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Alphabet (GOOGL) Q3 Earnings Miss Estimates, Revenues Beat

Alphabet Inc.’s GOOGL non-GAAP earnings of $10.12 per share in third-quarter 2019 missed the Zacks Consensus Estimate of $12.57. Also, earnings decreased 29% sequentially and 22.5% year over year.

The earnings decline was a result of heavy investment in the cloud-computing business, artificial intelligence and consumer hardware.

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 $33.01 billion. The figure was up 4.1% sequentially and 21.5% year over year.

Net revenues surpassed the Zacks Consensus Estimate by 0.52%.

Following the weaker-than-expected third-quarter results, Alphabet’s share price was down 1.63% in the after-hour trading session.

Notably, primary drivers of the Google business haven’t changed. Yet, pricing remains under pressure, both on account of nagging FX concerns, and continued strength in mobile and TrueView.

Nonetheless, Google continues to enjoy strength in the mobile platform. 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 the huge database. As a result, direct response marketers continue to show interest in it.

The company stated that Google Cloud is recording substantial revenue growth, and it will continue to invest in this space.

YouTube, which remains a strong contributor to the company’s growth, is benefiting from improvement in online video consumption. More than a thousand creators are currently engaged in the platform, bringing in a thousand subscribers every day. However, time and again it faces continuous pressure from advertisers to tighten controls on the fast-growing YouTube video service, in a bid to avoid adult or offensive content.

Alphabet Inc. Price, Consensus and EPS Surprise

 

Alphabet Inc. Price, Consensus and EPS Surprise

Alphabet Inc. price-consensus-eps-surprise-chart | Alphabet Inc. Quote

Numbers in Detail

Revenues

Gross total revenues of $40.5 billion increased 4% sequentially and 20% year over year (up 22% in constant currency). The increase was primarily driven by strength in ad revenues, reflecting strong demand for the company’s search, video and web display ads.

Google Segment

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

Coming to the search business, revenues from Google-owned sites were up 4.8% on a sequential basis and that of partner sites increased 0.1%, resulting in a 4% increase in total advertising revenues.

Google-owned and partner sites grew 19.1% and 7.5% year over year, accounting for 70.7% and 13% of quarterly revenues, respectively. This resulted in a year-over-year increase of 17.1% in total advertising revenues.

In addition, Other revenues increased 4% sequentially and 38.5% year over year, accounting for 15.9% of third-quarter revenues.

Other Bets Segment

Other Bets revenues were $155 million, down 4.3% sequentially but up 6.2% year over year, accounting for 0.4% of total third-quarter revenues.

Total traffic acquisition cost or TAC was up 3.5% sequentially and 13.8% year over year.

TAC paid out to network partners increased 0.4% sequentially and 6% year over year. Given the fact 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 6.6% sequentially and 22.2% year over year.

Operating Results

Cost per click on Google sites was up 3% sequentially but down 2% from the year-ago quarter. Cost-per-impression on Google Network Members' properties remained flat on a sequential basis but decreased 3% year over year.

Paid clicks on Google properties were up 1% sequentially and 18% from the year-ago quarter. Impressions on Google Network Members' properties remained flat on a sequential basis but increased 12% on a year-over-year basis.

Operating expenses were $13.8 billion, up 27% from the year-ago quarter due to an increase in headcount.

Balance Sheet

At the end of the third quarter, Alphabet had a solid balance sheet, with cash & cash equivalents, and marketable securities of around $109.1 billion, down from $121.1 billion in the comparable prior-quarter period.

The company generated around $13.2 billion cash from operations in the third quarter and spent $5.3 billion on capex, netting a free cash flow of $8.7 billion.

Zacks Rank and Stocks to Consider

Currently, Alphabet carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader technology sector include Itron, Inc. ITRI, Booking Holdings Inc. BKNG and Ambarella, Inc. AMBA. While Itron sports a Zacks Rank #1 (Strong Buy), Booking Holdings and Ambarella carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth for Itron, Booking Holdings and Ambarella is currently projected at 25%, 13.08% and 11.18%, respectively.

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