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Alphabet earnings Q2 2018: Google posts profit of $3.1bn despite EU fine of $5bn

Alphabet, Google’s parent company reported its Q2 2018 results, with total revenue clocking in at $32.7 billion, up 26% from the second quarter of 2017. Accounting for EU’s $5 billion fine, the company’s net income stands at $3.1 billion, and excluding the fine stands at $8.2 billion, down from $9.4 billion in the last quarter. The company’s net income for the same quarter last year stood at $3.5 billion when it had paid a fine of $2.7 billion to the European Commission.

Robust earnings despite EU fine, ads rakes in most revenue

Alphabet’s primary source of revenue is Google’s advertising business, which brought in $28 million, or 86% of its total revenue. Q2 ad revenue is up from $18.4 billion in the same quarter last year. Advertising on Google’s own platform (Search, YouTube) brought in $23.2 billion while advertising on its network properties brought in another $4.8 billion.

The results appeared to have an insignificant impact from the EU’s General Data Protection Regulation that came into effect in early May. The GDPR limited the ways companies can use customer data, which was expected to have a negative effect on ad revenue. GDPR affected some advertising technology firms as companies have held off on using some data-intensive ad services in order to comply with the data protection law. However, Google’s ad revenue has gone up significantly by 24% year-on-year.

How Google will deal with EU regulators

The company said in its investor call that ad revenue growth was primarily driven by ads sold on mobile devices. EU regulators said that Google unfairly requires smartphone manufacturers that use its Android mobile operating system to drive users to its own services, such as search, its Play app store and the Chrome browser. Google allows companies to use Android for free in exchange for loading those Google-owned apps. A large amount of the net income was wiped out by the record-breaking fine imposed by the EU, after finding the company breaching its anti-trust laws. Although Google said it will appeal the EU’s decision and fine, it has accounted for the fine in this earnings report.

It isn’t clear how Google is going to tide over its Android market in the EU given that the European Commission has told Google to comply with its laws in 90 days or face heavy penalties. Google may have to change its Android OS services which drive forward the use of Google products. Google CEO Sundar Pichai said that the company is committed to finding a way for Google to continue making Android “available at scale to users everywhere.” He said Google had created more choice for users: “You can clearly see there’s robust competition. There’s a lot of innovation,” he said. “I think overall it’s created more choice for everyone, not less.”

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Other revenues jump 37% year-on-year

Google’s “other revenues” besides advertising, the large chunk of which are its cloud computing operations, the Google Play app and media store and its smartphones and Home smart speakers, jumped 37% from the same quarter last year, to $4.4 billion. In fact, Google’s other revenue grew more than its ad revenue at 24%.

Alphabet’s “Other Bets,” which include self-driving car firm Waymo, internet service provider Fiber, the Nest home devices unit, the healthcare and biotech company Verily and other businesses, logged an operating loss of $732 million, up from $633 million a year ago, on revenue of just $145 million up from $97 million a year ago. Alphabet CTO Ruth Porat said most of the revenue came from Fiber and Verily.

Google’s traffic acquisition costs, which includes the money it pays to phone manufacturers, like Apple, to use its services, like search, was $6.4 billion, or 23% of its advertising revenues. That’s up year-over-year, but down slightly from 24% last quarter.

Google Translate has potential

Pichai revealed that Google’s Translate service translates 143 billion words a day, and got a big boost in the World Cup in Russia. Google Translate is available in 103 languages: it can translate single words, whole sentences, or even entire web documents them and translate them. The search giant launched its translation service 12 years ago and recently made the service available offline as well.. The Google Translate app, for example, can now translate conversations in near real-time and can also translate street signs written in another language. Currently, the translation service and its app run ad-free, which means it is yet to be monetized.

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