensing deals to manufacturers that want to include its Google Play app store, Maps, Gmail and Google-owned YouTube on their devices. Another license will let phone makers include Google's search engine and Chrome browser.

Google filed an appeal of the ruling with the General Court of the European Union earlier this month.

The Android pricing changes in Europe will begin "in the next few weeks," Pichai said, but change will be gradual since people don't buy smartphones frequently. "We want to make sure the transition for users and [handset manufacturing] partners is as smooth as possible."

Google also faces tighter privacy regulations in Europe -- specifically the new General Data Protection Regulation that gives people new rights and imposes new restrictions on how companies use their data. On Wednesday, Apple CEO Tim Cook called for a GDPR equivalent in the US.

In contrast to Apple, Google relies on advertising revenue generated in part by knowing a lot about us all. But Pichai said he doesn't have a problem with the GDPR.

"We were very early engaged in GDPR and made sure our products are in compliance," Pichai said. "The GDPR is a very good and comprehensive set of regulations ... I don't think they're at odds with what we're trying to accomplish."

Google's growing hardware and services business

Google in October started selling the Pixel 3 smartphone and Google Home Hub. This marks the third year of the company's stronger in-house effort at making hardware. Google hardware has the potential to be a big new business, along with Waymo, YouTube and cloud computing, Pichai said, but didn't offer specifics about how well the hardware products are faring in the marketplace.

However, he did say the number of daily users of the Google Home smart speaker line has increased by a factor of five over last year. 

Two factors will limit the Pixel 3 success, he said: Google's ability to manufacture enough -- a problem for the first two Pixel phone generations -- and a strong presence in the marketplace. The Pixel 3 needs to be "in as many retailers' locations as possible, in as many countries as possible, with as many carrier certifications as possible," Pichai said.

Pichai also had praise for two online services. The Google Drive cloud storage and sync products became its eighth product with more than a billion users, and Gmail now has 1.5 billion, Pichai said.

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