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Alphabet (GOOGL) Misses on Q4 Earnings, Beats Revenues
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Alphabet (GOOGL - Free Report) fourth-quarter earnings of $7.56 missed the Zacks Consensus Estimate of $7.65 due to higher taxes. However, earnings were up 7.1% year over year.
Following weaker-than-expected earnings, shares were down more than 2% in after-hours trading. Higher cost of revenue and steeper taxes impacted the quarter’s earnings.
Coming to the price performance, over the past one year, shares of Alphabet have been steadily treading higher. The stock returned 19.43% compared with the Zacks categorized Internet Services industry’s gain of 19.39%.
On the Other Bets side, most of the businesses included in it are in their early stages. However, it is gradually picking up. Management said that Nest, Fiber and Verily were revenue contributors in the fourth 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 36% 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 distribution agreements with Apple (AAPL). But the upcoming threats shouldn’t be ignored. Apple may not renew its agreement, Microsoft (MSFT - Free Report) 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 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 everyday.
And finally, Google platforms like Android, Chrome and Daydream continue to help it draw more users and sell more ads.
The Numbers in Detail
Revenues
Gross total revenue of $26.06 billion grew 16.1% sequentially and 22.2% year over year (up 24% 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 newer investment areas and solid progress in Other Bets aided revenue growth.
The geographic distribution was as follows: the U.S. generated around 49% of revenues, up 19.8% sequentially. The U.K., with an 8% revenue share was up 10.5% sequentially. Other international markets accounted for the balance, representing sequential increase of 14.1%.
Google Segment
The segment includes search, advertising, Play, hardware and Cloud & Apps.
Coming to the search business, on a sequential basis, revenues from Google-owned sites grew 11.7%, while that from partner sites increased 18.7% resulting in a total advertising revenue growth of 13.0%.Google-owned sitesand partner sites grew 20.3% and 7.0%, respectively, year over year and brought in 69% and 17% of quarterly revenues.
Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 as well as 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 39.9% sequentially and 62.0% year over year to just over 13% of fourth quarter 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 of2016. The segment includes Fiber, Verily, Calico, Nest and incubation activities in X Labs. Revenues were up 33.0% sequentially and 74.7% 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.
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 15.9% sequentially and 19.6% year over year.
TAC paid out to network partners were up 17.5% sequentially and 7.6% year over year. Mobile search carries higher TAC so the increase in mobile search revenue is driving related TAC according to management.
TAC for distribution arrangements was up 13.3% sequentially and 48.3% year over year.
Net advertising revenue, excluding TAC was up 12.2% sequentially and 16.8% year over year.
Revenue net of TAC came in at $21.22 billion, up 16.1% sequentially and 22.8% year over year. The top line beat the Zacks Consensus Estimate of $20.58 billion.
Margins
Gross margin of 59.1% shrank 216 bps sequentially and 251 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 9% and 15% from the previous and year-ago quarters. On a sequential basis, CPC was down 11% on Google sites but remained flat on network sites. On Google sites, CPCs were down 16% from the year-ago quarter, while network CPC declined 19%.
Paid clicks grew 20% sequentially and 36% 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 23% and 43%, respectively, from the previous and year-ago quarters. Network paid clicks also increased 6% sequentially and 7% from the year-ago quarter.
Operating expenses of $8.76 billion increased 9.8% sequentially and 12.9% from the December quarter of 2015. The operating margin was 25.5%, down 22 bps sequentially but up 425 bps from the year-ago quarter.
Non-operating gains were $218 million compared with $278 million in the previous quarter and ($180) million in the Dec 2015 quarter.
Alphabet reported net income of $5.33 billion, or 20.5% of sales, compared with $5.06 billion, or 22.5% of sales in the Sep 2016 quarter and $4.92 billion, or 23.1% of sales in the year-ago quarter. GAAP earnings of $7.56 a share were up from $7.25 in the previous quarter and $7.06 in the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $86.33 billion, up $3.27 billion from the third quarter. The company generated around $9.41 billion of cash from operations in the fourth quarter and spent $3.08 billion on capex, netting a free cash flow of $6.34 billion.
Alphabet also spent $662 million on acquisitions and $13 million to repay some debt.
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Alphabet (GOOGL) Misses on Q4 Earnings, Beats Revenues
Alphabet (GOOGL - Free Report) fourth-quarter earnings of $7.56 missed the Zacks Consensus Estimate of $7.65 due to higher taxes. However, earnings were up 7.1% year over year.
