Alphabet Inc. (NASDAQ:GOOG)(NASDAQ:GOOGL) is set to release third-quarter 2016 results this Thursday, Oct. 27, 2016, after the market close. With shares up 9% over the past three months (as of this writing) thanks largely to a stellar second-quarter report in July, what can investors expect to hear from the internet-search behemoth this time?
Alphabet's headline numbers
This will mark Alphabet's fourth quarterly report since it began breaking out its results on a segment basis earlier this year. Alphabet instituted the practice after reorganizing last October to become the holding company of Google and its operating subsidiaries, and -- to borrow the company's words -- "to bring increased focus, accountability, and transparency" for investors who wish to know more about those varied businesses.
Much to the chagrin of analysts, however, Alphabet doesn't make a habit of providing specific financial guidance each quarter. So while we don't typically pay close attention to Wall Street's near-term demands, note that consensus estimates predict Alphabet will grow revenue 18.1% year over year, to $22.05 billion, and generate earnings of $8.64 per share (up from $7.35 in last year's third quarter).
Within that, we can expect Alphabet to divide its report into two primary segments, namely Google and "Other Bets."
If Alphabet were an apple right now, Google would be its core and most of the flesh. But this shouldn't be terribly surprising, considering Google encompasses results from nearly every well-known product Big G has innovated, from Search to Android, Maps, Chrome, YouTube, Google Play, and Gmail.
As such, last quarter Google represented more than $21.3 billion of Alphabet's $21.5 billion in total revenue. And as operating margin for the segment expanded 100 basis points year over year, to 32.8%, Google generated operating income of just under $7 billion.
Digging deeper into those totals, the vast majority of Google's revenue comes from advertising, which grew 19.5% year over year in Q2, to $19.1 billion. Alphabet should further break that down this quarter into both ad revenue that came from its own websites (up 24.2% last quarter, to $15.4 billion), and the amount derived from Google Network Members' sites (up 3.4% in Q2, to $3.74 billion). In recent quarters, Google has largely credited that growth to progress in monetizing mobile search, as well as rapid increases in revenue from YouTube.
Relatedly, listen for metrics on the volume of aggregate paid clicks (up 29% year over year last quarter), and aggregate cost-per-click, the latter of which measures how much Google makes per ad. But keeping in mind cost-per-click declined 7% last quarter, don't be surprised if it continues that downward trend. In part, this is a consequence of that outsized growth from YouTube, where Google's TrueView ads reach consumers early in the purchase funnel, so tend to monetize at lower rates than traditional web-based impressions.
We also can't forget about Google's non-advertising products, including Apps, Commerce, Cloud, and hardware products. Collectively, these sources saw sales increase last quarter by one-third year over year, to $2.3 billion. This quarter, I'm particularly interested to hear about consumers' early reactions to Google's new Pixel smartphone.
On the other side of Alphabet's fence is its decidedly unprofitable -- but ripe with long-term potential -- Other Bets segment, which includes Fiber (high-speed internet), Nest (connected home products), Verily (longevity), Calico (life sciences), self-driving cars, and X ("moonshot" initiatives).
With the exceptions of Nest, Verily, and Fiber, which together helped Other Bets revenue rise last quarter 150% year over year, to $185 million, Alphabet's other bets are primarily pre-revenue businesses that seek to solve novel problems across multiple industries. As a result, that revenue translated to a segment operating loss of $859 million last quarter alone.
But we also shouldn't judge Other Bets' results by viewing each quarter in isolation. Because these efforts are early-stage, can be hugely affected by one-time items like new partnerships, and operate in disparate industries, Alphabet CFO Ruth Porat will almost certainly reiterate her assertion that it's most "instructive" to view Other Bets with at least a 12-month time frame in mind. That's fair enough; given their considerable potential to meaningfully change the way we do things -- and, of course, with the financial resources and cash flow provided by Alphabet's massively profitable Google segment -- Alphabet can afford to thoughtfully invest in these young businesses.
In the end, barring any negative surprises from its usually stable core business, I suspect this week's report will contain little to fundamentally alter Alphabet's compelling growth story. But that won't stop us from digging in to better understand Alphabet's progress in continuing to generate long-term value for shareholders.