Alphabet (GOOGL) Q3 Earnings Beat Estimates, Revenues Lag

Alphabet Inc.'sGOOGL non-GAAP earnings of $13.06 in the third quarter of 2018 surpassed the Zacks Consensus Estimate of $10.54. Also, earnings increased 11.1% sequentially and 36.5% year over year.

Net revenues, excluding total traffic acquisition cost or TAC (TAC is the portion of revenues shared with Google's partners, and amounts paid to distribution partners and others who direct traffic to the Google website) came in at $27.16 billion, up 3.5% sequentially and 21.9% year over year.

However, net revenues marginally missed the Zacks Consensus Estimate of $27.32 billion.

Following third-quarter results, Alphabet's share price was down 3.95% in after-hour trading. The decrease could be due to lower-than-expected revenues, continued rising expenses and concerns about regulatory scrutiny.

Coming to price performance, Alphabet's shares have returned 0.3% on a year-to-date basis against the industry 's loss of 22.6%.

The company stated that Google Cloud is recording substantial revenue growth, reflecting ongoing momentum in the business.

Primary drivers of the Google business haven't changed. Pricing remains under pressure, both on account of nagging FX concerns, coupled with continued strength in mobile and TrueView.

Google continues to enjoy strength in the mobile platform. One of its drivers is Accelerated Mobile Pages (AMP), which is being accepted by a number of publishers and sites across the world. Management is focused on driving mobile experiences and the company is well positioned to pick up strong intent-to-buy signals by studying mobile searches from its huge database. As a result, direct response marketers continue to show interest in it.

YouTube continues to remain a strong contributor, benefiting from growth in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day.

Finally, Google platforms like Android, Chrome and Daydream continue to help it in drawing more users, and selling more ads.

Numbers in Detail


Gross total revenues of $33.7 billion increased 3.3% sequentially and 21.5% year over year (up 22% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, healthy growth in cloud, YouTube and desktop search aided its revenues.

Google Segment

The segment includes search, advertising, Play, hardware, and Cloud & Apps.

Coming to the search business, revenues from Google-owned sites were up 3.4% on a sequential basis, while that of partner sites increased 1.6%, resulting in an increase of 3.1% in total advertising revenues.

However, Google-owned and partner sites grew 22% and 12.9% year over year, respectively, accounting for 71.3% and 14.5% of quarterly revenues.

Management stated that mobile search continued to benefit from improvement in ad formats, and hence remains optimistic about search revenue growth on both tablets and desktops.

Other revenues increased 4.9% sequentially and 29.2% year over year, accounting for 13.8% of third-quarter revenues.

Other Bets Segment

In the third quarter, Other Bets revenues were $146 million, down 0.7% sequentially but up 24.8% year over year, accounting for 0.4% of the total revenues.

Total traffic acquisition cost or TAC was up 2.5% sequentially and 19.6% year over year.

TAC paid out to network partners increased 0.5% sequentially and 10.5% year over year. Given that mobile search carries higher TAC, the increase in mobile search revenues is driving related TAC, according to management.

TAC for distribution arrangements was up 4.9% sequentially and 31.4% year over year.

Net advertising revenues, excluding TAC, were up 3.3% sequentially and 20.5% from the prior-year quarter.


Gross margin of 57.7% increased 18 basis points (bps) sequentially but decreased 219 bps from the year-ago quarter.

Price declines remained negative in year-over-year comparisons, as the mix continued to move toward lower-margin business.

Cost per click (CPC) on Google sites was down 7% sequentially and 28% from the year-ago quarter. However, Cost-per-impression on Google Network Members' properties increased 2% sequentially and 11% year over year.

Paid clicks on Google properties grew 10% sequentially and 62% from the year-ago quarter, partly driven by growing volumes of mobile and TrueView ads on YouTube. Google Impressions on Google Network Members' properties decreased 1% sequentially but increased 1% from the year-ago quarter.

Operating expenses of $11.1 billion increased 26.1% year over year. Operating margin was 25%, down 300 bps from the year-ago quarter.

Balance Sheet

Alphabet has a solid balance sheet, with cash & cash equivalents, and marketable securities of around $106.4 billion, up from $102.3 billion in the second quarter. The company generated around $13.2 billion of cash from operations in the third quarter and spent $5.3 billion on capex, netting a free cash flow of $7.9 billion.

Alphabet Inc. Price, Consensus and EPS Surprise

Alphabet Inc. Price, Consensus and EPS Surprise | Alphabet Inc. Quote

Zacks Rank and Stocks to Consider

Currently, Alphabet carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector are EVINE Live EVLV , IAC/InterActiveCorp IAC and AMETEK, Inc. AME . While EVINE Live sports a Zacks Rank #1 (Strong Buy), both IAC/InterActiveCorp and AMETEK carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

Long-term earnings growth rate for EVINE Live, IAC/InterActiveCorp and AMETEK is currently pegged at 3%, 15% and 10.97%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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