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Google's sales boom, but profit misses as payments rise

Despite money still pouring in from online ads, the company faces rising costs tied to mobile search. Meanwhile, diversity and video-policing are a problem.

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Google CEO Sundar Pichai

James Martin/CNET

Google is dealing with serious questions about its culture and diversity, but there's one thing it doesn't don't have to worry about: sales.

In recent months, the search giant has dealt with a swirl of controversy. An internal memo caused national headlines over the summer when an engineer argued the company's gender gap was partly due to "biological" differences between men and woman, not sexism. (He was fired.) Racist and graphic videos have led to backlashes against YouTube, Google's video-streaming arm. Disturbing videos on its children's channel, YouTube Kids, have also raised concerns about how the company polices content.

Those concerns, however, weren't apparent Thursday, when Google parent Alphabet unveiled financial results for the last three months of 2017 that beat Wall Street expectations. Alphabet tallied $32.32 billion in sales, topping estimates of $31.85 billion. 

There were bumps, though. 

Alphabet missed profit expectations, reporting $9.70 per share. Analysts had expected $9.96 per share. Including taxes, Including expenses, Alphabet reported a loss of $4.35 per share, an indication it brought in taxable revenue from overseas. Another factor in that miss was Google's growing cost of payouts to partners. That's because people are doing more searches on smartphones, and Google must pay its partners more for mobile searches than for those on desktop, Alphabet and Google CFO Ruth Porat said. Traffic acquisition costs rose 33 percent from a year earlier. 

Alphabet's success is built on one business: Google. That's Alphabet's largest division, and it's only profitable one. Google's businesses include search, internet, YouTube, Gmail and a hardware unit, which makes products like its Pixel phones. 

Online advertising, which is sold against search results, accounts for about 85 percent of sales. That's prompted the company to look for other ways to generate revenue. Sundar Pichai, CEO of Google, said Thursday that the fast-growing Google Cloud service is a "$1 billion a quarter business." 

Pichai called out YouTube, Google Cloud and hardware as big focuses for the future of the company. 

"These bets have enormous potential, and already they are showing real momentum and gaining traction," Pichai told analysts on a conference call. 

His words didn't soothe investors, who would like to see the company develop meaningful revenue outside of its search-advertising business. Shares of Alphabet fell nearly 5 percent in after-hours trading. 

Alphabet's experimental projects, called "other bets" in its parlance, include Waymo, a self-driving car unit, and Verily, a health-and-biotech company. Those types of projects lose money, but less than they used to. In the fourth quarter, they lost $916 million, versus $1.09 billion over the same period the previous year.

Separately, the company said it had appointed John L. Hennessy as chairman of the board of directors, after former Chairman Eric Schmidt said last month he would step down. Hennessy, who is a past president of Stanford University, has been a member of Google's board since 2004. 

Controversies piling 

Alphabet's earnings announcement comes as Alphabet CEO Larry Page and Pichai grapple with questions about the company's diversity and culture. In August, Google engineer James Damore made national headlines for a 3,300-word memo that challenged the way the company thinks about diversity. Damore argued a gender gap exists not necessarily because of sexism, but in part because of "biological" differences between men and women. Days after the memo went viral, Pichai fired Damore.

The controversy isn't going away. In January, Damore filed a lawsuit against his former company, alleging Google discriminates against white men and conservatives. Meanwhile, the US Department of Labor is probing Google for allegations of gender pay discrimination. (Google's workforce is 69 percent male and 31 percent female.)

Meanwhile, YouTube is also on the hot seat. Logan Paul, a YouTube star whose channel has more than 15 million followers, posted a video on New Year's Eve from a forest in Japan that showed the body of someone who'd committed suicide. YouTube eventually decided to cut business ties with Paul, ousting him from Google Preferred, YouTube's premium advertisement lineup. The episode highlighted how much YouTube, the biggest online video site in the world, struggles with policing a platform that boasts more than a billion viewers a month.

YouTube has also been under fire after the filters for YouTube Kids, the version of the site designed for younger audiences, failed to recognize or pull down some videos that feature disturbing images aimed at children -- like Mickey Mouse lying in a pool of blood or a claymation version of Spider-Man urinating on Elsa, the Disney princess from "Frozen." Videos featuring children doing innocuous activities like exercising are also riddled with predatory or sexual comments from viewers.

In November, the company outlined new rules to make YouTube safer for kids. They included using machine learning and automated tools to identify inappropriate videos, as well as doubling the number of human reviewers to police the content. Some critics, though, felt the new rules didn't go far enough.

Pichai didn't address those concerns directly on Thursday, though he called out the "significant work we're doing to protect users and stop abuse on the platform."

First published Feb. 1, 1:17 p.m. PT.
Update, 3:29 p.m. PT: Adds more information from conference call. 

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