Alphabet adds to cash pile despite higher costs, antitrust fine

SAN FRANCISCO (Reuters) – Alphabet Inc reported a 21 percent jump in quarterly revenue on Monday, maintaining a growth rate that is rarely seen among companies its size and suggesting the big sales gains enjoyed recently by the other Internet firms are not done yet.

Alphabet, the owner of Google and YouTube, said it made $3.5 billion in net income on sales of $26 billion. The profit would have been much larger but for a record $2.7 billion European Union antitrust fine.

Still, the company noted that costs were rising faster than sales and warned that expenses would remain high as more searches shift to mobile devices.

The squeeze on expected future profit appeared to weigh on Alphabet’s share price, which fell about 3 percent to $967 after the bell. Shares had closed up in regular trading and have gained 26 percent for the year.

Alphabet’s cost of revenue, a measure of how much money the company must spend to keep its platforms running before added costs such as research, rose 28 percent, well above the growth in revenue itself.

The rising costs, including what Google pays to drive traffic to its search engine, hurt operating margins more than most people had expected, said Doug Kass, president of Seabreeze Partners Management.

“This could be problematic going forward,” Kass said.

Alphabet Chief Financial Officer Ruth Porat, asked about margins during a conference call with analysts, said the company was focused on getting bigger.

“As we’ve often said, we’re focused on revenue and operating income dollar growth and not on operating margins,” she said.

Increasing costs, Porat added, are a result of more money going into high-growth products that she said would create value for shareholders.

With its latest profits, Alphabet reported $15.7 billion in cash and cash equivalents, and another $79 billion in marketable securities.

Alphabet and social media rival Facebook Inc, which together dominate the online ad market, compete for advertising dollars.

This year, Google is expected to have $73.75 billion in net digital ad revenue worldwide while Facebook is expected to take in $36.29 billion, according to research firm eMarketer. Together they will have about 49 percent of the market, eMarketer said.

Facebook is due to report earnings on Wednesday.

The technology sector has led a big rally in U.S. stocks. The SP 500 information technology index is up 23.1 percent this year, compared with a 10.4 percent rise in the SP 500.

Antitrust risk has shadowed Google for years, and antitrust enforcers in the European Union last month fined Google 2.42 billion euro ($2.7 billion) for favoring its own shopping service.

The fine came in the first of three EU probes of Google’s dominance in searches and smartphone operating systems, and analysts are going to monitor the downside closely, said Josh Olson, an analyst with Edward Jones.

“It is not so much the money or the fine itself,” Olson said, but “questions linger about what impact that could have on Google’s Europe business, and they did not really comment on that.”

U.S. antitrust enforcers thus far have chosen not to follow Europe’s lead.

If not for the fine, Alphabet said that earnings per share would have been $8.90 in the second quarter, compared with $7 a year earlier. With the fine, Alphabet reported earnings per share of $5.01, beating an average estimate of $4.49.

Sundar Pichai, chief executive officer of Google, said in response to an analyst question during Monday’s call that Google would fight to continue bundling its Android operating system with popular smartphone apps such as Google Maps — a practice the EU antitrust officials are investigating.

“It’s a very open market, open ecosystem, and it works well for everyone, and I expect that to continue,” Pichai said, adding that billions of people use Google products.

Pichai was also appointed to the Alphabet board of directors on Monday.

Google’s ad revenue rose 18.4 percent to $22.67 billion.

Revenue from other Google products, a category that includes the Pixel smartphone, the Play Store and Google’s cloud business, rose 42.3 percent to $3.09 billion. Alphabet competes heavily in the fast-growing cloud business with tech companies Amazon.com Inc and Microsoft Corp.

Losses from other Alphabet units – an array of businesses known as “other bets” that includes the Waymo self-driving car company, thermostat-maker Nest and the life sciences firm Verily – narrowed to $772 million from $855 million a year earlier.

Reporting by David Ingram in San Francisco and Rishika Sadam in Bengaluru; Additional reporting by Noel Randewich in San Francisco and Jennifer Ablan in New York; Editing by Bernard Orr and Lisa Shumaker

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Senate Braces for Health Showdown With McCain on Hand but a Plan Unclear

The remarks from Mr. Trump, who has been largely absent from the policy debate, had the ring of a threat by a president who has grown frustrated watching Republicans repeatedly try, and fail, to reach consensus on his campaign promise to immediately roll back the health law and enact a better system.

He said their constituents would exact a price for inaction — “you’ll see that at the voter booth, believe me” — and hinted that any Republican who did not support the bid to open debate on an as-yet-determined health bill would be painted as complicit in preserving a health law passed on the basis of “a big, fat, ugly lie.”

