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Alphabet: 2Q19 results beat expectations

31 July 2019

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by Nick Dennis, Anchor Global Equity Fund

Google’s parent company, Alphabet, reported better-than-expected 2Q19 results on Thursday (25 July). Earnings came in at $14.21/share, vs the Refinitiv consensus forecast of $11.30/share, while sales rose 19% YoY (or 22% YoY in constant currency terms) to $38.94bn, ahead of the $38.15bn Refinitiv consensus had expected.

Ad revenues were up 16% YoY. Google sites sales rose 18% YoY on the back of the benefits from applying machine learning to user and advertiser experiences. Network sales increased by 9% YoY (driven by Google Ad Manager and Ad Mob), while paid clicks on Google properties jumped 28% YoY. However, cost-per-click on Google properties declined 11% YoY. Impressions on Google Network Members’ properties were unchanged but cost per impression on these properties rose 5% YoY.

In terms of its various segments, Other revenues jumped 39.7% YoY, with Cloud sales strong and Google Cloud Platform (GCP) being the main driver. Google Play’s revenue was also robust and its Other Bets segment saw revenue rise 11.7% YoY.

By region, the US recorded a revenue increase of 20% YoY, EMEA was up 21% in constant currency terms, Asia Pacific (APAC) rose 33% YoY in constant currency terms and Other Americas jumped 25% YoY in constant currency terms. There was a sequential acceleration vs 1Q19 in all of its regions.

The cost of revenue increased by 24.5%, while traffic acquisition costs (TAC) were up 12.7% YoY. Other cost of revenues was $10.1bn, up 35% YoY, including datacentres, content acquisition costs ([CACs] mostly YouTube and other ad-supported content, as well as for other subscription services – YouTube Premium and YouTube TV – these have a higher CAC as a percentage of revenue). There was also growth in hardware costs. The decline in TACs continued. However, there was a positive mix shift in revenue from Network to Sites, while the faster-growing mobile advertising segment had a negative impact on TAC. The growth of YouTube (TAC-free) also had a positive impact.

Figure 1: TACs to Google network members and distribution partners,mn:

Source: Alphabet

Alphabet’s operating profit (OP) advanced 13% YoY, with an operating margin (OPM) of 24%. Google’s OP was up 16% YoY, with an OPM of 26.8%, while its Other Bets segment’s losses expanded from $732mn to $989mn. Research and development (R&D) costs rose 21.5% YoY.

Alphabet announced the authorisation of stock repurchases valued at $25bn (3% of the firm’s market cap pre-results). We note that the signal here is more important than the amount. Alphabet has cash on hand of $121bn.

Our key takeaways of these results were:

  • Alphabet (Google) delivered robust revenue growth and operating results, reminding investors that it is one of the world’s great companies.
  • For the first time, management disclosed the size of its Cloud business, which is hitting an annualised revenue run-rate of $8bn. This segment is now the third-largest dollar contributor to Google’s overall growth (after Search and YouTube, respectively).

 

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