Google hits high growth in ad revenues, but investors remain wary of rising traffic acquisition costs

Key highlights:

• Alphabet posted a huge 24% growth in its revenues
• Google's advertising revenues grew to $24 billion during Q3
• traffic acquisition costs rose 54 % in the quarter, accounting for 12% of ad sales

Google's parent company Alphabet Inc on Thursday reported that a higher than expected revenues in its third quarter earnings. This result was welcomed by investors and saw the stock gaining nearly 3% on the stock market at the end of the day.

Alphabet posted a huge 24% growth in its revenues in the quarter ending September 30, 2017 from a growth of 20% in the same period a year back. The revenues of the company rose to $27.7 billion in Q3 2017 from $22.4 billion in Q3 2016.

A major portion of the revenues came from Google's advertising revenues which posted a robust 21.4% growth during Q3. Google's advertising revenues grew to $24 billion during Q3 this year from $19.8 billion during the same quarter last year.

This means that Google's ad revenues still account for nearly 90% of Alphabet's revenues.

Despite the ad business of Google facing competition from social media company Facebook, it has managed to grow as more users turn to Google's YouTube and mobile search services.

However, there has been a concern among investors about the rising costs of traffic acquisition. The costs of getting ads in front of users has been rising as Google pays companies such as Apple and others to integrate Google search into mobile products and services.

The payments are included in traffic acquisition costs, or TAC, and they rose 54 % in the quarter, accounting for 12% of ad sales.

Traffic acquisition costs to Google Network Members rose to $3.1 billion during Q3 this year from $2.6 billion in the same quarter last year.

TAC to Google Network Members as a percentage of Google Network Members' properties revenues rose to 71% during this quarter from 70% a year ago.

TAC to distribution partners to increased significantly to $2.4 billion from $1.5 billion. TAC to distribution partners as a percentage of Google properties revenues increased to 12% in Q3 2017 from 10% in 2016.

The total traffic acquisition costs as a percentage of Google advertising revenues grew to 23% as it stood at $5.5 billion in Q3 2017 from $4.1 billion in Q3 2016.

Pichai, however, defended the partnerships in response to several analysts' questions on Thursday, calling the deals "a win-win construct" because Google performs "better when our partners do well”. He further added, "We're pretty comfortable with how we're approaching it.”

Google's other revenue, which includes hardware such as the Pixel smartphones and Home speakers as well as the cloud computing business, also enjoyed solid growth. Sales from non-ad businesses rose 40% from a year ago to $3.4 billion in the quarter.

Google's other revenues grew to $3.4 billion in Q3 2017 from $2.4 billion Q3 2016. This shows Google's push in the hardware business is starting to reap dividends.

(With inputs from Reuters)

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