Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG), parent company of online search giant Google, reported strong fourth-quarter results on Monday. A healthy digital advertising business helped constant-currency year-over-year revenue growth accelerate from 22% growth in Q3 to 23% in Q4. Google's "other" revenue helped, too, increasing 31% over the same time frame.
For investors wanting a glimpse behind these numbers to learn more about what Alphabet management is thinking, they should check out the company's fourth-quarter earnings call. Here's a look at three key takeaways from the call, including insight into the company's momentum in the cloud, its approach to organic investment, and how management thinks about acquisitions.
Google Cloud: A key catalyst
The most important growth driver of Alphabet's fast-growing Google other revenue is its cloud business. But just how rapidly is its cloud business growing? Though Google CEO Sundar Pichai says the cloud is a "fast-growing multibillion-dollar business" for the company, further details are scant.
But Alphabet CFO Ruth Porat did provide some vague context on the business, pointing out strong momentum in its Google Cloud Platform (GCP).
Cloud does continue to deliver a sizable revenue growth, driven by GCP. And GCP does remain one of the fastest-growing businesses across Alphabet. As Sundar said, we've doubled the number of GCP contracts greater than $1 million. We're also seeing a really nice uptick in the number of deals that are greater than $100 million and really pleased with the success and penetration there.
What about those rising costs?
One concern some investors may have about Alphabet's fourth-quarter results was the company's steep costs. Capital expenditures for the quarter exceeded $7 billion, up from $4.3 billion in the year-ago quarter. Meanwhile, a sharp increase in operating costs meant the company's operating margin narrowed from 24% in the fourth quarter of 2017 to 21% in the fourth quarter of 2018.
Will fast-growing costs and a narrower operating margin be the new norm? Probably not. Porat suggests the company's investments are designed to provide a meaningful return on investment over the long haul.
[W]e are very focused on investing to support long-term revenue and earnings growth. We're very mindful of the capex [capital expenditures] impacts on free cash flow and earnings growth. And so, we're trying to get it right. Overinvesting, underinvesting, neither of those works for long-term value creation.
Finally, Pichai gave investors a look into how the company thinks about acquisitions.
[W]e are always evaluating opportunities. We have a very high bar. And so, to me, it's been more about us finding the right fit rather than being constrained by anything in particular. But I do think it's always an important part of our strategy. And we have done great acquisitions in the past. Things like YouTube and Android were big acquisitions for us. And so, we continue to look for opportunities ahead.
Porat also noted during the call that the company's primary use of capital is to support organic growth. Maintaining flexibility for acquisitions is second in priority, with share repurchases coming in third.
Ending the quarter with $109 billion in cash and marketable securities, Alphabet is more than ready to make meaningful acquisitions when opportunities arise.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Daniel Sparks has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.