Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon.com (NASDAQ:AMZN) both had impressive earnings releases this week, and the market sent both stocks up 10% after hours. On this tech episode of Industry Focus, Motley Fool analysts Dylan Lewis and Sean O'Reilly walk through the numbers and see what segments drove growth for each company and what to expect going forward.
A full transcript follows the video.
Sean O'Reilly: Beating earnings is as easy as saying your ABCs, on this technology edition of Industry Focus.
Greetings, Fools! I am Sean O'Reilly here at Fool headquarters in Alexandria, Va. It is Friday, Oct. 23, 2015, and joining me is the objectively awesome Dylan Lewis.
Dylan Lewis: I'm glad you went with "objectively awesome."
O'Reilly: I had another options lined up.
Lewis: I had heard some of the other ones pre-shooting, and I wasn't so thrilled about it.
O'Reilly: You revered yourself to me before we went into the studio, and so I thought, "I'll be nice."
Lewis: Oh, thank God.
O'Reilly: Dylan, I've got to ask you; as I understand it, The Motley Fool, a few employees had a bit of a flag football game last night.
Lewis: Yeah. We had the annual firth-floor versus fourth- and first-floor head-to-head matchup.
O'Reilly: And it's usually fifth that wins.
Lewis: Last year fifth won, but the thing is, we move around so much here that you can't really ...
O'Reilly: We used to be fourth floor.
Lewis: We were fourth floor last year when the game was played. Fifth floor, which is where editorial is, a lot of people that work on the back-end services on the business side, they handed it to the fourth and first floors. That's where Motley Fool Wealth Management is and where all of our investing team sits and where accounting is. It was 56 to 7, or something like that. Huge shout out ...
O'Reilly: You drank heavily afterward, I'm sure.
Lewis: Yeah. Drink to forget, sure. Huge shout out to Austin Morgan, the guy who puts together our Industry Focus shows.
O'Reilly: Austin's waving, everybody.
Lewis: In his first appearance in a Fool football game, just chucked it all over the field at quarterback and tore up the fourth- and first-floor defense.
O'Reilly: You get a ring for that?
Lewis: You get a huge trophy.
O'Reilly: Can I see this later?
Lewis: I don't know what he's doing with it. It should be on his desk somewhere.
O'Reilly: Austin! Kudos! That's awesome. Hold it up, Austin. Hold up the trophy.
Lewis: Shockingly heavy. It's like a 20-pound trophy.
O'Reilly: Where does the Fool get a 20-pound trophy? Oh, does it get handed off each year?
O'Reilly: Oh, OK. So it's like the Stanley Cup?
Lewis: It's Mark Reeth's doing, I'm sure.
O'Reilly: Naturally. Did you have any memorable plays, Dylan?
Lewis: I caught a couple bombs from Austin. A couple interceptions, but it was a team effort.
O'Reilly: A couple interceptions?
O'Reilly: All right. Good for you.
Lewis: Well, the fourth and first floor could not throw the ball very well. Moving on, I guess we'll actually talk some tech today. I like that you went "technology." The full ...
O'Reilly: I'm in an enunciation kind of mood today.
O'Reilly: Before we dig into Google's earnings, which will obviously have a plethora of Sesame Street jokes to come along with it, Amazon crushed it.
Lewis: Yes. Amazon absolutely destroyed it.
O'Reilly: I was in Houston this week meeting some oil execs -- those of you who want to hear about this trip, tune into next week's Energy Edition show on Thursday. It's going to be -- I have good stories. The earnings came out, I was sitting at the hotel that morning, and a big, wry smile cracked across my face. I was like, "Jeff Bezos!"
Lewis: Happy to be a shareholder, I'm sure, for a lot of Fools. Revenue of $25.4 billion, up 23% year over year, and up 30% if you exclude some of the unfavorable impact from some foreign exchange on the currency side.
O'Reilly: That darn dollar.
