Alphabet beats Q2 targets even as profit slumps on $2.7 billion EU fine

The record-breaking, $2.7 billion antitrust fine imposed on Google took a major chunk out of Alphabet's earnings.

Alphabet's second quarter revenue topped estimates but its shares are taking a hit after hours thanks to the record-breaking, $2.7 billion antitrust fine imposed on Google last month by the European Commission.

Breaking down the numbers, the tech giant reported a net income of $3.52 billion, or $5.01 per share.

Non-GAAP earnings were $5.01 per share on revenue of $26 billion, up 23 percent year-over-year, when including traffic acquisition costs (TAC). On average, Wall Street was looking for Q2 earnings of $4.49 per share with $25.65 billion in revenue.

Net revenue excluding TAC was expected to be at $20.87 billion. Alphabet delivered above target with $20.92 billion in revenue excluding TAC.

Google's EU fine had a significant impact on analyst expectations for the quarter. Analyst firm Stifel lowered its estimates from $7.91 per share to $4.02 per share, while JMP's estimate went from $8.54 per share to $4.64 per share. Excluding the EU fine, Alphabet said earnings were $8.90 per share.

Google revenues, which include more of the enterprise cloud, software and data management products, attributed most of Q2 sales with $25.76 billion in revenue, up from $24.5 billion the previous quarter.

Google's cost-per-click, which is how much it makes off each advertising click, decreased 26 percent year-over-year. The company's total advertising revenue was $22.7 billion.

Google CEO Sundar Pichai, who was just appointed as the thirteenth member on Alphabet's board of directors, highlighted growth in Google's cloud business and the "incredible momentum" the company has seen in its machine learning products.

"One focus area for us this quarter has been enabling our machine learning algorithms to learn and improve our products much faster," Pichai said on the call with analysts. "One such research initiative, auto ML, enables us to pursue approaches to automate the design of machine learning audits."

"Our ability to rapidly deploy the best machine learning in all of our products enabled us this quarter to launch all sorts of new smart features to help moderate comments, such as Smart Repies in Gmail and improved translations. We rolled out new machine learning features in Google Maps, YouTube, Gmail and Google Photos," he added.

Pichai also said sales of Google's hardware products, including Home and the Pixel phone, were strong in the second quarter. Pichais said there will be 11 Daydream-enabled devices on the market by the end of this year.

In the Other Bets category, which houses Waymo, Nest, Fiber, Alphabet's healthcare-driven initiatives and other speculative projects, Alphabet posted revenue of $248 million over the quarter, with operating losses narrowing slightly to $772 million. Last quarter, losses in this category totaled $855 million. Google CFO Ruth Porat said revenue was driven primarily by Nest, Fiber and Verily.

Looking forward toward the third quarter, Wall Street is expecting non-GAAP earnings of $8.43 per share with $26.7 billion in revenue.