Alphabet Inc. (GOOGL +0.77%) (GOOG +0.99%) announced significantly better-than-expected first-quarter 2018 results on Monday after the market closed, albeit partly bolstered by the favorable impact of a new accounting standard. The parent company of Google also graduated one of its up-and-coming "Other Bets" companies into the search giant's hardware business.
With shares little changed in after-hours trading as of this writing, let's take a closer look at how Alphabet kicked off the year.
IMAGE SOURCE: ALPHABET INC.
Alphabet's results: The raw numbers
Alphabet's consolidated revenue grew 26% year over year (or 23% at constant currency) to $31.146 billion -- well above the $30.36 billion most investors were expecting. As reported, that translated to 73% growth in net income to $9.401 billion, or $13.33 per share.
But the latter also includes a positive contribution of $3.40 per share from Alphabet's adoption of a new accounting standard this quarter, which changes the way it accounts for equity security investments. Even excluding that item, however, its net income of $9.93 per share arrived comfortably ahead of expectations for $9.35.
Breaking it down further, remember Alphabet divides its business into two broad segments: Google and "Other Bets." Here's how each performed.
| Metric | 3 Months Ended March 31, 2017 | 3 Months Ended March 31, 2018 | Year-Over-Year Growth |
|---|---|---|---|
| Google revenue | $24.618 billion | $30.996 billion | 25.9% |
| Google operating income | $7.446 billion | $8.368 billion | 12.4% |
| Other Bets revenue | $132 million | $150 million | 13.6% |
| Other Bets operating income (loss) | ($703 million) | ($571 million) | N/A |
DATA SOURCE: ALPHABET Q1 2018 RELEASE.
Changes at "Other Bets"
Revenue at "Other Bets," the segment comprised of early-stage, high-potential businesses, climbed a modest 13.6% year over year to $150 million, mostly thanks to sales from Fiber high-speed internet and Verily life sciences products.
At first, that growth appears to be a massive deceleration from last quarter, when Other Bets sales jumped 56% to $409 million. But note that sales from the Nest subsidiary (think smart home devices like thermostats and smoke detectors) are now being reported under the Google segment's hardware business. Alphabet has also restated its prior periods to reflect the change.
Other Bets also notably includes Waymo, which exceeded 5 million miles of driving on city streets this quarter, up from 4 million just three months ago. Waymo also announced a new long-term partnership this with Jaguar Land Rover involving the British automotive leader's fully electric I-PACE vehicles.
More of the same (strength) from Google
Google remains strong with year-over-year revenue growth accelerating to 25.9%, with mobile search leading the way followed by strong contributions from both desktop search and YouTube. Similar to last quarter, Google's revenue growth continued to outpace operating income growth; cost of revenues jumped 37%, driven by a combination of data center investments, content acquisition costs for YouTube, and hardware costs.
To the latter end, non-advertising revenue at Google rose 36% year over year to $4.354 billion, thanks to growth in cloud, hardware (including Nest, as above), and Google Play sales.
Meanwhile, Google's core advertising business is as healthy as ever. Total ad revenue increased 24.4% to $26.642 billion, including 26.4% growth from Google's own sites (to just under $22 billion), and 15.9% growth from network members' sites to $4.644 billion.
Aggregate paid clicks on Google's properties grew 59%, while cost per click -- which helps measure how much Google actually makes from each ad -- dropped 19%. As I noted in my earnings preview a few days ago, investors shouldn't be overly concerned with that decline because it's primarily the result of the fast growth at YouTube, where ads tend to reach users earlier in the purchase funnel so monetize at lower rates.
Due to the continued rise of programmatic ad sales, going forward Alphabet will no longer measure paid clicks or cost per click on Network Members' properties. Instead, it will focus on impressions at Network Members' sites (which were flat on a year-over-year basis), and their respective cost per impression (which increased 18%).
Looking forward
CFO Ruth Porat says they're "pleased" with the quarter and that Alphabet's solid revenue growth reflects "strong underlying trends across the business, which are amplified by our relentless focus on innovation."
As per usual, Alphabet didn't provide specific revenue or earnings guidance. But Porat did reiterate her expectation that TAC should continue to increase as a percentage of site revenue due to the growth in mobile search. At the same time, she reaffirmed guidance for the pace of year-over-year growth in sites TAC to begin to slow in the second quarter of this year.
All told, there were no big surprises in this stronger-than-expected report from Alphabet. The company's lucrative advertising business is still growing quickly even from its enormous base. Google's Cloud and Play products are still driving exceptional top-line gains. And following Nest's graduation to the big leagues as part of Google's thriving hardware operations, we now enjoy greater visibility into the status of Alphabet's remaining "Other Bets" businesses.
It's hard to ask much more of Alphabet than that. And I think shareholders should be pleased with its position today.
