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Alphabet (GOOGL) Beats on Q3 Earnings as Revenues Grow
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Alphabet’s (GOOGL - Free Report) third-quarter earnings of $7.25 breezed past the Zacks Consensus Estimate of $6.64 on strong revenues. Earnings were up 26.5% year over year. As a result, shares were up 0.95% in extended trading.
On the Other Bets side, revenues were lumpy because most of the businesses included in it are in their early stages. Management said that Nest, Fiber and Verily were revenue contributors in the third quarter.
The main drivers of the Google business haven’t changed. Pricing remains under pressure, both on account of the ongoing FX concerns as well as continued strength in mobile and TrueView. Volumes are however encouraging as total paid click growth of 33% remains a reassuring number.
Google continues to enjoy strength on the mobile platform. One of the drivers is Accelerated Mobile Pages (AMP). This is being accepted by many publishers and sites around the world covering more than 700,000 domains. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals as a result of studying mobile searches from its huge data base. As a result, direct response marketers remain interested in it.
Google also mentioned messaging as an important addition to its product line in the form of Allo (mobile messaging) and Duo (video messaging) to further drive user experience. Also, the company said that Google Cloud is generating substantial revenue growth, reflecting the ongoing momentum in the business.
The company has greater control on the browser through Android as well as through distribution agreements with Apple (AAPL). But upcoming threats shouldn’t be ignored. Apple may not renew its agreement, Microsoft MSFT Windows 10 could steal overall search market share, Facebook graph search and the social network itself could take away advertising dollars, and Amazon (AMZN - Free Report) already takes care of most product searches.
Management said that YouTube remains a very strong contributor benefiting from the increase in online video consumption. More than a thousand creators are currently engaged with the platform bringing in a thousand subscribers every day.
And finally, Google platforms like Android, Chrome and Daydream continue to help the company draw more users and sell more ads.
The Numbers in Detail
Revenue
Gross total revenue of $22.45 billion grew 4.4% sequentially and 20.2% year over year (up 23% in constant currency or CC). The increase was primarily driven by the strength in Mobile Search, with the ongoing strength in YouTube. Also, strength in programmatic advertising and Play aided revenue growth.
Alphabet’s hedging programs were partially successful in offsetting the negative impact of $196 million ($91 million negative impact after adjusting hedging gains) on account of a stronger dollar in the year-over-year comparison.
The geographic distribution was as follows: the U.S. generated around 47% of revenues, up 6.0% sequentially and 22.0% from the year-ago quarter. The U.K., with a 9% revenue share was flat sequentially and up 5.0% (18% ex-FX) from last year. Other international markets accounted for the balance, representing sequential and year-over-year increases of 3.1% and 22.0% (25% ex-FX), respectively.
Google Segment
The segment includes search, advertising, Play, hardware and Cloud & Apps. So first, the search business:
On a sequential basis, revenue from Google-owned sites grew 4.5%, while that from partner sites decreased 0.3% resulting in a total advertising revenue increase of 3.5%. Both segments grew (22.9% and 1.0%, respectively) from the year-ago quarter. Overall, Google-owned and partner sites brought in 72% and 17% of quarterly revenue, respectively.
Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 and remained optimistic about search revenue growth on both tablets and desktops. TrueView and DoubleClick Bid Manager were the primary drivers of YouTube revenue although app promotions are becoming bigger contributors.
The traditional AdSense benefited from strength in programmatic and AdMob, offset by a decline in the traditional network business.
Other revenue was up 12.0% sequentially and 38.8% year over year to just over 10% of revenue. The strength was on account of Play Store sales (apps, content) and cloud revenues.
Other Bets Segment
Alphabet broke out the segment for the first time in the March quarter this year, which includes its Fiber, Verily, Calico, Nest, self-driving cars and incubation activities in X Labs. Revenues were up 6.5% sequentially and 39.7% year over year.
Since this segment is a combination of several businesses that are in the pre-revenue stage, operating different models and serving diverse end markets, the results are likely to be lumpy in any given quarter. The main drivers of revenues last quarter were Nest Fiber and Verily.
Total traffic acquisition cost, or TAC (the portion of revenue shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website) was up 5.2% sequentially and up 17.3% year over year to nearly 21% of total advertising revenues.
TAC paid out to network partners was flat sequentially and 4.3% year over year, representing 70% of network revenue. Mobile search carries higher TAC so the increase in mobile search revenue is increasing related TAC according to management.
TAC for distribution arrangements was up 15.3% sequentially and 48.2% year over year, representing nearly 10% of Google website revenue.
