Alphabet Delivers Another "Exceptional" Quarter

By Steve Symington Markets Fool.com

Shares of Alphabet Inc.(NASDAQ: GOOG)(NASDAQ: GOOGL)were down nearly 3% in Thursday's after-hours trading after the internet search giant released fourth-quarter 2016 results. But keeping in mind Alphabet stock opened the trading session at a fresh all-time high, as well as the fact that it doesn't provide specific quarterly financial guidance, the market's response isn't necessarily indicative of a disappointing quarter.

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Let's take a closer look at what drove Alphabet's latest results.


Google's headquarters building. Image source: Alphabet, Inc.

Alphabet's headline numbers

Quarterly revenue climbed 22.2% year over year (24% at constant currency), to $26.064 million, and -- based on generally accepted accounting principles (GAAP) -- translated to 23.4% growth in operating income, to $6.639 billion, and 8.3% growth in GAAP net income, to $5.333 billion. GAAP net income per share grew 7.1%, to $7.56, for both Class A and Class B shares.

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On an adjusted (non-GAAP) basis, which adds perspective by excluding items like stock-based compensation, operating income grew 24.5% year over year, to $8.485 billion, net income grew 9.1%, to $6.593 billion, and net income per share grew 8%, to $9.36. By comparison-- and though we don't usually pay close attention to Wall Street's quarterly demands -- analysts' consensus estimates called for higher adjusted earnings of $9.64 per share but more modest 18.3% growth in revenue, to $25.23 billion.

CFO Ruth Porat added:

Our growth in the fourth quarter was exceptional [...]. This performance was led by mobile search and YouTube. We're seeing great momentum in Google's newer investment areas and ongoing strong progress in Other Bets.

More specifically, here's a broad look how Alphabet's two primary operating segments (Google and "other bets") fared:

Metric Three Months Ended Dec. 31, 2015 Three Months Ended Dec. 31, 2016 Year-Over-Year Growth
Google segment revenues $21.179 billion $25.802 billion 21.8%
Google operating income $6.744 billion $7.883 billion 16.9%
Other bets revenues $150 million $262 million 74.7%
Other bets operating income (loss) ($1.213 billion) ($1.088 billion) N/A

DATA SOURCE: ALPHABET, INC.

On Google

Alphabet's core Google business -- which includes the likes of Search, Android, Maps, Chrome, YouTube, Google Play, and Gmail, as well as Ads, Commerce, Apps, Cloud, and hardware products -- predictably represented the bulk of the company's consolidated revenue.

Within that, advertising revenue climbed 17% year over year, to $22.4 billion, or roughly 85.9% of Alphabet's total revenue (down from 88.3% last quarter, and just over 89% two quarters ago). Breaking it down further, ad revenue from Google's own properties climbed 20% year over year, to $17.968 billion, and ad revenue from network members' properties rose 7%, to $4.431 billion.

Aggregate paid clicks increased 36% year over year, including 43% growth in paid clicks on Google properties, and 7% growth in paid clicks on Google network members' properties. Meanwhile, aggregate cost-per-click -- a key measure that helps show how much Google makes per ad -- declined 15%, including 16% and 19% declines on Google properties and network members' properties, respectively. As I noted in my earnings preview earlier this week, declines in aggregate cost-per-click continue to stem from outsized growth at YouTube, where TrueView ads tend to reach consumers earlier in the purchase funnel so monetize at lower rates.

Finally, other revenue within Google grew an impressive 62% year over year, to $3.403 billion, driven by broad strong growth in each of Google's hardware, Play, and Cloud subsegments.

On other bets

Speaking to Porat's mention of "strong progress in Other Bets," remember that this segment is primarily comprised of early-stage, pre-revenue businesses operating in several disparate industries. As such, growth and profitability of the other bets segment can vary widely from quarter to quarter so is best viewed through a long-term lens.

In the meantime, other bets achieved respectable 74.7% year-over-year growth in fourth-quarter revenue, to $262 million, almost completely attributable again to sales of Nest connected home products, Fiber high-speed internet, and Verily longevity solutions. Other bets continued to remain solidly unprofitable (for now), generating an operating loss of $1.088 billion, which was narrowed from a $1.213 billion operating loss in the same year-ago period. Even excluding stock-based compensation, other bets' operating loss would have been $927 million, compared to $1.082 billion excluding SBC in last year's fourth quarter.

Looking forward

Alphabet didn't offer specific forward financial guidance as per usual. But in a broader sense, management did suggest during the subsequent conference call that they plan to focus on not only continuing the momentum of their core advertising business in 2017 but also investing to further grow additional revenue streams as it works to diversify its business.

As Porat explained:

We remain excited about the sizable opportunities that have not yet been tapped. Alongside these businesses, we are focused on growing additional revenue streams within Google over the medium and long term. In 2016, our "Other" revenue line grew 41% on a full-year basis reflecting the growth in our Play, hardware, and cloud businesses. We see tremendous potential ahead for these businesses, as well as in the continued development in non-advertising revenue streams from YouTube. We're investing in our cloud and hardware businesses, as well as our newer non-ad revenue sources from YouTube in order to accelerate their progress as major revenue drivers for Google in the next several years.

In the end, apart from Alphabet's slight bottom-line shortfall relative to Wall Street's expectations, this was another strong performance, with continued admirable top-line growth from the global tech juggernaut. And with shares only enduring a modest pullback right now from all-time highs, I think Alphabet investors should be more than pleased with where their company stands.

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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). The Motley Fool has a disclosure policy.