Lewis: Yeah. Net income, $79 million, or $0.17 per share; which is up from a loss of $0.95 per share during the Q3 of 2014.
O'Reilly: Hold on, Dylan. Does that say "net income"?
Lewis: Yes. Analysts were expecting a loss of $0.17 per share and revenue of about $24.9 billion.
O'Reilly: So they were way off.
Lewis: They beat on both. For them to be net income positive is shocking.
O'Reilly: It's a big deal.
Lewis: Not something that we're used to seeing from Amazon.
O'Reilly: Net income, as we both know, does not actually matter to a company like Amazon. Let's talk about operating income, cash flow.
Lewis: Yeah. Operating income was well above the prior guidance. It came in at $406 million, a swing of almost $1 billion over last year.
O'Reilly: I can't even whistle loud enough for that.
Lewis: Yeah, shocking. Of course, the stock popped about 10% after hours.
O'Reilly: Naturally, because that's what Amazon does.
Lewis: All in all; destroyed.
O'Reilly: I think I know why. Is it because of AWS?
Lewis: It's because of AWS. They started breaking out Amazon Web Services about two reports ago. It's been less than a year that we've been able to track it.
O'Reilly: In fact, when they started talking about it separately, the stock popped.
Lewis: The fact that they identified it as a business segment and mentioned, it was like, "This is great." AWS just continues to grow. They had a revenue of $2 billion, growing 78% year over year.
O'Reilly: OK. Real quick, just for our listeners that may or may not be familiar; what is AWS in four sentences?
Lewis: It's basically the Web hosting and cloud aspect of the business server, providing for other companies. They're providing all the infrastructure for companies to run their tech.
O'Reilly: So they own a bunch of servers in a warehouse.
O'Reilly: Awesome. How does guidance look? They try to have their own Black Friday, or something? I look forward to that at the end of the next month.
Lewis: Oh, yeah. Amazon's Retail Day. The Amazon holiday they invented. How brilliant is that?
O'Reilly: Yeah. It's all good. So what did they say about the holidays?
Lewis: I thought there were two really cool notes from the PR release they had. One of them was they expect a record holiday season. That gets you to perk up a little bit. Amazon expects revenue between $33.5 billion and $36.75 billion during the fourth quarter. That would be year-over-year growth of 14% to 25%, depending on where they land in that range.
Lewis: Impressive. Operating income is expected to be somewhere between $80 million and $1.2 billion, compared with $590 million in the fourth quarter of last year. The high end of Amazon's guidance would be more than doubling operating profit year over year. That's pretty incredible.
O'Reilly: They've got to pay for that new headquarters somehow.
Lewis: Yeah. A lot of what's pushing this is their AWS growth.
Lewis: What's going on in retail for them is huge, and the kind of growth they're seeing on their platform is great, but this insane stat that I saw was "AWS accounts for about 8% for Amazon's revenue and roughly half of its profits."
O'Reilly: Oh my God.
Lewis: To give you an idea of the kind of margins that they're working with, that's insane. They seem like they're going to continue to grow.
O'Reilly: I don't know how they snuck in. I'm a happy Prime member, and I actually save all my videos and photos of my son -- I just didn't want to be totally tied to Apple for diversification's sake -- I cannot comment on their AWS ...
Lewis: The B2B side of things.
O'Reilly: Yeah, the B2B side. The value proposition is awesome. It's like $6 a month, or something. Good to go. All my photos are there.
Lewis: That's been the appeal a long time for customers. You're like, "Oh, I'm getting this insane package of stuff. I'm getting free, two-day shipping, I'm getting all this media that's available to me."
O'Reilly: I love the shows on Prime.
Lewis: Shows are great, in terms of their original programming. It's really fantastic. For a long time it's been that it's a great value proposition for customers. You can see how they're building up this huge user base. Is it going to be a profitable business?
O'Reilly: It is now!
Lewis: Now we're seeing it. It's incredible.
O'Reilly: What was the funny headline you were talking about earlier?
