Alphabet CFO Ruth Porat
- Alphabet's capital expenditures nearly tripled in the first quarter.
- Alphabet CFO Ruth Porat said some of the costs were due to the purchase of the Chelsea Market, home to Google's New York headquarters.
- But there's something else driving Google's capex spending, and it's not going away.
Alphabet gave investors a difficult pill to swallow when it reported Q1 earnings on Monday: Staying ahead in the internet business today is incredibly expensive.
How expensive? $7.3 billion.
That's the amount that Alphabet, the parent company of Google, spent in capital expenditures during the first three months of the year, an eye-popping increase from its $2.5 billion of capex in the year ago period.
To be fair, $2.4 billion of the new expenditures were for Google's purchase of Chelsea Market, a premium piece of real estate in Manhattan where Google's New York headquarters are located.
The company prefers to own rather than to lease its offices, Alphabet CFO Ruth Porat explained during Monday's conference call. She noted that the cap ex during the quarter, was "equally split" between facilities (like Chelsea Market) and technology infrastructure.
While investors may not be too fond of big-ticket real estate deals like Chelsea Market, they can take comfort in the fact that such property deals are sporadic (or "lumpy" to use Porat's term). But Porat's message to investors about the other big increase in capex was much less reassuring.
The CFO ticked off a catalog of costs the company believes is required to manage an operation of Alphabet's size and sophistication. All that money is necessary to "support the growth that we see across Google," Porat said.
Google is building a very expensive moat around its business
Alphabet is essentially building its own global internet network, a multi-billion dollar endeavor that includes laying its own undersea cables, building data centers and buying tons of computers.
"On machines, the biggest contributor is the demand we're seeing. In particular it's the expanding application of machine learning across Alphabet, plus the requirements for cloud and search and YouTube. And secondarily, the increased costs of newer technologies: CPUs, memory, network," Porat explained.
Google currently has 20 new data centers in construction across the world, she noted.
Given that Google continues to grow and that competition from the likes of Facebook and Amazon is also growing, it's a budget item that probably won't be going away.
In fact, Porat made sure there was no confusion on that point.
During the conference call an analyst raised the topic of the elevated capex levels, which he noted were up substantially even if one backed out the hefty Chelsea Market expense. Should investors expect capex to continue at similar levels throughout the year, he wondered?
Porat ticked off the previously mentioned technology infrastructure items.
"I wouldn't want to suggest a one-off," she said.
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