Net advertising revenue, excluding TAC was up 3.1% sequentially and 18.3% year over year.
Revenue net of TAC came in at $18.27 billion, up 4.2% sequentially and 20.9% year over year, beating the Zacks Consensus Estimate of $17.906 billion.
Margins
Gross margin of 61.3% shrank 93 bps sequentially and 107 bps from the year-ago quarter.
Price declines remained negative in both sequential and year-over-year comparisons as the mix continued to move toward lower-margin business.
Cost per click (CPC) was down a respective 5% and 11% from the previous and year-ago quarters. On a sequential basis, CPC was down 6% on both Google sites and network sites. On Google sites, CPCs were down 6% from the year-ago quarter, while network CPC declined 14%.
Paid clicks grew 9% sequentially and 33% year over year, helped in part by growing volumes of mobile and TrueView ads on YouTube. Google sites did better than Network sites with paid clicks growing 11% and 42%, respectively, from the previous and year-ago quarters. Network paid clicks also increased 1% both sequentially and from the year-ago quarter.
Operating expenses of $7.99 billion increased 7.9% sequentially and 15.2% from the September quarter of 2015. The operating margin was 25.7%, down 207 bps sequentially but up 48 bps from last year. As a percentage of sales, R&D and S&M expenses decreased while G&A increased from the year-ago quarter.
Non-operating gains were $278 million compared with $151 million in the previous quarter and $183 million in the Sep 2015 quarter.
Alphabet reported net income of $5.06 billion, or 22.5% of sales, compared with $4.88 billion, or 22.7% of sales in the Jul 2016 quarter and $3.98 billion, or 21.3% of sales in the year-ago quarter. GAAP earnings of $7.25 a share were up from $7.00 in the previous quarter and $5.73 in the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $83.06 billion, up $4.60 billion from the third quarter. Management said that $50 billion or 60% of this is held overseas. The company generated around $9.85 billion of cash from operations in the third quarter and spent $2.55 billion on capex, netting a free cash flow of $7.29 billion.
Alphabet also spent $2.55 billion on capital expenditure, $252 million on acquisitions and $3.25 billion to repay some debt.
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Alphabet (GOOGL) Beats on Q3 Earnings as Revenues Grow
Alphabet’s (GOOGL - Free Report) third-quarter earnings of $7.25 breezed past the Zacks Consensus Estimate of $6.64 on strong revenues. Earnings were up 26.5% year over year. As a result, shares were up 0.95% in extended trading.
On the Other Bets side, revenues were lumpy because most of the businesses included in it are in their early stages. Management said that Nest, Fiber and Verily were revenue contributors in the third quarter.
The main drivers of the Google business haven’t changed. Pricing remains under pressure, both on account of the ongoing FX concerns as well as continued strength in mobile and TrueView. Volumes are however encouraging as total paid click growth of 33% remains a reassuring number.
Google continues to enjoy strength on the mobile platform. One of the drivers is Accelerated Mobile Pages (AMP). This is being accepted by many publishers and sites around the world covering more than 700,000 domains. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals as a result of studying mobile searches from its huge data base. As a result, direct response marketers remain interested in it.
Google also mentioned messaging as an important addition to its product line in the form of Allo (mobile messaging) and Duo (video messaging) to further drive user experience. Also, the company said that Google Cloud is generating substantial revenue growth, reflecting the ongoing momentum in the business.
The company has greater control on the browser through Android as well as through distribution agreements with Apple (AAPL). But upcoming threats shouldn’t be ignored. Apple may not renew its agreement, Microsoft MSFT Windows 10 could steal overall search market share, Facebook graph search and the social network itself could take away advertising dollars, and Amazon (AMZN - Free Report) already takes care of most product searches.
Management said that YouTube remains a very strong contributor benefiting from the increase in online video consumption. More than a thousand creators are currently engaged with the platform bringing in a thousand subscribers every day.
And finally, Google platforms like Android, Chrome and Daydream continue to help the company draw more users and sell more ads.
The Numbers in Detail
Revenue
Gross total revenue of $22.45 billion grew 4.4% sequentially and 20.2% year over year (up 23% in constant currency or CC). The increase was primarily driven by the strength in Mobile Search, with the ongoing strength in YouTube. Also, strength in programmatic advertising and Play aided revenue growth.
Alphabet’s hedging programs were partially successful in offsetting the negative impact of $196 million ($91 million negative impact after adjusting hedging gains) on account of a stronger dollar in the year-over-year comparison.