Lewis: There was a headline from Wired: "Get Used to Amazon Being a Profitable Company."
O'Reilly: That's funny, given what we were saying about Amazon just a year ago.
Lewis: Yes. I think it's a testament to how strong AWS is. It's something we talked about before the show. E-commerce is a super-low-margin business to be in. it's not something where you're making a ton of money, especially the way that they operate in e-commerce. The fact that they have this seemingly huge catalyst coming down the pike and it's already posted great results for them, I think it's super-encouraging. It makes me kick myself for not owning Amazon.
O'Reilly: I hate Michael Douglass.
Lewis: Yeah. Folks at home, Michael Douglass sits next to us in editorial.
O'Reilly: You'll remember him from the healthcare show. He's a happy Amazon shareholder.
Lewis: So is half the office. Anytime Amazon pops, Fools are happy.
O'Reilly: Including our founder, David Gardner. Before we move on, I wanted to point our listeners to a newly redesigned focus.fool.com. There you'll discover a special offer to join The Motley Fool's Stock Advisor newsletter for all Industry Focus listeners.
All loyal IF listeners have access to a special discount on Stock Advisor that works out to $129 for a full two-year subscription. Just go to focus.fool.com to take advantage of this offer. You'll see Dylan's and my smiling mugs. Once again, that's focus.fool.com
Moving on to the big news of the day, Google, Alphabet, I don't know what they're calling themselves ...
Lewis: ABCs. Whatever you want to call them.
O'Reilly: A-B-C, 1-2-3. They reported after close yesterday. Stock's up, so I'm assuming it was good.
Lewis: Yeah. Much like Amazon, we saw a 10% pop on an already solid company that has been on a pretty good run for a long time. They posted earnings of $7.35 per share on revenue of $18.68 billion.
O'Reilly: For the quarter? Good.
Lewis: Yeah. Analysts expected $7.21 per share on $18.53 billion in revenue. Solid beat there. Year-over-year revenue growth of 13%. Like we said ...
O'Reilly: That's not white-hot, but they're a huge company.
Lewis: Yeah. Very favorable market reaction. I think as a reminder to investors, this is the last report we will see as "Google" as you know it. They will be moving forward and reporting in the Alphabet structure moving forward.
O'Reilly: For those who may or may not be aware, why did they shake things up and make their bread-and-butter business that was Google a subsidiary of this Alphabet thing? Why?
Lewis: A lot of it had to do with providing all these individual business segments more autonomy, as well as having more focused management on those. By shedding off their responsibilities of Brin and Page and making Sundar Pichai the CEO of Google, I think you wind up being able to retain talent, being able to promote people to executive-level positions -- which is huge in tech -- and for the six or so business segments that are going to have dedicated executives, that's great.
I think it also lets them have a better blend of their businesses. It gives them someone that is looking at the big picture for all six or so. There's that side of it. I think another big reason they're doing it is because it helps give Wall Street more clarity into their business.
O'Reilly: It was basically just Google, and then all this other stuff.
Lewis: Yeah. Rather than have some of these bottom line-draining business segments dragging down overall reporting for things like Google, instead you're seeing Google's Internet properties separate, and then some of the life sciences and big bet-type things being segmented out so you can see what capex is going to be for that segment specifically.
O'Reilly: What are the six segments that Google has?
Lewis: One of the coolest stats that I saw -- maybe I'm misunderstanding your question here -- but ...
O'Reilly: I meant about the Google division. From now on: Alphabet, Google. Two separate things.
O'Reilly: They had to see this was coming.
Lewis: Yeah. So much confusion. Google has six properties. The Internet side of the business has six properties with over 1 billion users. This was something that came out when they were doing their reporting in the conference call. Search, Android, Maps, Chrome, YouTube were already in that club. Google Play just joined them.
O'Reilly: That is really surprising to me. You're a Play user, right?
Lewis: No. I'm an iOS guy.
O'Reilly: OK. Sorry.
