Alphabet (GOOGL) Q4 Earnings Miss Estimates, Revenues Beat

Alphabet Inc .'s GOOGL fourth-quarter diluted non-GAAP earnings of $9.70 missed the Zacks Consensus Estimate of $10.12. However, earnings increased 2% sequentially and 29% year over year.

The increased spending on its consumer gadgets, YouTube video app and cloud computing services impacted its profits.

The Internet powerhouse reported decent top-line numbers. 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 $25.9 billion, increasing 16.2% sequentially and 22% year over year. The top line beat the Zacks Consensus Estimate of $25.7 billion.

Following the weaker-than-expected fourth-quarter profits, share price were down 2.33% in after-hours trading. However, Alphabet's shares have returned 42.6% in the past 12 months, outperforming the industry 's growth of 31.4%.

The company said that Google Cloud is generating substantial revenue growth, reflecting the ongoing momentum in the business. Its cloud business now generates more than $1 billion in sales per quarter.

Also, management announced that John L. Hennessy, who has been working with the company's board since 2004, will become the new chairperson of Alphabet. He will replace chairman Eric Schmidt and assume his new role on Feb 15.

The primary drivers of the Google business haven't changed. Pricing remains under pressure both on account of nagging FX concerns as well as continued strength in mobile and TrueView. However, volumes are encouraging as total paid click growth of 43% remains a reassuring number.

Google continues to enjoy strength in the mobile platform. One of the 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.

The Numbers in Detail


Gross total revenues of $32.3 billion were up 16.4% sequentially and 24% year over year (up 24% in constant currency or CC). The increase was primarily driven by strength in mobile search. Also, healthy growth in network revenues, hardware, cloud and Play aided revenue growth.

Google Segment

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

Coming to the search business, revenues from Google-owned sites increased 12.7% on a sequential basis, while that from partner sites increased 14.9%, resulting in an increase of 13.1% in total advertising revenues. However, Google-owned sites and partner sites grew 23.8% and 12.6%, respectively, year over year, and accounted for 69% and 15% of quarterly revenues.

Management said that mobile search continued to benefit from improvements in ad formats and delivery initiated in the third quarter of 2015 as well as remained optimistic about search revenue growth on both tablets and desktops.

Other revenues increased both 37.7% sequentially and year over year, accounting for 15% of fourth-quarter revenues.

Other Bets Segment

Alphabet broke up the segment in the March quarter of 2016. The segment includes businesses like self-driving unit Waymo and smart home appliance maker, Nest, among others. Although costs are still running high and the divisions is running at a loss, it is gaining momentum and has performed well in the fourth quarter.

Revenues were up 35.4% and 56.1% year over year and accounted for 1% of fourth-quarter revenues.

Total traffic acquisition cost , or TAC was up 17.2% sequentially and 33% year over year.

TAC paid out to network partners increased 18.5% sequentially and 19.2% year over year. Given that mobile search carries higher TAC, the increase in mobile search revenue is driving related TAC according to management.

TAC for distribution arrangements was up 15.6% sequentially and 57.2% year over year.

Net advertising revenues, excluding TAC was up 11.9% sequentially and 18.4% year over year.


Gross margin of 55.9% decreased 400 bps sequentially and 324 bps from the year-ago quarter.

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

Cost per click (CPC) was declined 6% and 14%, respectively, from the previous and year-ago quarters. On a sequential basis, CPC was down 7% on Google sites but was up 1% on network sites. On Google sites, CPCs were down 16% from the year-ago quarter, while network CPC declined 4%.

Aggregate paid clicks grew 18% sequentially and 43% year over year, driven partly by growing volumes of mobile and TrueView ads on YouTube. Google sites paid clicks grew 19% and 48%, respectively, from the previous and year-ago quarters. Network paid clicks increased 9% sequentially and 13% from the year-ago quarter.

Operating expenses of $10.4 billion increased 17.5% sequentially and 18.6% year over year. Operating margin was 23.7%, down 431 bps sequentially and 176 bps from the year-ago quarter.

Balance Sheet

Alphabet has a solid balance sheet, with cash and short-term investments of around $101.9 billion, up from $100.1 billion in the third quarter. The company generated around $10.3 billion of cash from operations in the fourth quarter and spent $4.3 billion on capex, netting a free cash flow of $6 billion.

Alphabet Inc. Price, Consensus and EPS Surprise

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

Zacks Rank and Stocks to Consider

Alphabet carries a Zacks Rank #3 (Hold).A few better-ranked stocks in the technology sector are PetMed Express, Inc PETS and Teradyne, Inc. TER , both sporting a Zacks Rank #1 (Strong Buy), while Mercadolibre, Inc. MELI , sporting a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 (Strong Buy) Rank stocks here .

Long-term earnings per share growth rate for PetMed, Teradyne and Mercadolibre is projected to be 12%, 12% and 25%, 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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