Google's Q1 ad revenues surge even as Alphabet bets heavily in other areas

Dive Brief:

Alphabet Inc., Google's parent company, reported $31.1 billion revenue for Q1 2018, a 26% year-over-year increase, per a news release. The company reported operating expenses of $10.7 billion, a 27% increase year-over-year, reflecting a commitment to future growth.
Advertising revenue totaled $26.6 billion for the quarter, a near 20% increase year-over-year, according to CNBC. "Other revenues," such as the company's cloud business and hardware sales, including its smart home Nest products, were about $4.3 billion — an increase from $3.2 billion in Q1 2017. Paid clicks on Google properties, including search and YouTube, increased 8% quarter-over-quarter and 59% year-over-year, as cost-per-click decreased 7% quarter-over-quarter and 19% year-over-year. Revenues from properties were nearly $22 billion.
Google's total traffic acquisition costs, the fees it pays to other companies to run its ads and services, reached $6.28 billion, accounting for 24% of advertising revenue. Traffic acquisition costs were up 22% over Q1 2017.

Dive Insight:

While Alphabet posted significant growth in revenue for Q1, it also reported some of the highest expenses over the past few years, which could suggest the company is looking to a future beyond advertising. Advertising sales account for nearly 90% of Alphabet's revenue, but the increase in spending suggests the company is doubling down on investments that would diversify its business, according to The New York Times. Specifically, spending was up significantly in Q1 in areas like self-driving cars and online computer services for businesses.

The bigger bets on non-advertising related investments come at a time when digital marketing is under attack on several fronts, including concerns over a lack of transparency and data privacy, with stricter regulations soon going into effect across Europe through the General Data Protection Regulation. A tougher regulatory stance seems more likely than ever in the U.S. as well following Facebook's Cambridge Analytica scandal, where the personal data of more than 87 million users were abused by a data firm with ties to Donald Trump's presidential campaign.

Alphabet's numbers show that these issues have not materially impacted its advertising business so far. One reason why Google may feel little impact from the fallout following the Cambridge Analytica scandal is that so much of its advertising business is based on paid search, which relies on very limited information, Google CEO Sundar Pichai said during an earnings conference call.

The E.U.'s new set of privacy rules, the GDPR, go into effect May 25. To comply with GDPR, Google has said that it supports non-targeted ads for consumers who opt out of data collection for targeting. The company also said that it will limit processing personal information for children and launch new controls for Google Analytics users to manage their data.

Google also continues to see growth from YouTube, even as it continues to face brand safety issues. The company reported that the number of channels earning six figures annually grew more than 40%. YouTube's recent exclusive Coachella live stream had more than 41 million live views. The platform removed more than 6 million videos in Q4 that were first flagged by machine systems for violating content standards, with more than 75% removed before receiving a single view.

Alphabet's Q1 2018 earnings received a hefty boost from a change in accounting rules that change how companies account for equity security investments, requiring the company to report current fair value of nonmarketable securities, such as its stake in ride-sharing app Uber, according to The Wall Street Journal.