Expectations were high for Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), formerly known as Google, when it reported earnings July 28. GOOGL stock rose about $4/share during the day in hopes of good news.
The optimism was well placed.
Alphabet said it earned $5.968 billion, $8.42/share with revenue of $21.5 billion for the quarter ending in June, easily beating expectations for revenue of $20.64 billion, and earnings of $8.06 per share, along with the “whisper number” of $8.20. This was due — in part — to the financial discipline of CFO Ruth Porat, who completing her first full year in that position.
The initial reaction was electric, with GOOGL stock jumping over $800, in the first minutes after the number came out, an increase of over 4.5%. Shares of GOOG, which do not have voting rights, also rose 4.5% to over $780.
What caused the jump? Year-over-year revenues were up 21%, and margins actually rose to 28%, from 27%. Porat called the results “terrific” and noted the revenue number was actually up 25% in constant currency.
What’s New With GOOGL’s Earnings
The assumption when Porat joined last year was that she would keep a tight rein on operations and not let too much cash drizzle out into “other bets” like Nest, Verily and Google Fiber. During the June quarter these bets brought in $185 million, double last year’s $74 million, but losses expanded to $859 million from $660 million.
Even within GOOGL, not all the growth was on the Web. “Google Other” revenue, which includes such things as Google Play and the Nexus phones, was up 33% year-over-year to $2.2 billion. Google ad revenue rose 19% to $19.1 billion, easily beating the previous quarter’s growth rate of 16%. The company ended the quarter with $78.5 billion in cash, most of it offshore.
There was a belief that the success of Facebook Inc (NASDAQ:FB) was going to cut into Google’s revenue, but so far that has not happened. While “cost-per-click” fell 7% year-over-year, that was still better than the previous quarter’s fall of 9%. More effective mobile search ads and higher conversion rates were credited.
It’s in capital expenditures that investors wanted Porat to apply discipline, and that spending did peak during the quarter before Porat joined. For the June quarter they came in $2.123 billion, down 16% compared with $2.515 billion in the same quarter a year ago. Operating expenses actually fell to 34% of revenue from 36% a year ago, and again Porat got the credit. Free cash flow jumped to $7 billion, from $4.58 billion a year ago.
Google was re-named Alphabet soon after Porat came on-board from Morgan Stanley (NYSE:MS) in May, 2015. Co-founder Larry Page, now CEO of Alphabet, was clear at the time that the CFO is subsidiary to the CEO, that she was there to please the Street and not to run the company.
The reviews of Porat’s move from New York were rapturous and the shares were up almost 40% since she joined the company, even before the latest earnings.
Porat and Google CEO Sundar Pichai handled the conference call. “The primary driver was mobile search by consumers,” she said, “along with continued growth in YouTube and programmatic advertising.” U.S. revenue was up 25%, with revenue from the rest of the world up 26% in constant currency, but only 19% when the strong dollar was factored in.
“Over the last year the move toward mobile has increased Traffic Acquisition Costs (TAC),” she said, “as more mobile traffic is subject to TAC.” She said the next quarter will see higher costs for employee stock rewards, that costs are usually back-loaded to the end of the year, and credited new technology for keeping capital expenditures down.
“We delivered strong revenue growth and delivered operational efficiencies,” she concluded. Investors seemed to agree.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares of GOOGL.