Lewis: It's just a testament to how entrenched they are, especially in mobile. That's a big thing for Google Play.
O'Reilly: Are we witnessing the death of desktop search? What's going on?
Lewis: I think we're getting there. It's never going to die away, but mobile search queries are something they talked about again on the conference call. It's now outnumbered those on desktop. Same goes for YouTube. They're seeing that both with standard Google search, and stuff that people are searching for on YouTube.
O'Reilly: Drum roll ... Google made an announcement in their quarterly report. They're doing something they've never done before.
Lewis: Yeah. Something that we might not have seen coming. For all of the financial tidying up that they've done in the past couple months, I was never expecting them to initiate a buyback anytime soon.
O'Reilly: It's not huge. As I understand it, it's ...
Lewis: Are you going to try to read the number?
Lewis: That's a big $0.59.
O'Reilly: Dylan, what is the significance of this number?
Lewis: $5,099,019,514 is the square root of 26. Of course, there are 26 letters in the alphabet.
O'Reilly: Does that include transaction costs? I wonder.
Lewis: I don't know. Probably not. That's the headline here, right? "Does that include transaction costs?" More Google being kitschy and Google-y. They have to have fun. If they're going to be like "We're going to initiate a buy back, might as well ..."
O'Reilly: Have some yuks. I was trying to extrapolate, like, "What other fun numbers could they do if they upped this?" Anyway, on that note, I don't want to pooh-pooh it because it's fun that they're returning a portion of their $70 billion-plus in cash. This is not large. It's a $470 billion market cap company, they have $70 billion in the bank. This is not a large buyback.
Lewis: In the context of their revenue that they just pulled in from the previous quarter, it's just over 25% of that.
O'Reilly: They had the standard thing that any company that initiates a buyback program puts out. The board of directors authorized Alphabet to repurchase. The repurchase is expected to be executed from time to time, subject to general business and market conditions. Subject rule 105B-1. They're just going to do this if the stock pulls back at Christmastime. It's not "OK, in December, we're going to spend $5 billion for assurance." This is a ...
Lewis: This is going to be opportunistic.
O'Reilly: Yes. That's exactly it. It seems like it's not only not a big buyback, but it's being done because of the new CFO.
Lewis: Yeah. Like I alluded to earlier, one of the most noticeable differences in their corporate governance and how they've been approaching Wall Street recently; it's very visible that there's this new regime with CFO Ruth Porat. I don't know how heavily involved, or ...
O'Reilly: Formerly of Morgan Stanley, as I recall.
Lewis: Yes. She has a background of being on the Street and knowing how to cater to investors well. For a long time, I think Google has bucked the idea of being Wall Street-friendly.
O'Reilly: Well, their IPO was done Dutch-auction style, which is more investor friendly and not Wall Street/IPO/fee friendly. They never split anything, which is -- Warren Buffett agrees with it, but Wall Street likes it because it's more shares, or whatever. The last thing I wanted to throw out about the buyback before we move on was the fact that the stock isn't necessarily expensive. It's trading at 26 times forward earnings estimates, from what I could find on S&P Capital IQ. On the other hand, it's being done at an all-time high. What's up, guys?
Lewis: They might recede a little bit post-earnings and we'll start to see them back down. Like you said, it is an opportunistic buy. It's not a scheduled buy. One of the things I thought was interesting is, they are not a stable "All right, we're going to grow at 4% per year." Like a big tobacco-type company, where the business is stable and you know what cash flows are going to be and ...
O'Reilly: You buy back stock. That's your job.
Lewis: Yeah. Usually a lot of companies that are issuing dividends or have big buyback programs in place don't have a better use for their money. They can't internally use it to put it toward more lucrative projects. It's interesting to see Google ...
O'Reilly: One would think that the ventures that these guys see in the Google Ventures division alone, I would think they could throw $5 billion at something.
Lewis: I think, maybe, the reality is just the scale that they've hit and the cash that they have available is so humongous that it doesn't hurt them.
