Shares of Alphabet (GOOG 0.37%) (GOOGL 0.35%) were soaring more than 8% in after-hours trading Thursday -- and with good reason. Though we at The Motley Fool don't usually pay close attention to Wall Street's demands, the parent company of Google absolutely trounced estimates with its second-quarter 2019 report, driven largely by the strength of the internet search giant's core advertising business.
Oh, and Alphabet followed by authorizing a massive $25 billion (yes, with a "b") stock repurchase plan.
Let's take a closer look at what Alphabet had to say about its incredible quarter, as well as what investors should be watching in the coming months.
IMAGE SOURCE: ALPHABET.
Building "a more helpful Google for everyone"
Let's start with the headline numbers: Alphabet's second-quarter revenue climbed 19.3% year over year (or 22% at constant currencies) to $38.944 billion, accelerating from 16.7% growth last quarter and far above the $38.17 billion most analysts were modeling. On the bottom line, that translated to net income of $9.947 billion, or $14.21 per share, up 20.9% from adjusted earnings of $11.75 per share this time a year ago (excluding the impact of last year's European Commission antitrust fine of more than $5 billion), and again absolutely trounced estimates for $11.33 per share.
Alphabet doesn't provide specific revenue or earnings guidance, but there's no denying its relative outperformance this quarter.
"Our effort to build a more helpful Google for everyone brings countless opportunities to help users, partners, and enterprise customers every day," stated Google CEO Sundar Pichai. "From improvements in core information products such as Search, Maps, and the Google Assistant, to new breakthroughs in AI and our growing Cloud and Hardware offerings, I'm incredibly excited by the momentum across Google's businesses and the innovation that is fueling our growth."
On Alphabet's segment performance
Alphabet breaks its results down based on two primary business segments, Google and "other bets." Here's how they each performed in terms of revenue and operating income (or losses) in the second quarter:
| Metric | 3 Months Ended June 30, 2019 | 3 Months Ended June 30, 2018 | Change |
|---|---|---|---|
| Google revenue | $38.782 billion | $32.512 billion | 19.3% |
| Google operating income | $10.388 billion | $8.959 billion | 16% |
| Other bets revenue | $162 million | $145 million | 11.7% |
| Other bets operating income (loss) | ($989 million) | ($732 million) | N/A |
Data source: Alphabet.
Within Google's totals, advertising revenue increased 16.1% to $32.601 billion, largely driven by a 17.5% jump in revenue from Google's own properties, to $27.335 billion, and supplemented by a 9.1% gain from network members' sites, to $5.266 billion. Traffic acquisition costs (TAC) climbed a healthy 12.7% to $7.238 billion, comfortably trailing advertising sales growth and falling 1 percentage point year over year to 22% of total ad sales.
Drilling deeper, impressions on network members' sites climbed 11% year year over, and cost-per-impression fell 1%. Paid clicks on Google properties climbed 28%, while Google's cost-per-click -- which helps illustrate how much Google makes per ad -- fell 11%, partly a byproduct of the outsize growth of YouTube, where ads tend to reach users earlier in the purchase funnel so they monetize at lower rates.
Next, let's not forget Google's non-advertising segment, where revenue skyrocketed 39.7% year over year to $6.181 billion thanks largely to the strength of Google Cloud products and Google Play. In particular, Cloud exceeded an annual revenue run rate of $8 billion during the quarter as it admirably sustained its growth. Google's hardware business also benefited from the successful launch of its new Pixel 3a smartphone.
Outside of Google, growth at Alphabet's "other bets" segment stemmed mostly from Fiber high-speed internet and Verily life-sciences products. During the subsequent conference call, CFO Ruth Porat also highlighted progress from other bets' Waymo business, which now has more than 1,000 active riders in its fully self-driving vehicle service, and recently surpassed 10 billion miles driven in simulation. Porat also praised the Loon balloon internet business for deploying during the quarter to provide connectivity following the recent magnitude 8.0 earthquake in Peru.
Other bets unsurprisingly remained vastly unprofitable, significantly widening its losses from the same year-ago period. Still, these are early-stage, long-term-oriented businesses with enormous potential, and management reiterated during the call that Alphabet continues "to invest meaningfully for the long-term opportunity we see."
On guidance, regulatory challenges
When asked during the call for color on recent regulatory news -- particularly given a new antitrust probe opened by the U.S. Department of Justice -- Pichai weighed in:
We understand that there will be scrutiny. [...] It's not new to us. We have participated in these processes before. Today we do operate under a lot of regulation, be it on privacy, be it on competition, be it on copyright, intellectual property, etc. And even in the U.S., we have engaged in the process before to the extent we have to answer questions, [and] we will do so constructively. And to the extent there are concerns, we'll address them as well. But I think, for me, it's important that we stay focused on building helpful products to users and that's the value we ultimately provide our users. And I think that's what we'll stay focused on as a company.
Meanwhile, Porat warned foreign currency exchange will continue to serve as a headwind to both revenue and operating income in the third quarter. Still, she noted Alphabet is "pleased" with its top-line momentum even as it builds on its enormous base.
Finally, Porat reminded shareholders that Google's primary goal for capital allocation remains investing to drive organic growth, followed by allowing the flexibility to make strategic acquisitions and investments.
"We complement these growth drivers with a return of capital," Porat added, before touching on the company's staggering $25 billion buyback authorization.
In the end, from Alphabet's generous capital returns to its broad-based acceleration in growth, there was nothing not to love about this quarterly update. Alphabet's stock price is responding accordingly.
