Alphabet (GOOG +1.09%)(GOOGL +1.37%) announced stronger-than-expected second-quarter 2018 results on Monday after the market closed. The parent company of Google highlighted sustained momentum from its core advertising business, touched on the progress of some of its early-stage "Other Bets," and elaborated on their thoughts surrounding last week's record $5.07 billion antitrust fine imposed by the European Commission.
But before we get there, let's take a closer look at Alphabet's headline numbers and segment performance.
IMAGE SOURCE: ALPHABET.
Alphabet's results: The raw numbers
Consolidated revenue climbed 26% year over year (23% at constant currency) to $32.657 billion, which translated to GAAP net income of $3.195 billion, or $4.54 per share, down from $5.01 per share in the same year-ago period. Adjusted for fines -- and that means both last week's fine and a similar $2.7 billion EC penalty absorbed in last year's second quarter -- Alphabet's non-GAAP net income was $8.266 billion, or $11.75 per share, up from $8.90 per share a year ago.
Google doesn't provide specific quarterly guidance. So, for perspective, both the top and bottom lines were comfortably above most investors' expectations for adjusted earnings of $9.54 per share on revenue of $32.19 billion.
Digging deeper, Alphabet divides its business into two segments: Google and "Other Bets." Here's how they fared:
| Metric | 3 Months Ended March 31, 2017 | 3 Months Ended March 31, 2018 | Year-Over-Year Growth |
|---|---|---|---|
| Google revenue | $25.913 billion | $32.512 billion | 25.5% |
| Google operating income | $7.664 billion | $8.959 billion | 16.9% |
| Other Bets revenue | $97 million | $145 million | 49.5% |
| Other Bets operating income (loss) | ($633 million) | ($732 million) | N/A |
DATA SOURCE: ALPHABET Q1 2018 RELEASE.
On "Other Bets"
Alphabet's Other Bets revenue was once again primarily generated by its Fiber high-speed internet and Verily life sciences products.
During the subsequent conference call, CFO Ruth Porat added that Waymo expanded its partnership with Fiat Chrysler during the quarter with an option to add as many as 62,000 Chrysler Pacifica minivans to its self-driving fleet. Waymo also exceeded 8 million fully antonymous miles driven -- up from 5 million miles just last quarter -- with much of that total on city streets.
Porat also noted that their Loon internet balloon business and Wing drone delivery -- two projects that started in Alphabet's secretive X lab -- both graduated during the quarter into their own independent companies within Other Bets.
"Graduation from X signals that these companies have reached certain technical and business milestones," Porat explained, "and that their focus is shifting toward commercialization."
On Google's performance, the EC fine
Google's strength once again stemmed from the its dominance in mobile search -- which incidentally was the source of its new EC fine -- as well as continued strength from both YouTube and desktop search. In particular, the European Commission alleges that Google used the dominance of its Android mobile operating system with the goal of "[thwarting] potential competitors to safeguard its mobile-advertising business."
During the call, Google CEO Sundar Pichai reiterated the company's position that Android "clearly" faces robust competition, and has "created more choice for everyone, not less."
Pichai further stated that Google is analyzing the decision, but promised they will appeal while simultaneously searching for "a solution above all that preserves the enormous benefits of Android to users."
In the meantime, Google admirably maintained its advertising momentum, with ad revenue climbing 23.9% to roughly $28.1 billion. Within that total, revenue from Google properties increased 26.3% to roughly $23.3 billion, and revenue from Google Network Members' properties grew 13.6% to just over $4.4 billion. Impressions on network members' properties climbed a modest 1% year over year, while cost-per-impression jumped 14%.
Aggregate paid clicks on Google properties also soared 58% year over year, and cost per click -- a measure for how much Google makes per ad -- fell 22%. As we've seen in the last several quarters, the latter decline is largely a consequence of outsized growth at YouTube, where ads tend to monetize at lower rates as they reach users earlier in the purchase funnel.
Next, Google's other (nonadvertising) revenue increased 36.5% year over year to $4.425 billion, with solid contributions from its cloud, hardware, and Google Play businesses.
Looking forward
Alphabet maintained its habit of not providing specific quarterly guidance. But as per usual, Porat did offer some color on the company's longer-term outlook. First, she insisted the company is "pleased" with its advertising momentum, which is benefiting from Google's continued investments in innovation, including applying machine-learning algorithms to improve the experience for both users and advertisers. So, Google will continue to make "disciplined" investments with long-term growth in mind.
Porat also reminded investors that the hardware business will likely achieve lower growth rates in the third quarter due to regular seasonality, particularly in anticipation of the launch of new products in time for the holidays.
In the end, the mammoth EC fine notwithstanding, this was as strong a quarter as Alphabet investors could have hoped for. And it should be no surprise to see the stock hitting fresh all-time highs in response during after-hours trading.
