Google's parent company, Alphabet, has investors concerned over its Q2 earnings which will likely be "modest" according to SunTrust's Robert Peck.
In a note to investors, Peck shared his thoughts on the company's upcoming 28 July announcement which has raised quite a few questions and concerns regarding its results. Many are eager to know how Brexit affected Alphabet's business as almost 9 per cent of Google's revenues are from the UK and over 20 per cent are from Europe. Investors are also curious as to what weakening search-revenue trends have done to the company's financial results in Q2.
The main concern Peck and the company's investors have is in regard to how Google has increasingly spent more money with the hope of making more money. This issue played a part at Alphabet's previous earnings call and it will be quite difficult for the company's investors to ignore or downplay it again.
Google's total traffic-acquisition costs (TAC), the money it pays to partner websites to run Google ads or services, rose to $3.8 billion. This number makes up 21 per cent of the company's total advertising revenue. However the TAC that goes to its distribution partners climbed to 33 per cent year-over-year. These costs are what allow Google search to be the default search engine on iPhone and according to leaked court documents the company paid Apple $1 billion in 2014 to remain the default search engine on iOS products.
In his note, Peck wrote: “Investors remain concerned about the growth of distribution TAC which rose more than expected during Q1 at +33 per cent vs. revenue growth of 20 per cent (~26 per cent ex FX). This is the 3rd straight quarter of accelerating growth in TAC.”
If Apple decides to renegotiate its contract with Google, the company could end up spending even more to remain relevant on the company's iOS operating.
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