Mobile, YouTube lift Google parent Alphabet's results

SAN FRANCISCO — Google's clicking with mobile device users, lifting the fortunes of parent company Alphabet.

Strength in advertising on mobile devices and videos fueled yet another solid quarter for Alphabet that topped Wall Street estimates.

Alphabet said Thursday that third-quarter net income rose 27% to $5.06 billion, or $7.25 a share, from a year ago. Excluding certain expenses, Alphabet said it would have earned $9.06 a share, beating analyst estimates of $8.60 a share.

Alphabet revenue rose 20% to $22.45 billion. Excluding payments to advertising partners, total revenue was $18.27 billion. Analysts expected revenue of $17.99 billion.

"Revenue growth continues to accelerate, 20% growth and 23% with neutral currency, those are really significant growth rates," said CFRA analyst Scott Kessler. "It underscores the continuing vibrancy of the company's offerings and business model."

Google's ad revenue rose 18.1% to $19.82 billion in the third quarter, accounting for 89.1% of Google's total revenue.

As people spend more time on smartphones, they are clicking on more Google ads. Advertisers generally pay less to reach consumers on mobile devices than desktop computers.

Paid clicks, when users click on an advertisement, rose 33%, compared with an increase of 29% in the second quarter. Cost-per-click, the average amount advertisers pay Google for each click, fell 11% in the latest period after dropping 7% in the second quarter.

"Paid clicks are notably higher than folks expected and the decline in cost-per-click was roughly in line with what people anticipated," Kessler said.

Online video has emerged as another key driver of advertising growth with YouTube playing a starring role for Google, Ruth Porat, chief financial officer of Alphabet, told analysts. "YouTube revenue continues to grow at a very significant rate," she said.

Pivotal Research Group analyst Brian Wieser says YouTube is not only making progress in capturing share of online video, it's making "an increasingly plausible case for capturing traditional television budgets." Google, Facebook and other tech companies are eager to crack open that big pot of dollars that marketers spend on television.

"This was illustrated by this year’s announcement that clients of Interpublic’s Magna Global would commit $250 million of TV ad spending to YouTube," Wieser said.

Digital is forecast to overtake TV ad spending this year for the first time. By the end of this year, U.S. digital ad spending will reach $72.09 billion, while TV spending will grow to $71.29 billion, according to research firm eMarketer.

Not sitting on its laurels, Google is pushing into new businesses beyond advertising, such as its effort to compete with Amazon, Microsoft and IBM in cloud computing. Those other businesses, called "other revenue," was $2.4 billion in the third quarter, up 39% year over year.

"We’re building new businesses to serve as sources of future revenue growth. Most notably, Google Cloud is generating substantial revenue growth reflecting the ongoing momentum in the business as well as the enormous opportunity in this area," Porat told analysts.

There are signs of trouble in Alphabet divisions outside of Google. The executive who ran the Google Fiber unit stepped down this week as the company halted roll-out of the super-speedy Internet and announced it's laying off 9% of its staff.

Porat told analysts Alphabet remains committed to Google Fiber which is being deployed in 12 cities but is pausing roll-out in eight others as it develops new technologies such as wireless.

"As we reach for moonshots that will have a big impact in the longer-term, it’s inevitable that there will be course corrections along the way and that some efforts will be more successful than others," Porat said. "Over the past year, for example, you’ve seen us make progress and accelerate our efforts in some areas while re-positioning or taking a pause in others. We are taking the steps necessary to lay the foundation for a stronger future."

Alphabet's "other bets," which include smart-home device maker Nest, self-driving cars and the X research facility, generated revenue of $197 million, but reported an operating loss of $865 million.

BGC Financial analyst Colin Gillis said the narrowing loss shows the influence of Porat, who has brought greater financial discipline to the Internet giant. "Alphabet is showing discipline on other bets," he said.

In other news, Alphabet's board approved authorized a $7 billion repurchase of its Class C stock.