Going into Alphabet's (GOOGL 1.27%) (GOOG 1.25%) second-quarter financial report, investors were looking for assurances that the organization's increasing cost of traffic would finally ease. Additionally, investors were fresh off news that the company had recently been fined a record $5 billion by the European Union (EU) for alleged antitrust violations involving its Android operating system.
Alphabet soon put those concerns to rest, significantly outperforming expectations and accelerating its revenue growth.
Image source: Google.
The raw numbers
|
Metric |
Q2 2018 |
Q2 2017 |
Year-Over-Year Change |
|---|---|---|---|
|
Revenue |
$32.66 billion |
$26.01 billion |
26% |
|
Operating income |
$2.81 billion |
$4.13 billion |
(32%) |
|
Net income |
$3.20 billion |
$3.52 billion |
(9%) |
|
GAAP diluted earnings per share |
$4.54 |
$5.01 |
(9%) |
Data source: Alphabet Second-Quarter Financial Release. Chart by author.
For the 2018 second quarter, Alphabet reported revenue of $32.657 billion, which rose 25.6% year over year and exceeded analysts' consensus estimates for $32.17 billion. The $5 billion EU fine impacted net income: A bottom-line result of $3.2 billion represented a 9% decline from the prior-year quarter. Reported diluted earnings per share of $4.54 were also down 9%. Excluding the impact of the fine, adjusted earnings per share of $11.75 soared 32% compared to the prior-year quarter, and crushed consensus expectations for $9.59.
It's important to point out that Alphabet's results were favorably impacted by the accounting standards adopted last quarter, with growth in its stake in equity security investments like Uber adding $1.06 billion in the "other income and expenses" section of the income statement. The sum of all new accounting adjustments added $1.17 per share to results.
Google made good on its word that the upward trend of traffic acquisition costs (TAC) would slow. Total TAC grew to $6.4 billion, up 26% year over year, and comprised 23% of Google's advertising revenue. This decelerated from 35% growth in the first quarter, in which TAC constituted 24% of advertising sales. More and more of the company's advertising growth comes from mobile and programmatic advertising, which carry higher TAC. At the same time, paid clicks at Google increased by a whopping 58%.
Growing beyond just search
Google's "other" segment includes many of the company's non-core businesses such as Nest thermostats, cloud computing, hardware sales, and Google Play. Revenue from these activities continued its torrid growth, to $4.4 billion, up 36% year over year.
Alphabet's Other Bets category includes numerous smaller companies that operate as independent business units that are growing and could one day produce significant additional revenue. These include Google Fiber and life sciences division Verily, as well as its two newest additions: drone unit Wing and balloon segment Loon. Other Bets increased revenue to $145 million, up 49% compared to the prior-year quarter, though some of that increase may have been due to its most recent arrivals.
The best-known business in the Other Bets category is probably Waymo, the company's self-driving car segment. On the conference call to discuss the results of the quarter, Alphabet Chief Financial Officer Ruth Porat provided an update on Waymo's progress. The company recently expanded its agreement with Fiat Chrysler Automobiles (FCAU), and will be adding as many as 62,000 Chrysler Pacifica minivans to Waymo's self-driving fleet. The companies have also initiated discussions that could make Fiat Chrysler cars with Waymo self-driving tech available to Fiat's retail customers. Finally, Waymo announced that it has completed more than 8 million self-driving miles, with the majority of those on city streets.
Looking ahead
After several quarters of concerns regarding escalating traffic acquisition costs, investors cheered when Google followed up on its claims that the pace of those increases would slow. The company was also able to demonstrate that even with a market cap above $800 billion, Alphabet can still produce significant year-over-year growth.
With continuing investments in artificial intelligence, self-driving cars, and cloud computing, as well as ongoing progress in hardware, Alphabet continues to defy detractors and find new avenues to expand.
