Alphabet Earnings: Despite Growth In Revenues, EU Fine Impacts Profits

Alphabet (NASDAQ:GOOG) announced its second quarter results on July 24. The company posted 21% growth in revenues to $26 billion. The key highlights of the results were as follows:

• Google segment revenues for the quarter grew by 20.6% y-o-y to $25.7 billion. While Google’s operating profit grew by 11.6% to $7.8 billion, the operating margin declined due to the $2.7 billion European Commission fine.
• Other Bets business, which includes Fiber, Verily, Calico, Nest, self-driving cars, and incubation activities in X, reported revenue of $248 million and operating losses of $772 million on a quarterly basis.

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The core search business continued to witness pricing pressure, while ad volume for the company continued to grow due to widespread adoption of its programmatic platform. Furthermore, the movement in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube, TrueView and mobile search. The key takeaways from the earnings were as follows:

• Revenue from developing regions such as Latin America ($1.4 billion) and APAC ($3.7 billion) continue to lead the growth in search ads revenues as revenues from these regions grew by 31% and 28%, respectively. While U.S. revenues grew by 23% year-over-year to $12.3 billion, EMEA revenues grew by 14%, a lower rate compared to other regions, to $8.5 billion reflecting weakness in the British pound and the Euro.
• The programmatic platform, which includes AdMob, AdExchange and DoubleClick Bid Manager, continued to witness growth resulting in 13% growth in network website revenues to $4.2 billion.
• Cost per click (CPC), which measures the price paid for the number of times a visitor clicks on a search ad, has been in a steady decline for the past few years. In Q2, CPC declined by 26% on Google websites and 11% on network member sites. Furthermore, the aggregate cost per click declined by 23% during the quarter. The recent trend is indicative of geographical mix, device mix, currency headwinds, property mix and the rise of the programmatic platform.
• YouTube continues to drive revenue growth as 1.5 billion monthly viewers viewed 60 minutes of videos each day on their phones and tablets.
• Android continues to power Google’s revenues as 2 billion devices powered by the OS boosted Google Play content. Google Play witnessed double-digit growth across the world and in developing countries.
• The European Commission imposed fines of over $2.7 billion on Google for favoring advertisers that used its services to display and rank their shopping search results higher in listing. While the fine is included in “accrued expense and other current liabilities” on company’s consolidated balance sheet, this could potentially open up the company to lawsuits in other regions.

We are in the process of updating our model. We currently have an $893 price estimate for Alphabet, which is slightly below the current market price.

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