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Alphabet Drops an Earnings Shocker

By Daniel Vena - Feb 4, 2020 at 9:15AM

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The search giant finally provided two metrics that investors have long sought.

Alphabet (GOOGL 2.39%) (GOOG 2.36%) reported its fourth-quarter and full-year results after the market closed on Monday, and the results were weaker than expected. The company generated revenue of $46.08 billion, up 17% year over year, but falling almost $1 billion shy of analysts' consensus estimates of $46.94 billion. The numbers were slightly better on a constant currency basis, gaining 19%.  

The bottom line painted a much rosier picture. Alphabet produced net income of $10.67 billion, 19% year over year, and earnings per share of $15.35 billion, up 20% and sailing past expectations of $12.53 billion.

The overall results weren't the big news, however. The headliner was that Alphabet has at long last disclosed the contributions made by its video-sharing platform YouTube and its cloud-computing service Google Cloud. The greater transparency comes just two months after Sundar Pichai was named CEO of Google's parent company.

Cloud computing icons over a blurred background.

Image source: Getty Images.

YouTube

Alphabet disclosed in its earnings report that during the quarter, revenue from YouTube ads grew to $4.7 billion, up nearly 31% from the prior-year quarter. The company also provided results for the previous three years, showing remarkably consistent growth.

Year

Revenue

YOY Change

2019

$15.15 billion

36%

2018

$11.16 billion

37%

2017

$8.15 billion

N/A

Data source: Alphabet Q4 financial report. YOY = year-over-year. N/A = not applicable.

The disclosure doesn't include the revenue that comes from non-advertising sources, such as subscriptions for YouTube TV -- its streaming video service -- which are included in Google's other-revenue segment. On the conference call, CFO Ruth Porat revealed that non-advertising revenue achieved a $3 billion run rate during the fourth quarter, though much of that revenue goes to content creators.

Google Cloud

Perhaps even more importantly, Alphabet revealed the contribution from Google Cloud, which has been in a three-way race in the cloud infrastructure market, with Amazon's (AMZN 2.07%) Amazon Web Services (AWS) and Microsoft's (MSFT 1.70%) Azure cloud.

The revenue increases were surprisingly brisk. For the fourth quarter, cloud revenue grew to $2.61 billion, up 53% year over year. Alphabet's 2019 revenue was more than twice what the segment earned in 2017.

Year

Revenue

YOY Change

2019

$8.92 billion

53%

2018

$5.84 billion

44%

2017

$4.06 billion

N/A

Data source: Alphabet Q4 financial report. YOY = year-over-year. N/A = not applicable.

The results show that cloud growth has accelerated over the past year, as Alphabet placed greater emphasis on the segment. In mid-2019, the company said it planned to triple its cloud sales force in the coming years. The push comes as Google Cloud looks to better compete with Amazon and Microsoft.

In its most recent quarter, AWS grew revenue to $9.95 billion, up 34% year over year, while Microsoft's Azure cloud grew by 62%. While Microsoft provides Azure's year-over-year growth rate, it doesn't yet break out its results. It's important to note that it's unclear exactly what is included in each company's reported cloud segment, so the numbers that investors have don't provide an apples-to-apples comparison. That won't stop the denizens of Wall Street from making their best estimates in the days and weeks to come.

"I'm really pleased with our continued progress in search and in building two of our newer growth areas -- YouTube, already at $15 billion in annual ad revenue, and cloud, which is now on a $10 billion revenue run rate," said Pichai, commenting on the results. Alphabet's management provided no explanation for the change in its long-standing policy of not breaking out the results for its two high-growth segments.

The only constant is change

The additional disclosures come at a pivotal time for Alphabet. The company's former Google co-founders, CEO Larry Page and Google president Sergey Brin, both stepped down back in December, placing Pichai at the helm.

Alphabet has been facing increasing pressure from regulators regarding anti-competitive behavior as the result of the tech giant's dominant position in the internet search and advertising business. Recent reports suggest that a number of state attorneys general may join a U.S. Justice Department probe into potential antitrust violations. 

While providing investors with additional insight into Alphabet's business, the move could also be a pre-emptive strike to forestall regulators.

 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Alphabet (A shares) and Amazon. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, and Microsoft and recommends the following options: long January 2021 $85 calls on Microsoft and short January 2021 $115 calls on Microsoft. The Motley Fool has a disclosure policy.

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