Alphabet 4Q18 results beat expectations, but costs concern the market

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Alphabet (Google) reported 4Q18 results on Monday (4 February) that beat expectations across the board. Earnings came in at $12.77/share (+12% YoY) vs $10.82/share expected by Refinitiv consensus estimates, while revenue came in at $39.28bn (+22% YoY) vs $38.93bn expected by Refinitiv consensus estimates. Traffic acquisition costs (TACs), or the fees Google pays to companies such as Apple to be the default search engine, came in at $7.44bn – up 13% QoQ and 15% higher YoY. TACs declined to 23% of total ad revenue from 24% in the year-ago quarter.

The vast majority of Alphabet’s sales are from Google and its various advertising units, which continues to be the key driver and brought in $32.64bn in 4Q18. However, cost per click on Google properties — which measures the amount Alphabet charges advertisers for each ad served on its web sites — declined by 29% YoY and 9% QOQ. Other revenue still only represents 15% of total revenues for the year.

Google continued to grow its “other revenues” segment, which includes its cloud business, the Google Play store and hardware sales, which brought in $6.49bn (+31% YoY). The company did not break out Cloud revenues for the quarter but said that it remains “one of the fastest growing businesses across Alphabet.” Its “Other Bets” category, which houses Alphabet’s other companies, including its health venture Verily and self-driving start-up Waymo, came in shy of revenue estimates losing $1.33bn on sales of $154mn. Still, the segment posted an 18% YoY rise.

In 4Q18, Alphabet used $6.85bn for Google’s capital expenditures (capex), up from $3.81bn in 4Q17 and higher than the $5.63bn in capex that was projected. Overall, for the year, Alphabet spent $21.4bn on R&D – up 29% YoY from $16.6bn in 2017, with CFO Ruth Porat saying on the conference call that investment in machine learning was a factor in the company’s increase in investment.

The firm’s 4Q18 margins disappointed, with its operating margin declining to 21%, lower than the 22% expected and the 23% margin it reported in 4Q17.

Despite the revenue and earnings beat, the share price traded down c. 3% in the after-hours trading on Monday likely due to growing costs and falling cost-per-click numbers.

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