OK, Google fans, it's that time again. Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), the parent company of the world's largest internet search engine, is set to release third-quarter 2017 results on Oct. 26 after the market closes.
With shares trading almost exactly where they stood three months ago, when the tech giant remained solidly profitable even after absorbing a $2.7 billion European Commission fine into its second-quarter results, let's take a closer look at what to expect when Alphabet's Q3 report hits the wires.
On the EC fine and Alphabet's headline numbers
Alphabet doesn't provide specific revenue or earnings guidance each quarter. But for perspective, consensus estimates predict that the company will deliver third-quarter earnings of $8.33 per share on revenue of $27.2 billion. Of course, we don't usually pay close attention to Wall Street's demands. But for better or worse, any deviance from those "expected" figures can mean Alphabet stock responds in kind over the near term.
Relatedly, last quarter Alphabet management told investors that it accounted for the fine -- which came after the EC ruled that Google had unfairly favored its own comparison-shopping service over those of competitors in Google search results -- as a separate operating expense line on the income statement. In turn, this reduced Alphabet's GAAP net income by the full amount of the fine.
Alphabet also emphatically disagreed with the EC decision, however, and noted last quarter that the company was still in the early stages of determining its next steps to either combat the ruling or propose remedies to avoid further fines.
Sure enough, it's doing both. Google formally appealed the fine early last month, though industry watchers note that a final ruling on the appeal may not arrive for several years. In the meantime, Bloomberg reported late last month that Google is set to spin off its shopping service into a standalone business unit -- one that's independently funded and operated -- in an effort to appease antitrust regulators.
Expect Google management to spend some time during the conference call, then, to specifically address the current status of this situation.
On segment results
Digging deeper, Alphabet breaks its results down into two primary segments: Google and "Other Bets."
The Other Bets bucket contains a number of early-stage businesses that mostly operate in their pre-revenue (and pre-profit) stages. But there are several businesses here that already generate significant sales. Other Bets revenue climbed more than 34% year over year last quarter to $248 million, primarily driven by Nest connected-home solutions, Verily life-sciences products, and Fiber internet services. But that also translated to a segment quarterly operating loss of $772 million. In any case, Google will be quick to remind shareholders that these are high-potential businesses that could materially contribute to overall results if they're able to capture their respective massive end markets.
Meanwhile, Google generates the vast majority of Alphabet's total revenue -- more than 99% in Q2 at nearly $25.8 billion -- and all of its operating profit. And the health of Google's advertising business is key here. Ad revenue climbed 18.4% year over year last quarter and represented nearly 96% of the Google segment's total sales. Within that, Alphabet should also provide color on Google's aggregate paid clicks (up 52% last quarter), as well as aggregate cost per click (down 23% in Q2), the latter of which is a measure of how much Google makes per ad.
That said, don't be surprised if aggregate cost per click continues to decline on a year-over-year basis. An outsize portion of Google's ad growth of late has come from YouTube and its TrueView ads, which tend to reach consumers earlier in the purchase funnel and monetize at lower rates than traditional Web ad impressions do. In any case, you won't find Google complaining about this fast-growing source of incremental revenue.
Finally within Big G, look for non-advertising revenue (up 42% last quarter to $3.1 billion) to continue its hearty pace of growth, thanks to sales from the Google Play store, cloud-based products, and hardware such as its Pixel smartphone, its Chromecast media steaming device, and Google Home smart-home products.
On potential guidance
Alphabet tends to operate from a position of strength and is forthright communicating with investors on its plans to handle unusual situations such as the EC fine. So barring a surprise deterioration of its advertising business, don't suspect its impending report to hold any shocking revelations. Nonetheless, you can be sure the market will be closely monitoring what Alphabet has to say.