Google beats sales estimates with rebound in ad spending

Alphabet Inc. returned to growth in the third quarter after a decline in the previous period, fueled by digital advertising that has rebounded along with the American economy. The shares rose about 7% in extended trading in New York.

The Google parent reported third-quarter revenue, minus the cost of distribution deals for its search engine, rose 15% to $38 billion. While that was slower than the pace of growth a year ago, it was a stark change from the the 2% drop in the second quarter and better than what analysts were expecting. YouTube, the fastest-growing part of Google’s ad business, brought in $5 billion, 32% more than last year.

About 90% of Google’s revenue stems from advertising, much of it linked to search results. That business ground to a halt in the spring, as the pandemic decimated some of its biggest clients: travel and tourism companies. But as lockdowns wore on and people adjusted to spending more time at home, e-commerce has boomed and people have spent more time watching YouTube, helping the search giant business get going again. The U.S. economy also showed signs of recovery, notching record growth in the third quarter.

“Overall we’re pleased with the degree to which advertisers have re-activated their budgets,” Chief Financial Officer Ruth Porat said on a conference call. YouTube’s focus on direct-response e-commerce ads has also helped boost revenue, she said.

The pickup in digital advertising also helped Facebook Inc., Snap Inc. and Pinterest Inc., all of which reported solid revenue growth in the quarter.

Google’s positive results weren’t confined to advertising. The company’s cloud business pulled in $3.4 billion in the quarter, up 45% from the same period last year. Analysts from Canaccord Genuity had estimated growth of 42%. Millions of people working from home due to the pandemic has sped up the “digital transformation” of the workplace, a trend that drives more demand for Google’s products, Porat said. A drop in capital spending helped push Google’s margins and profit up too. Net income jumped 59% to $11.2 billion and earnings per share of $16.40 beat analysts’ estimates for $11.42.

Even as Alphabet stages a financial comeback, the company is facing its most serious regulatory challenge yet: an antitrust lawsuit by the U.S. Department of Justice, which accuses the company of abusing its dominant position in online search. Google has issued a lengthy rebuttal to the suit, which it calls “deeply flawed.” One of the government’s arguments takes aim at Google’s agreements with Apple Inc. to prioritize its search engine in the iPhone maker’s products. Google pays an estimated $8 billion to $12 billion for the privilege, and as a result the DOJ said nearly half of Google’s search traffic in 2019 came from Apple products.

The third-quarter results showed that those payments, to Apple and other partners, continue to rise. Traffic acquisition costs increased 9% in the third quarter to $8.2 billion.

Google has packed the top of search results with advertising in recent years, increasing its ability to profit from users’ hunts for information.