What To Expect From Alphabet’s Q3 Earnings

by Trefis Team
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Alphabet (NASDAQ:GOOG) is scheduled to announce its Q3 earnings on Thursday, October 25. The company has consistently reported solid growth in revenues in recent years, driven by Google’s core search advertisement business. Advertising revenues on Google’s own platforms, or Google Properties revenues, make up over 70% of Alphabet’s net revenues in recent years, and have grown at around 20% annually in the same period. This trend is likely to continue through the current year. In addition, Alphabet’s other revenues (apps, in-app purchases, digital content, Pixel smartphones, licensing, Google Cloud offerings such as Docs) have grown massively at over 40% in recent years. We expect this trend to continue in the current year as well. Earlier this year, the company incurred a fine of $5.1 billion charged by the European Commission (EC) due to Google’s Android-related distribution agreements that infringed European competition law, which will impact full-year earnings adversely.

Going forward, we expect the growth trend to continue across segments for Alphabet. We have summarized our second quarter expectations on our interactive earnings preview dashboard for Alphabet. You can change expected segment revenue and net margin figures for Alphabet to gauge how changes will impact its expected EPS for the quarter. Our forecast for the EPS for Q3 is slightly higher than consensus estimates.

Key Growth Trends

The company has reported strong growth in revenues generated on Google’s own properties. This trend has continued this year, with a 26% increase in revenues to $45 billion. On the other hand, revenues generated by advertising on partner websites, or Google Network Members’ Properties revenues, have shown mixed trends in recent years. This happened mainly due to two factors: First, the increase in paid clicks on Network Members’ Properties has not been as high as on Google Properties. Secondly, the average cost per click has been on a decline (a trend consistent even on Google Properties). Going forward, we expect Network Members’ Properties revenues to continue to grow, albeit at a slower pace than core ad revenues on Google owned and operated properties. We forecast Q3 revenues for ads on Google properties to be 22% higher on a y-o-y basis to $24 billion. Similarly, ad revenues on network members’ properties are expected to be up 17-18% to just over $5 billion.

Other revenues (from Pixel, apps, in-app purchases, digital content in the Google Play and Google Cloud offerings) are expected to continue to increase rapidly. We expect a nearly 30% y-o-y increase in these revenues to $4.5 billion. In recent years, the company’s revenue growth has been complemented by a slight improvement in margins. However, the trend reversed in 2017 when profits plummeted. In the first half of this year, Alphabet’s cost of revenues and operating expenses were up significantly, due to which its operating profit margin compressed slightly. We expect this trend to continue in the September quarter as well. As a result, we forecast a roughly flat margin over Q3’17 at around 28%. Consequently, net income and EPS are expected to be up only around 12-13% on a y-o-y basis to $7.6 billion and nearly $11 per share, respectively.

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