Alphabet's $2.7B EU Fine Will Impact Search, Earnings

As the Q2 2017 earnings season rolls in, the impact of several key events impacting Google and YouTube could have a measurable effect on Alphabet earnings and search.

The impact on YouTube of advertisers pulling their ads seems limited, according to Baird Equity Analyst Colin Sebastian. The research note published late Wednesday looks at several key trends ahead of earnings.

The analyst firm also plans to adjust its Q2 earnings per share estimates to reflect the impact of the recent $2.74 billion European Commission fine that Alphabet will recognize in full this quarter. The fine was slapped on Alphabet after EU antitrust regulators ruled the company had abused its authority by promoting its shopping comparison service on its own Internet property at the top of search results. 

"We now expect GAAP EPS of $4.03, down from our original $7.92 estimate that excludes this one-time impact," Sebastian wrote. "We estimate core Google (gross) revenues and operating income of $23.5 billion (+17% Y/Y) and $7.3 billion (31.1% margin) with Other Bets contributing $232 million in revenues with a $894 million drag on operating income."



On June 30, Alphabet released a statement that it would "report a separate operating expense line for the $2.74 billion charge on the income statement. The fine is not tax deductible. Therefore, the charge will reduce our GAAP net income and GAAP EPS by the full amount."

Earlier this year, eMarketer released estimates that Google will earn $61.8 billion in search ad revenue in 2017, or 61.6% of the search ad market worldwide. 

Overall, the company could generate nearly $74 billion in net digital ad revenue worldwide, up 17.8% compared with 2016. eMarketers says that represents 33% of the total worldwide digital ad market, which this year is worth $223.74 billion. 

Facebook will generate about $36 billion in net digital ad revenue worldwide this year. 

While Google will remain the dominate company in search ad revenue, it is second to Facebook in display advertising. eMarketer forecasts Google will generate $11.95 billion in display ad revenue worldwide this year, or 11.2% of total display spending. 

Facebook’s U.S. display business will jump 32.1% to $16.33 billion to take 39.1% of the U.S. display market.

Google will control about 32.4% of the U.S. mobile ad market, while Facebook will take about 24.6%. Google will take nearly $19 billion in mobile revenue this year, which eMarketer says will reach nearly 56% of Google’s total revenue for the first time.

Facebook’s mobile ad revenue will grow to $14.37 billion this year, as mobile’s share of the company’s business grows to 88%.  

The shift in local ad spend in search from desktop to mobile seem fuels the change. BIA/Kelsey estimates that this year, local search revenue on desktop will reach $4.3 billion, but decline 1.3% by 2021. Local search for mobile will reach $8.7 billion this year, up 12% by 2021.

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