Alphabet’s Revenue Surges on Mobile Search and YouTube

Revenue jumped 22% Y-o-Y to $26.06 billion from $21.32 billion in the year-ago period

Technology giant Alphabet Inc. (NASDAQ: GOOG) announced its Q4 FY16 and full year FY16 financial results on January 26th, 2017. The Mountain View, California-based company, through its subsidiaries, provides online advertising services in the U.S., the U.K., and rest of the world. The company offers performance and brand advertising services. It operates through Google and Other Bets segments.

The Google segment includes principal Internet products, such as Search, Ads, Commerce, Maps, YouTube, Apps, Cloud, Android, Chrome, and Google Play, as well as technical infrastructure and newer efforts, such as Virtual Reality. This segment also sells hardware products comprising Chromecast, Chromebooks, and Nexus. The Other Bets segment includes businesses, such as Access/Google Fiber, Calico, Nest, Verily, GV, Google Capital, X, and other initiatives. Read more about Alphabet’s financial results below.

Q4 FY16 financial highlights

During Q4 FY16, Alphabet’s revenue jumped 22% Y-o-Y to $26.06 billion from $21.32 billion in the year-ago period. On a constant currency basis, revenue grew 24% versus the year-ago period, powered by its strength in mobile search and YouTube. During the reporting quarter, Google’s revenues rose to $25.8 billion from $21.17; operating income grew to $7.88 billion from $6.74 billion in the year-ago period. Other Bets revenue rose to $262 million from $150 million, driven by Nest, Fiber and Verily. Other Bets operating loss narrowed to $1.08 billion from $1.21 billion in the year-ago period.

Advertising still accounts for the lion’s share of Google’s revenue, rising 17.4% to $22.4 billion during the reporting quarter. However, Google has been investing heavily in new business lines such as Google Play, cloud computing and hardware businesses. That segment grew 62% to $3.4 billion, propelled by growth in cloud computing and sales of Google’s new Pixel smartphones and home speaker, Google Home, which launched in October 2016.

Alphabet is beginning to reap the rewards of its investment in hardware, as seen in the doubling of sales of the company’s line of Nest smart home products during the key holiday period including Black Friday and Cyber Monday. Google-branded hardware such as Google Home, a smart speaker, and the Pixel smartphone remained popular gifting options over the holidays.

Cost of revenues rose to 41% of revenues, up from 38% a year ago. Cost of revenues rose to $10.66 billion from $8.19 billion a year ago. The company’s traffic acquisition costs hit $4.8 billion during the quarter.

During the reporting quarter, GAAP operating income grew to $6.63 billion versus $5.38 billion in the year-ago quarter, while GAAP operating margin remained flat at 25%. Alphabet reported a 22% rate in the fourth quarter, up from a 5% rate a year ago. Alphabet also reporting a tax-charge related to stock-based compensation of $586 million, higher than the $316 million a year ago.

In all, Q4 FY16 GAAP net income rose to $5.33 billion, or $7.56 per diluted share, from $4.92 billion, or $7.06 per diluted share, in the year-ago quarter.

Advertisement revenues

According to eMarketer, Google is second only to social media giant Facebook Inc. (NASDAQ: FB) in terms of display ad revenue worldwide, and is the leader of search ad spending. eMarketer has estimated that Google will capture $60.92 billion in search ad revenue in 2017, or 58.8% of the search ad market worldwide.

Paid clicks, or clicks on Google ads, rose 36% in Q4 FY16 compared to a 33% increase in Q3 FY16. Paid clicks are those ads on which an advertiser pays only if a user clicks on them. Cost-per-click dropped 9%, a slide that has continued as Google sells more mobile ads, which command lower prices. However, the shift is not necessarily alarming as it suggests Google is selling more ads on YouTube, which is seen as a key growth driver.

Google’s non-advertising products, including apps, commerce, cloud, and hardware products are expected to get a fillip from the introduction of the new mobile phone, Pixel, which is aimed at not only diversifying its revenues, but also at enriching Google’s advertising targeting capabilities as consumers engage and share information with Pixel, Google Assistant, Daydream View, Chromecast, and other Google ecosystem devices.

FY16 financial highlights

During FY16, Alphabet’s revenue grew to $90.27 billion from $74.98 billion in the year-ago period. Total costs and expenses jumped to $66.55 billion from $55.62 billion in the year-ago period, mainly due to investments in the Other Bets segment. Despite higher costs, net income grew to $19.47 billion, or $27.85 per diluted share, from $16.34 billion, or $22.84 per diluted share, in the prior year.

Other highlights

Cash balance and cash flow: At the end of Q4 FY16, Alphabet had $86.33 billion in cash and cash equivalents and free cash flow of $6.33 billion. Its capital expenditures for the reporting quarter were $3.07 billion, while maintaining a headcount of 72,053 globally.

Unveils latest self-driving system: Google redefined futuristic mobility with the launch of its latest self-driving system in Chrysler Pacifica minivans during the North American International Auto Show in Detroit on January 8th, 2017. Waymo, the company formed from Alphabet’s Google Self-driving Car research project, is designing and building all the sensors, radar and computers used in its automated test vehicles, along with the artificial intelligence programs that control everything.

Alphabet has a partnership with Fiat Chrysler Automobiles N.V. (NYSE: FCAU), the world’s seventh-largest automaker, to develop and install the company’s autonomous driving technology into real cars. At the auto show, Alphabet unveiled a latest set of self-driving hardware and software that incorporates a new array of sensors, including an enhanced vision system, improved radar and laser-based Lidar, all developed and built in-house. Waymo is using the new hardware and software in Chrysler Pacifica minivans that begin road tests in January 2017.

Sale of Skybox satellite business: Alphabet is said to be in talks to sell its Skybox Imaging satellite business, which it acquired for $500 million less than three years ago, as reported by Bloomberg on January 10th, 2017. Planet, a satellite imaging startup formerly known as Planet Labs that has raised more than $150 million, is looking to acquire Skybox. Some employees from the Alphabet division, renamed Terra Bella in 2016, would move to Planet as part of the deal. The Skybox sale to Planet will likely be an equity transaction, where Alphabet would own a stake in the latter.

Temasek invests in Verily: Alphabet’s Verily Life Sciences announced on January 26th, 2017 that it is getting an $800 million investment from a Singapore state investment firm Temasek Holdings to help it expand in Asia, including China. Temasek said it would take a minority stake in Verily and nominate a director to its board. Its investment will start over the next several days and be completed in the second half of 2017.

In August 2016, Verily joined hands with British drug maker GlaxoSmithKline PLC (NYSE: GSK) to create a new company called Galvani Bioelectronics for the development and commercialization of bioelectronic medicines. Galvani is developing miniature, implantable devices to modulate irregular or altered impulses that occur in many illnesses and chronic conditions such as diabetes, arthritis, and asthma.

Stock Performance

Alphabet’s stock finished the day at $796.79, falling 0.69%, at the close on Tuesday, January 31st, 2017, having vacillated between an intraday high of $801.25 and a low of $790.52 during the session. The stock’s trading volume was at 2,146,848 for the day. The Company’s market cap was at $542.55 billion as of Tuesday’s close.

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