Please ensure Javascript is enabled for purposes of website accessibility

Get Ready to See the Real Alphabet, Inc.

By Steve Symington – Jan 29, 2016 at 9:33AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

With a new operating structure and segment-based reporting, we're about to get our most detailed look yet at how the search giant spends its money.

Alphabet's simple new logo. Image source: Alphabet.

OK, Google. Time to let investors see the real you.

Google parent Alphabet (GOOG 6.30%) (GOOGL 6.09%) is set to release fourth-quarter 2015 results after the market close on Feb. 1, 2016. But if you're expecting more of the same from the Internet titan, you might be delightfully disappointed. 

Though Alphabet formally implemented its reorganization to become the holding company of Google and its various operating subsidiaries last October, this quarter will mark the first earnings report to fulfill the purpose of its new structure. That is, in Alphabet's words, "to bring increased focus, accountability, and transparency" to its wide-ranging businesses through more detailed segment-based reporting. 

In fact, in preparation of its new quarterly approach, Alphabet Chief Accountant Amie Thuener was kind enough to take to Google's official investor relations blog with a handy earnings prep sheet on Thursday in advance of the report. At the same time, astute investors who tuned in to the conference call following Alphabet's impressive third-quarter report three months ago have already received a solid sneak peek at what to expect.

Specifically, Alphabet management made it clear at the time segment reporting would primarily consist of revenue, profitability, and capital expenditures metrics for the business, broken up into two reporting segments:

On Google
First, on one (very large) hand will be Google, which will undoubtedly account for the vast majority of Alphabet's revenue and earnings power as it encompasses Search, Android, Maps, Chrome, YouTube, and Google Play -- each of which individually boasted more than 1 billion users globally last quarter -- as well as Ads, Commerce, Apps, Cloud, and hardware products including Chromecast, Chromebooks, and Nexus.

Digging deeper, Alphabet also confirmed it will still provide consolidated reporting for Google's core businesses, including both advertising revenue (up 13% year over year last quarter to $16.8 billion, or 89.9% of total sales) as well as traffic acquisition costs for Google's own sites (where revenue rose 16% to $13.1 billion in Q3) and for Network Members' sites (where revenue climbed 4% to $3.7 billion last quarter).

We should also continue to receive stats for growth in Google's aggregate paid clicks (up 23% last quarter), and aggregate cost-per-click (down 11% in Q3) -- the latter of which essentially measures how much Google makes per ad. But remember, though it may seem concerning that Google's cost-per-click is in a declining trend, that's partly due to strong growth in YouTube viewership, where the platform's TrueView ads reach consumers earlier in the purchase funnel. As a result, TrueView ads tend to monetize at lower -- though perfectly acceptable -- rates compared Google's usual web-based ad impressions.

On "other bets"
On the other hand will be all remaining Alphabet businesses, more affectionately known as "Other Bets."

Previously, these other bets were reported as a relative black box with revenue in the "Other" segment primarily driven by Google Play and hardware devices. But with those two categories now thrown under the Google umbrella, from now on Other Bets data will be combined and disclosed to include efforts like Access/Google Fiber (high speed Internet), Calico (focused on human longevity), Nest (connected home), Verily (formerly Life Sciences), GV and Google Capital (both investment arms), and X (encompassing "moonshot" initiatives and other long-term projects).

What's not clear in this case, however, is exactly how far Google intends to break down revenue and capex, for example, for each of these subsegments or whether our visibility into their individual results may be limited to supplementary management comments to quantify their performance.

For both segments...
Also according to the prep sheet, Alphabet will include each segment's (Google and Other Best) operating income (or loss), stock-based compensation, segment operating income excluding stock-based compensation, capital expenditures, depreciation and amortization, and any impairment charges. 

For comparison's sake, Alphabet will also provide prior-year and annual information on these metrics for three full years, which in this report will include all four quarters of 2015, the fourth quarter of 2014, and full-year results for 2015, 2014, and 2013.

Finally, Alphabet will disclose any "reconciling items" for each metric above, with the aim of helping clarify how the amounts reported in each segment relate to Alphabet's consolidated results in its income or cash flow statements. For segment operating income and stock-based compensation, reconciling items will primarily include corporate administrative costs and other miscellaneous items not allocated to any one segment. For CapEx, this will mostly relate to timing differences of payments.

In any case, I know I'm not the only one looking forward to digging in when Alphabet's report hits the wires, especially given the hope expressed by CFO Ruth Porat last quarter.

"By doing this," Porat stated at the time, "we expect that you will be able to better understand how we manage the business, including the pace and allocation of our investments."

Given Alphabet's immense financial resources and world-altering, long-term- oriented ambitions, it's hard to overstate the importance of the perspective such understanding could bring for both current and prospective investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Steve Symington has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Alphabet Stock Quote
Alphabet
GOOGL
$100.99 (6.09%) $5.80
Alphabet Stock Quote
Alphabet
GOOG
$101.45 (6.30%) $6.01

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
349%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.