Three months after revving up investors with better-than-expected earnings, Alphabet Inc. today reversed course with a third-quarter report that left investors less impressed this time.

The parent of Google LLC earned a profit of $7.07 billion, or $10.12 a share, down 23% from a year ago on a 20% revenue rise, to $40.5 billion, or 22% if currency rates had remained the same.

But the quarterly profit figure was hurt by a $549 million charge for accounting changes. Essentially, Alphabet recorded a $1.38 billion gain on equity investments a year ago but took a $1.53 billion loss on them in the quarter just ended Sept. 30.

Analysts on average had forecast a much higher profit of $12.38 a share on $40.32 billion in revenue. In addition, operating income of $9.18 billion came in a bit short of the Wall Street consensus estimate of $9.43 billion.

Likely as a result of the shortfall, as well as higher costs across the board, Alphabet shares in initial after-hours trading were falling about 2%.

Before a planned 2 p.m. PDT conference call with analysts, the company offered little color on key operations ranging from its massive ad business to its cloud computing business.

“I am extremely pleased with the progress we made across the board in the third quarter, from our recent advancements in search and quantum computing to our strong revenue growth driven by mobile search, YouTube and Cloud,” Sundar Pichai (pictured), Google’s chief executive officer, said in prepared remarks.

In the second quarter, Pichai had said Google Cloud had reached a $8 billion annual revenue run rate, double the rate in late 2017, and “continues to grow at a significant rate.” He didn’t provide an update on today’s call, instead focusing on customer examples such as the Mayo Clinic and Macy’s. “We saw customer momentum across multiple areas under Thomas Kurian,” Google Cloud CEO, he said.

Although cloud services are still a small portion of Alphabet’s revenue, they carry outsized importance because they’re a fast-growing market and Google is spending a lot on infrastructure and talent to take on rivals such as Amazon Web Services Inc. and Microsoft Corp.

Those companies have a big lead over third-place Google. In addition, they appear better-positioned for lucrative government cloud contracts, in particular Microsoft, which late Friday won the potential $10 billion, 10-year Joint Enterprise Defense Infrastructure or JEDI contract that the Pentagon had been expected to award to AWS. Google bowed out of that and other government contracts after employees raised concerns about how the services would be used.

Last week Microsoft reported that its Azure cloud infrastructure business revenue rose 59% in its fiscal first quarter, while Amazon said AWS revenue rose 35% in its third quarter. Both growth rates represented a continuing slowdown in cloud revenue, but they both have revenues much higher than Google Cloud.

Alphabet’s shares, which had risen about 21% so far this year, rose about 2%, to $1,288.98 a share in today’s regular trading.

As always, advertising constituted the vast majority of Alphabet’s revenue — about 85% — from Google search ads to YouTube and other sites that syndicate its ads. The company said ad revenue overall rose 17%, to $33.9 billion.

As usual, similar outside bets, collectively known as Alphabet’s “Other” business segment and including Waymo, Google Fiber and Verily life sciences, continues to rack up big losses. In the third quarter, the segment logged an operating loss of $941 million, up 29% from a year ago, as revenue rose 6%, to $155 million.

Earlier today, Alphabet was reported to be in talks to acquire fitness device maker Fitbit Inc. There’s speculation that Fitbit might bolster Google’s healthcare-related efforts. 

As for Google Cloud, the company still doesn’t reveal the precise size or nature, such as how much is its established G Suite applications. Patrick Moorhead, president and principal analyst at Moor Insights & Strategy, has noted that because Google includes software-as-a-service G Suite in its cloud revenue number, it’s likely the cloud platform overall is even smaller than it appears relative to AWS and Microsoft.

“Google Cloud is primarily a SaaS play with G Suite and a platform-as-a-service play with its machine learning application programming interfaces,” he said. “Companies looking for IaaS look primarily to AWS and Azure.”

However, Chief Financial Officer Ruth Porat said Google Cloud Platform, the infrastructure provider, accounted for most of the growth in cloud overall. Data analytics using Google’s BigQuery analytics data warehouse service was especially popular with customers, she added.

Pichai declined to offer an update on cloud revenue or growth, saying only that “the momentum has been great.” He did add that Google Cloud’s total addressable market is now much higher thanks to adding more services and certifications.

The one tangible indicator of cloud revenue besides Pichai’s $8 billion run rate, albeit a weak one, comes from Google’s “other revenues” segments, which is mostly cloud but also includes Google Play apps, smartphones and smart speakers. It grew 39%, to $6.43 billion, beating a $6.35 billion consensus.

But expansion doesn’t come cheap. Capital spending, from real estate purchases to data center investments, totaled $6.73 billion, up from $6.13 billion in the previous quarter and $5.28 billion a year ago. Overall expenses rose about 25% from a year ago, to $31.3 billion.

“It’s hard to catch up when you are No. 3 and your yearly revenue run rate is less than what the competition makes in a quarter,” said Holger Mueller, an analyst with Constellation Research Inc. “But Google has differentiating technology offers, especially in the machine learning and AI and data areas, and it needs to get these offerings to a broader audience. The gamble is that a larger enterprise salesforce will get this done.”

Pichai also has said Google plans to triple its cloud sales force over the next few years, something that contributed once again to Google Cloud accounting for the largest number of new hires. At Alphabet overall, employee count rose by 20,000 from a year ago, to 114,096 employees.

Beyond Alphabet’s specific lines of business, investors are especially interested in the potential impact of regulatory pressures against tech giants, including Alphabet. Despite some hefty fines recently from regulators in the U.S. and the European Union, investors seem to have shrugged off the impacts so far, but more fines and regulations seemingly likely to come in the next year or so may finally hit home.

Photo: Robert Hof/SiliconANGLE