Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) reported its fourth-quarter and fiscal year 2019 results and delighted investors by revealing YouTube ad revenue. Further, after years of being CEO of Google, this was Sundar Pichai's first earnings call as CEO of both Alphabet and Google. Revealing YouTub revenue, therefore, was one of his first big moves to help investors better appreciate Alphabet's fast-growing business.
On the whole, however, Alphabet's results were disappointing, featuring lower revenue growth than analysts were predicting. However, the move toward more transparency will give investors greater insight into Alphabet's business.
Let's look at what was made known about YouTube from the earnings report.
Image source: Getty Images.
Understanding Alphabet's YouTube segment
YouTube revenue includes ad revenue but it does not include nonadvertising services such as YouTube Premium, YouTube Music, and YouTube TV, which it reports in "other revenue."
In the Q4 earnings release, Pichai said, "To provide further insight into our business and the opportunities ahead, we're now disclosing our revenue on a more granular basis." Leave it to Alphabet to disclose additional information to provide more insight into the business, only to make it complicated still. Nevertheless, increasing overall clarity and visibility into the business will reduce uncertainty, which should be positive for valuation -- at least over the long haul.
Dissecting YouTube's recent performance
YouTube ads are working well for Alphabet. From 2017 to 2019, YouTube ads experienced a 36% compounded annual growth rate (CAGR) to reach revenue of over $15 billion, compared with the CAGR for Alphabet overall, which was 21%. In the tech company's fourth-quarter conference call, Pichai said, "People can now easily buy products in YouTube's home feed and search results, making it possible for advertisers to reach even more audiences." YouTube ad revenue continued to grow faster than Alphabet in Q4 specifically. For the quarter, YouTube ad revenue increased 31% from the previous year, while revenue for Alphabet overall grew 17%.
Nonadvertising revenue for YouTube, mainly from subscriptions such as YouTube TV and YouTube Premium, notably achieved a $3 billion revenue run rate in the fourth quarter, management explained in the company's earnings call. Alphabet is investing in growing this part of its business, joining an area with intense competition.
YouTube Premium subscribers, of which it reported 20 million, can get ad-free YouTube viewing plus YouTube Music for $11.99 per month. Additionally, Alphabet reported 2 million paid customers of YouTube TV, which costs $49.99 per month and offers live TV from 70+ channels. YouTube TV compares well on price with Hulu + Live TV, which costs $54.99 per month and offers 60+ channels plus access to the entire Hulu streaming library.
What this means for investors
Alphabet is noticing a shift in online advertising. One example is YouTube engagement ads, which monetize at a lower rate than traditional search ads. If YouTube is growing revenue at the expense of more profitable segments, it could hurt Alphabet's bottom line.
Alphabet introduced more transparency in a quarter where results were disappointing. Further, it left questions still unanswered, such as margins for YouTube. But an increase in openness is always welcome by all investors.
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