Following weaker-than-expected earnings, shares were down more than 2% in after-hours trading. Higher cost of revenue and steeper taxes impacted the quarter’s earnings.
Coming to the price performance, over the past one year, shares of Alphabet have been steadily treading higher. The stock returned 19.43% compared with the Zacks categorized Internet Services industry’s gain of 19.39%.
On the Other Bets side, most of the businesses included in it are in their early stages. However, it is gradually picking up. Management said that Nest, Fiber and Verily were revenue contributors in the fourth 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 36% 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 distribution agreements with Apple (AAPL). But the upcoming threats shouldn’t be ignored. Apple may not renew its agreement, Microsoft (MSFT - Free Report) 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 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 everyday.
And finally, Google platforms like Android, Chrome and Daydream continue to help it draw more users and sell more ads.
The Numbers in Detail
Revenues
Gross total revenue of $26.06 billion grew 16.1% sequentially and 22.2% year over year (up 24% 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 newer investment areas and solid progress in Other Bets aided revenue growth.
The geographic distribution was as follows: the U.S. generated around 49% of revenues, up 19.8% sequentially. The U.K., with an 8% revenue share was up 10.5% sequentially. Other international markets accounted for the balance, representing sequential increase of 14.1%.
Google Segment
The segment includes search, advertising, Play, hardware and Cloud & Apps.
Coming to the search business, on a sequential basis, revenues from Google-owned sites grew 11.7%, while that from partner sites increased 18.7% resulting in a total advertising revenue growth of 13.0%.Google-owned sitesand partner sites grew 20.3% and 7.0%, respectively, year over year and brought in 69% and 17% of quarterly revenues.
Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 as well as 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 39.9% sequentially and 62.0% year over year to just over 13% of fourth quarter 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 of2016. The segment includes Fiber, Verily, Calico, Nest and incubation activities in X Labs. Revenues were up 33.0% sequentially and 74.7% 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.
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 15.9% sequentially and 19.6% year over year.
TAC paid out to network partners were up 17.5% sequentially and 7.6% year over year. Mobile search carries higher TAC so the increase in mobile search revenue is driving related TAC according to management.
TAC for distribution arrangements was up 13.3% sequentially and 48.3% year over year.
Net advertising revenue, excluding TAC was up 12.2% sequentially and 16.8% year over year.
Revenue net of TAC came in at $21.22 billion, up 16.1% sequentially and 22.8% year over year. The top line beat the Zacks Consensus Estimate of $20.58 billion.
Margins
Gross margin of 59.1% shrank 216 bps sequentially and 251 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 9% and 15% from the previous and year-ago quarters. On a sequential basis, CPC was down 11% on Google sites but remained flat on network sites. On Google sites, CPCs were down 16% from the year-ago quarter, while network CPC declined 19%.
Paid clicks grew 20% sequentially and 36% 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 23% and 43%, respectively, from the previous and year-ago quarters. Network paid clicks also increased 6% sequentially and 7% from the year-ago quarter.
Operating expenses of $8.76 billion increased 9.8% sequentially and 12.9% from the December quarter of 2015. The operating margin was 25.5%, down 22 bps sequentially but up 425 bps from the year-ago quarter.
Non-operating gains were $218 million compared with $278 million in the previous quarter and ($180) million in the Dec 2015 quarter.
Alphabet reported net income of $5.33 billion, or 20.5% of sales, compared with $5.06 billion, or 22.5% of sales in the Sep 2016 quarter and $4.92 billion, or 23.1% of sales in the year-ago quarter. GAAP earnings of $7.56 a share were up from $7.25 in the previous quarter and $7.06 in the year-ago quarter.
Balance Sheet
Alphabet has a solid balance sheet, with cash and short-term investments of around $86.33 billion, up $3.27 billion from the third quarter. The company generated around $9.41 billion of cash from operations in the fourth quarter and spent $3.08 billion on capex, netting a free cash flow of $6.34 billion.
Alphabet also spent $662 million on acquisitions and $13 million to repay some debt.
Alphabet Inc. Price, Consensus and EPS Surprise
Alphabet Inc. Price, Consensus and EPS Surprise | Alphabet Inc. Quote
ZacksRank
Alphabet carries a Zacks Rank #2 (Buy).
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Today, you are invited to download the full list of 220 Zacks Rank #1 ""Strong Buy"" stocks – absolutely free of charge. Since 1988, Zacks Rank #1 stocks have nearly tripled the market, with average gains of +26% per year. Plus, you can access the list of portfolio-killing Zacks Rank #5 ""Strong Sells"" and other private research. See these stocks free >>