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Alphabet posts mixed 3Q18 results

31 October 2018

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by Anchor

Alphabet (Google) on Thursday (25 October) reported 3Q18 results, with revenue rising 21% YoY to $33.74bn but missing Refinitiv consensus estimates by c. $310mn. Net income of $9.19bn, or $13.06/share, compared with $6.73bn, or $9.57/ share, in the year-ago period, and came in above Refinitiv consensus analysts’ estimates of $10.45/share. The company said that earnings were buoyed by a lower tax rate and favourable valuation of the firm’s investments in startups such as Uber Technologies.

Google ad sales contributed 86% of revenue, but growth slowed to 20% YoY (to $28.95bn) vs c. 24% YoY growth in 2Q18. Alphabet’s cost of revenues increased 28% YoY, to $14.82bn for 3Q18. Excluding traffic acquisition costs (TACs), cost of revenues was $7.7bn, up 36% YoY, primarily driven by costs associated with Google data centres and content-acquisition costs primarily for YouTube, according to Google CFO Ruth Porat on the earnings call. Porat noted that the company’s ad revenue growth in the quarter was “led by mobile search with a strong contribution from YouTube, followed by desktop search.” However, she warned that TACs would continue to rise going forward (it accounted for 23% of advertising revenue in the quarter) as consumers increasingly shift from using its search engine on desktop computers to mobile devices. The company attributed much of the slower revenue growth to unfavourable currency exchange rates. Reuters reports that lower ad pricing to contend with antitrust concerns, new privacy rules in Europe and increased competition from Amazon may have also played a role. Non-advertising revenue (sales of mobile apps and cloud computing services), came in slightly below expectations. Those results combined with rising expenses brought down the company’s operating margin to 25% from 28% in 3Q17.

Readying newer ventures has been costly for Alphabet in terms of marketing and hiring, with about 5,300 employees added in 3Q18 and its cost of revenue standing at $14.3bn in the quarter (+28% YoY). Capital expenditures soared to $5.3bn from $3.5bn in the comparable period of last year, with 20 data centre sites in development, according to the company. We note that Google’s Pixel 3 and Google Home Hub, which launched in October are not included this quarter. Other revenue (including hardware, Play Store, and Google Cloud enterprise efforts), recorded revenue of $4.6bn (+29% YoY) vs $3.4bn in 3Q17. The Other Bets segment continued to lose money but it is slowly increasing revenue. It reported $146mn in revenue primarily generated by Verily and Fiber, with the operating loss up to $727mn from a restated $732mn in 2Q18.

The company ended the quarter with $106.4bn in cash and equivalents and marketable securities, and $3.99bn in long-term debt.

Alphabet’s share price dropped 3.5% in after-hours trading on the revenue miss. The share price is down c. 5% from Thursday’s close (25 October) to Tuesday (30 October).

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