O'Reilly: Same as Apple.
Lewis: It doesn't limit any of their business operations to shed this $5 billion and make Wall Street kind of happy.
O'Reilly: What were you saying about the new CFO making Wall Street happy with cost cutting, or something? You don't hear that out of Silicon Valley a lot.
Lewis: This is something we talked about last time we did Google's earnings on the podcast. Last quarter she went over on Wall Street in her first appearance talking about how they were going to be a little bit more fiscally conservative, cut back on some capex, and tighten the reins a little bit. Wall Street responded really well to that. They popped last time when they reported earnings. I think it's more of the same there.
Like we said before, they have the Google side of the business now, and they're going to be breaking out in their future earnings releases this "other bets" category. That's where we see the life-sciences things, driverless cars; all of these incubation efforts and things like that. That's another Wall Street-friendly thing to do. We're seeing, in the short time that she's been here, they've become a company that is much more ...
Lewis: Yeah. Much more transparent and much more speaking the same language as investors.
O'Reilly: On previous shows we've highlighted ad blocking as potentially bad.
O'Reilly: Did they mention it at all? Did they mention the thing that shall not be named?
Lewis: Yeah. It's like the Voldemort for Google. It came up in the conference call. One of the analysts asked, "Is it something we could expect to have meaningful impact on revenue at some point in the near future?" Sundar Pichai fielded the question, the CEO of Google, and he said, "On the ad blocking stuff, it's not a new phenomenon." He went on to say, "I think it's important to understand ads today fund almost all the services which people use, including products like Google Search, Maps, and many third party products.
For publishers it represents the majority of revenue, and I think users are OK with the contract, and we need to make sure it works well." Everything that I'm hearing with ad blocking from Google is more along the lines of "We need to make ads palatable to users, and not as invasive, and catered to their interests."
O'Reilly: It seems like he's implying -- I don't have a better word, and it's not the right one -- but a social contract between the American public and "We're going to watch all this stuff for free, and we'll accept some ads."
Lewis: It was funny, because when I read that quote, a light bulb went off. I was like, "Oh, yeah! I'm not paying to use that."
O'Reilly: No. A really big chunk of my music listening is done on YouTube, and I'm OK with the 15-second ad occasionally. I deal. It sounds like a pretty positive report. Was there any kind of negative, iffy ...?
Lewis: Yeah. If you were going to nitpick and look for something negative here, I think you've got to look at paid clicks and CPCs and what's going on there.
O'Reilly: This is, of course, related to the shift to mobile.
Lewis: Yes. Aggregate paid clicks grew 23% year over year; analysts had only expected 18.6%, so you think that's great. Volume-wise it was fantastic, but aggregate cost per click -- what people are paying for, individual placements -- fell 11% year over year. Analysts expected ...
O'Reilly: We talked about this last time.
Lewis: A drop of 8%. This is something we've talked about before, where CPCs are falling and they're making it up on volume, right? That's the narrative. People have been OK with that for a while. If there is something to be concerned about -- and this is the bear case for Google -- CPCs continue to fall as more users transition over to mobile, and in that transition, ads lose their efficacy. People just don't engage with them the same way that they do when they're on desktop, simply because of limited screen space, and people's browsing tendencies.
Because of that, they hit this critical point where they can't keep growing volume to support the growth because of low CPCs. I think that's a legitimate concern, but they just keep knocking it out of the park. A big part of me thinks that they will figure out something to supplant that revenue base because they have so many other projects in the hopper that could turn into huge, huge businesses for them.
O'Reilly: Awesome. Dylan, as always, thank you for your thoughts.
Lewis: Always a pleasure, Sean.
O'Reilly: If you are a loyal listener and have questions or comments, we would love to hear from you. Just email us at industryfocus@Fool.com. Again, that's industryfocus@Fool.com. As always, people on this program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear on this program. For Dylan Lewis, I'm Sean O'Reilly. Thanks for listening, and Fool on!