Financially, Alphabet (GOOGL 1.27%) (GOOG 1.25%) crushed it in its third quarter. Ahead of Q3, the tech giant's revenue growth already looked impressive. Yet the Google parent company's top-line growth still accelerated in Q3, rising 24% year over year, beating analysts' estimates by about $600 million. Alphabet's bottom line similarly beat estimates.
But there was more to Alphabet's third quarter than analyst-beating revenue and EPS. In Alphabet's third-quarter earnings call, management talked acquisitions, growth drivers, and its strategy for hardware -- all important narratives for investors to keep an eye on.
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How Alphabet thinks of capital allocation and acquisitions
With Alphabet purchasing part of HTC's business recently in order to beef up its hardware business, one analyst wanted to get an update on how management thinks of capital allocation and acquisitions. While management's approach to considering and acquiring companies hasn't changed, it's useful to review Alphabet's line of thinking on the important subject.
Alphabet CFO Ruth Porat explained (via an S&P Global Market Intelligence transcript):
The priority is organic [growth]. As you said in your question, we have a host of really exciting opportunities, and ensuring that we're investing to support long-term growth remains number one. The second is strategic, continuing to add on where it makes sense. We're pleased to have added on HTC this quarter. Acquisitions have obviously been an important part of our history. And then the third is the return of capital, and no change or update there in terms of how I think about that.
Alphabet's biggest growth drivers
With Alphabet posting one of its highest year-over-year revenue growth rates in five years, one analyst wanted more color on whether there were factors during the quarter that were an anomaly, or whether the drivers were sustainable aspects of Alphabet's business. While Porat didn't answer the question directly, her response suggests Alphabet is benefiting from some major growth drivers that are likely to stick around.
We feel -- we're really pleased with the [Google] sites revenue growth, the performance in mobile desktop and YouTube. I think if you just go down to the big categories, network [members' properties] revenue also was quite strong. ... And then Sundar has talked a lot about the components of other revenues up nicely. We're really pleased with what's going on there. And then on top of that, Other Bets have got a couple of components to it. I tried to give you color on each one.
In other words, Alphabet's business is benefiting from strong broad-based growth, not just across its major revenue segments, but from smaller categories like Google "other" revenue (cloud, Google Play app store, and hardware), and "Other Bets" revenue (Alphabet's smaller "moonshot" businesses).
Alphabet's hardware strategy
Considering Alphabet's recent acquisition of part of HTC's business and its recent launch of eight new Google-branded hardware products, management has clearly prioritized hardware more than it has in the past. This prompted one analyst to ask management to clarify its goals on hardware, as well as comment on how this will impact its relationships with Android partners.
Google CEO Sundar Pichai responded:
In terms of hardware, we are very seriously committed to making hardware. A few reasons. Hardware is -- the intersection of hardware and software is how you drive computing forward. And historically, hardware has been maybe a single- device business. For a long while, it was PCs and then maybe smartphones. But you're clearly entering an era where you're going to have different types of computing experiences. And so to do that and to stitch it all together across, I think it's important we thoughtfully put our opinion forward. We're equally committed to working with the ecosystem, and we provide the same basis on both sites, be it Android or Chrome.
So, though Alphabet its ramping up its hardware efforts, don't expect it to soften its efforts partnering with hardware manufacturers like Samsung. It seems like the company wants to have a strong presence in hardware without overpowering its existing relationships with original equipment manufacturers.
Overall, Alphabet's third-quarter earnings call reinforced the factors behind the company's strong competitive position. Strong, broad-based growth looks poised to continue.