“For Senate Republicans, this is their chance to keep their promise,” Mr. Trump said, repeating the “repeal and replace” mantra on which Republicans campaigned last fall. “There’s been enough talk and no action; now is the time for action.”

After months of planning, debating and legislating, much of it behind closed doors, the Senate this week has reached the moment when votes will have to be cast. The big question Monday was what exactly the Senate will be voting on.

The fight on the Senate floor will unfold in stages.

First, the Senate majority leader, Mitch McConnell of Kentucky, said he would move ahead with a procedural vote on Tuesday to take up the health bill that narrowly passed the House in May. He urged his colleagues to do so.

“Many of us have waited literally years for this moment to finally arrive, and at long last, it has,” Mr. McConnell said on the Senate floor.

If that vote succeeds, the Senate would then be able to consider numerous amendments, including complete substitutes for the House bill. But it remains unclear what would take its place, and Senate Republican leaders have not said which substitute measure would be considered first.

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Under one possible series of events, Mr. McConnell could quickly move to replace the House bill with an entirely new measure to repeal the Affordable Care Act without a replacement.

If that amendment vote fails, as it most likely would, he could move to replace the House bill with a version of the proposal he has been refining for weeks: to repeal the health law while also replacing it.

Senator John Cornyn of Texas, the No. 2 Senate Republican, said there would be “endless amendments” if the procedural hurdle were cleared. He played down the significance of which substitute measure would come first.

“Everybody will get a vote on everything they want to vote on,” Mr. Cornyn said. He added, “What we’re trying to do is convince everybody that if they’d like to get a vote on their amendment, then they need to vote to proceed to the House bill.”

Democrats were incredulous.

“We are potentially one or two days away from a vote on a bill that would reorganize one-sixth of the American economy, impacting tens of millions of American lives, and no one knows what it is,” said Senator Chuck Schumer of New York, the Democratic leader. “It’s sort of like Alice in Wonderland around here.”

What they will vote on will not matter if senators oppose beginning debate. Mr. McConnell can lose only two Senate Republicans, now that Mr. McCain intends to be in the chamber.

Senator Susan Collins, Republican of Maine, is all but certain to vote no on the procedural vote, no matter what legislation Mr. McConnell promises to put before the chamber if the initial hurdle is cleared.

At least two other Republicans, Shelley Moore Capito of West Virginia and Lisa Murkowski of Alaska, have indicated they will not vote to proceed if Senate leaders plan to then put forth a measure to repeal the health law without providing a replacement.

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While in West Virginia later on Monday, addressing the National Scout Jamboree, Mr. Trump teased the health and human services secretary, Tom Price, about whether he would be able to wrangle support from Ms. Capito and other Republicans. “He better get them,” Mr. Trump said, smiling at Mr. Price to indicate he was joking — or at least seemed to be. “Otherwise, I’ll say, ‘Tom, you’re fired.’”

He then added, “He better get Senator Capito to vote for it.”

Republican leaders are pressuring their senators to go along at least with the procedural step, to bring them closer to delivering on their longtime promise of repealing the Affordable Care Act, which was adopted without any Republican votes.

“While disagreements remain on the best way to repeal and replace Obamacare, one thing is certain: The American people rightfully expect us to keep our promises and get the job done,” said Senator Ted Cruz, Republican of Texas, who said he would vote to begin debate.

Another complication is whether the more comprehensive of the different repeal measures that could go before the Senate — Mr. McConnell’s bill, which would also replace the health law — could be pared down because of parliamentary rules.

The repeal bill is being considered under special expedited procedures that apply to certain budget-related legislation. These rules limit debate, preclude a filibuster and allow passage with a simple majority vote. However, the rules stipulate that provisions of the bill can be removed if they would not change federal spending or revenue, or if the budgetary effects are “merely incidental” to a policy objective.

The Senate parliamentarian, Elizabeth MacDonough, who serves as a sort of referee, has made a preliminary finding that a number of provisions of Mr. McConnell’s repeal-and-replace bill appear to violate Senate rules.

These provisions would, for example, cut off federal funds to Planned Parenthood for one year; prohibit the use of federal subsidies to buy insurance that includes coverage for abortions; and require people who have experienced a gap in insurance to wait six months before obtaining coverage in the individual market.

If a senator objects to any of these provisions, the presiding officer could sustain the objection, following the parliamentarian’s advice. Republicans would then need 60 votes to keep that provision in the bill — a nearly impossible threshold for any significant issue.

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