Alphabet, Inc. Delivers a "Terrific" Beat

By Markets Fool.com

Image source: Alphabet.

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Google parentAlphabet(NASDAQ: GOOG)(NASDAQ: GOOGL) just released segment-based results for the third time Thursday after the market close.With shares of the Internet juggernaut up more than 4% in after-hours trading, and flirting with a fresh 52-week-high as of this writing, investors are rightly happy with what it had to say.

The headline numbers

Consolidated revenue grew 21.3% year over year, to $21.5 billion, and would have increased 25% if it weren't for the negative effects of foreign-currency exchange. Based on generally accepted accounting principles (GAAP), that translated to 23.7% growth in operating income, to $5.97 billion, and 24.1% growth in GAAP net income, to $4.88 billion. GAAP net income per share climbed 42% year over year for class A and B common shares, and rose 8.9% for class C capital stock, both to $7.00.

On an adjusted (non-GAAP) basis -- which excludes items like stock-based compensation -- operating income climbed 25.4% year over year, to $7.47 billion, and adjusted net income grew 17.7%, to $5.86 billion. Adjusted net income per share increased 20.5% year over year, to $8.42. Alphabet also repurchased around 2 million shares of Class C stock during the quarter, for $1.4 billion, completing all authorized share repurchases under its repurchase program.

By comparison, and keeping in mind we don't typically pay close attention to Wall Street's demands, analysts' consensus estimates predicted lower adjusted earnings of $8.03 per share on revenue of $20.76 billion.

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Alphabet CFO Ruth Porat praised her company's results as "terrific," elaborating that they "reflect the successful investments we've made over many years in rapidly expanding areas such as mobile and video."

Breaking it down

Alphabet broke out therespective financial performances of its two primary operating segments, including the core Google business, and those efforts that fall under promising early stage "Other Bets" category.

3 Months Ended June 30, 2015 3 Months Ended June 30, 2016 Growth (YOY)
Google segment revenues $17.6530 billion $21.315 billion 20.7%
Google operating income $5.608 billion $6.994 billion 24.7%
Other Bets revenues $74 million $185 million 150%
Other Bets operating income (loss) ($660 million) ($859 million) N/A

DATA SOURCE: ALPHABET, INC.

On "Other Bets"

Alphabet's "Other Bets" segment is decidedly unprofitable, as quarterly capital expenditures (capex) dedicated to the early-stage businesses jumped more than 20% year over year, to $280 million. But that also represents a deceleration in capex growth for the segment; the figure held steady from $280 million last quarter, when Other Bets capex nearly doubled on a year-over-year basis. That's a small fraction of the $2.056 billion in capex that Alphabet dedicated to supporting its core Google business in Q2, which itself represents a slight decline from $2.06 billion in last year's second quarter.

Moreover, I'm compelled to remind investors that these short-term results aren't necessarily indicative of Other Bets' success. Rather, given the disparate industries and various levels of progress at which Other Bets businesses -- including Fiber (high-speed Internet), Verily (longevity), Calico (life sciences), Nest (connected home), self-driving cars, and X (moonshots) -- currently stand, Porat regularly insists a more "instructive" way to measure their collective progress is by viewing their results over periods of at least 12 months.

We should also note that several Other Bets businesses remain in the "pre-revenue" stage, with the majority of revenue once again coming from Nest, Verily, and Fiber.

On Google

Next, Google continued to expand profitability, achieving operating margin of 32.8% in Q2, up from 31.8% in the same year-ago period. Google segment businesses include Search, Android, Maps, Chrome, YouTube, Google Play, and Gmail, as well as Ads, Commerce, Apps, Cloud, and hardware products. But as I noted in my earnings preview earlier this week, the primary source of revenue for each of these sub-segments -- and Alphabet overall -- is advertising.

Advertising revenue at Google grew 19.5% year over year, to $19.1 billion, representing just over 89% of Alphabet's total revenue. More specifically, advertising revenue from Google's own websites increased 24.2%, to $15.4 billion, while revenue from Google Network Members' sites grew 3.4%, to $3.743 billion.

During the subsequent earnings conference call, Porat echoed her comments from last quarter that this growth can be credited to continued "substantial strength in mobile search, due to the ongoing benefit from the improvement in ad formats and delivery that we watched in the third quarter last year."

Porat also pointed to "solid" growth in both desktop and tablet search, while YouTube revenue continues to grow at a rapid clip. More specifically on the latter, the leading video portal continues to enjoy traction for its TrueView video ad format, but also sees increasing contributions from Google Preferred, as well as from buying on DoubleClick bid manager.

Next, Aggregate paid clicks climbed 29% year over year, including 37% growth in paid clicks on Google websites, and flat growth in paid clicks on Google Network Members' sites.

Aggregate cost-per-click -- which help measure how much Google makes per ad -- fell 7% year over year, including a 9% decline on Google sites, and an 8% decrease on Google Network Members' sites. Similar to the metric's decline over the past few quarters, however, this is partially owed to the outsized growth of YouTube, where TrueView ads reach consumers earlier in the purchase funnel, and tend to monetize at lower rates, rather than traditional web-based ad impressions. In any case, it's an enviable "problem" to have a fast-growing source of incremental ad revenue dragging down aggregate cost-per-click.

Finally, revenue from other (non-advertising) sources within Google increased 33% year over year, to$2.3 billion, reflecting strong, broad-based demand across Cloud, Apps, Play, and hardware.

In the end, there was little not to love about this impressive report from Alphabet. As the company continues to responsibly invest in long-term growth-driving initiatives, while fostering the health of its lucrative core business, I think investors should be more than happy with these results.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.