The geographic distribution was as follows: the U.S. generated around 47% of revenues, up 6.0% sequentially and 22.0% from the year-ago quarter. The U.K., with a 9% revenue share was flat sequentially and up 5.0% (18% ex-FX) from last year. Other international markets accounted for the balance, representing sequential and year-over-year increases of 3.1% and 22.0% (25% ex-FX), respectively.
Google Segment
The segment includes search, advertising, Play, hardware and Cloud & Apps. So first, the search business:
On a sequential basis, revenue from Google-owned sites grew 4.5%, while that from partner sites decreased 0.3% resulting in a total advertising revenue increase of 3.5%. Both segments grew (22.9% and 1.0%, respectively) from the year-ago quarter. Overall, Google-owned and partner sites brought in 72% and 17% of quarterly revenue, respectively.
Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 and remained optimistic about search revenue growth on both tablets and desktops. TrueView and DoubleClick Bid Manager were the primary drivers of YouTube revenue although app promotions are becoming bigger contributors.
The traditional AdSense benefited from strength in programmatic and AdMob, offset by a decline in the traditional network business.
Other revenue was up 12.0% sequentially and 38.8% year over year to just over 10% of revenue. The strength was on account of Play Store sales (apps, content) and cloud revenues.
Other Bets Segment
Alphabet broke out the segment for the first time in the March quarter this year, which includes its Fiber, Verily, Calico, Nest, self-driving cars and incubation activities in X Labs. Revenues were up 6.5% sequentially and 39.7% year over year.
Since this segment is a combination of several businesses that are in the pre-revenue stage, operating different models and serving diverse end markets, the results are likely to be lumpy in any given quarter. The main drivers of revenues last quarter were Nest Fiber and Verily.
Total traffic acquisition cost, or TAC (the portion of revenue shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website) was up 5.2% sequentially and up 17.3% year over year to nearly 21% of total advertising revenues.
TAC paid out to network partners was flat sequentially and 4.3% year over year, representing 70% of network revenue. Mobile search carries higher TAC so the increase in mobile search revenue is increasing related TAC according to management.
TAC for distribution arrangements was up 15.3% sequentially and 48.2% year over year, representing nearly 10% of Google website revenue.
Net advertising revenue, excluding TAC was up 3.1% sequentially and 18.3% year over year.
Revenue net of TAC came in at $18.27 billion, up 4.2% sequentially and 20.9% year over year, beating the Zacks Consensus Estimate of $17.906 billion.
Margins
Gross margin of 61.3% shrank 93 bps sequentially and 107 bps from the year-ago quarter.
Price declines remained negative in both sequential and year-over-year comparisons as the mix continued to move toward lower-margin business.
Cost per click (CPC) was down a respective 5% and 11% from the previous and year-ago quarters. On a sequential basis, CPC was down 6% on both Google sites and network sites. On Google sites, CPCs were down 6% from the year-ago quarter, while network CPC declined 14%.
Paid clicks grew 9% sequentially and 33% year over year, helped in part by growing volumes of mobile and TrueView ads on YouTube. Google sites did better than Network sites with paid clicks growing 11% and 42%, respectively, from the previous and year-ago quarters. Network paid clicks also increased 1% both sequentially and from the year-ago quarter.
Operating expenses of $7.99 billion increased 7.9% sequentially and 15.2% from the September quarter of 2015. The operating margin was 25.7%, down 207 bps sequentially but up 48 bps from last year. As a percentage of sales, R&D and S&M expenses decreased while G&A increased from the year-ago quarter.
Non-operating gains were $278 million compared with $151 million in the previous quarter and $183 million in the Sep 2015 quarter.
Alphabet reported net income of $5.06 billion, or 22.5% of sales, compared with $4.88 billion, or 22.7% of sales in the Jul 2016 quarter and $3.98 billion, or 21.3% of sales in the year-ago quarter. GAAP earnings of $7.25 a share were up from $7.00 in the previous quarter and $5.73 in the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $83.06 billion, up $4.60 billion from the third quarter. Management said that $50 billion or 60% of this is held overseas. The company generated around $9.85 billion of cash from operations in the third quarter and spent $2.55 billion on capex, netting a free cash flow of $7.29 billion.
Alphabet also spent $2.55 billion on capital expenditure, $252 million on acquisitions and $3.25 billion to repay some debt.
ALPHABET INC-A Price, Consensus and EPS Surprise
ALPHABET INC-A Price, Consensus and EPS Surprise | ALPHABET INC-A Quote
Zacks Rank
Alphabet carries a Zacks Rank #3 (Hold).
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