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What to Expect When Alphabet, Inc. Reports Earnings

By Steve Symington - Apr 18, 2016 at 6:27PM

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Google's parent company will release its second segment-based earnings report next week.

Image source: Alphabet.

Google parent Alphabet (GOOG -1.23%)(GOOGL -1.61%) is set to release first-quarter 2016 results this Thursday, April 21, after the market close. With last quarter's impressive inauguration of segment-based reporting still fresh on investors' minds, we can look forward to our second peek at the progress of both Alphabet's lucrative core Google business and its decidedly unprofitable "Other Bets" segment. 

Thinking big
Regarding the latter, that's not to say investors should be worried about Alphabet's Other Bets, which primarily consist of promising early-stage businesses run with a long-term mind-set. Or, as Alphabet CFO Ruth Porat succinctly explained during last quarter's call, "The majority of efforts within Other Bets are pre-revenue."

But not all are pre-revenue. Last year, Alphabet confirmed that Other Bets revenue rose 37% year over year, to $448 million, mostly derived from Nest connected-home products, Fiber high-speed Internet, and life science/longevity tech from Verily. At the same time, Other Bets' operating loss also widened more than 80% over the same period, to $3.567 billion.

There were also intriguing developments within Other Bets during the quarter for which I'd like to receive clarity, including recent reports that Alphabet has decided to sell its Boston Dynamics robotics subsidiary for its lack of a realistic path to "generate real revenue" in the near term. To that end, it seems strange considering shortly after Alphabet acquired Boston Dynamics along with several other robotics companies three years ago, then-Google executive and lead engineer Andy Rubin -- who has since left the company -- insisted of their robotics efforts: "Like any moonshot, you have to think of time as a factor. We need enough runway and a 10-year vision." 

Consequently, Alphabet investors should be careful not to place outsized focus on Other Bets' quarterly performance. According to Porat, Other Bets revenue, profitability (or lack thereof), and capital expenditures will be uneven in the near term given the fact these businesses operate within different sectors and with different business models. 

Android is one of Google's seven services with at least 1 billion monthly active users, Image source: Alphabet.

The (G)reat enabler
We also can't forget the reason Alphabet is able to make these other bets in the first place: through cash generated by its enormously profitable Google business. Last year, Google's operating margin rose to 31.4%, up from 28.9% in 2014 as the company made good on a promise to pursue growth opportunities "with great care regarding resource allocation." And last quarter, Google was the primary reason Alphabet was still able to generate operating cash flow of $6.4 billion, and free cash flow of $4.3 billion. 

Digging deeper as of last quarter, Google boasted seven services each with at least 1 billion users, including Search, Android, Maps, Chrome, YouTube, Google Play, and Gmail. And those services collectively drove advertising revenue 17% higher from the same year-ago period, to $19.08 billion, to represent just over 90% of Alphabet's total revenue. This quarter will almost certainly be similar, with revenue growth further broken down between that of both Google's own websites (up 20% year over year last quarter, to $14.94 billion), and from Network Members' sites (up 7% in Q4, to $4.14 billion). 

In addition, listen for statistics on aggregate paid clicks (up 31% last quarter), and cost per click (down 13%, essentially measuring how much Google makes per ad). To that end, don't be surprised if cost per click declines once again on a year-over-year basis. This isn't alarming, though, as Google has enjoyed strong growth of late from YouTube, where the video site's TrueView ads tend to reach consumers earlier in the purchase funnel and monetize at lower rates than traditional Web ads. 

Last but not least, look for color on Google's "Other" revenue -- or, more accurately to distinguish from Other Bets, non-advertising revenue -- which rose 24% last quarter, to $2.1 billion, thanks to continued momentum from Google Play, Cloud, and Apps.

In any case -- and keeping in mind Alphabet doesn't provide specific quarterly financial guidance -- this quarter should tell largely the same story, with Google churning out healthy top- and bottom-line growth to support the company's unprofitable (but promising) Other Bets. As long as that remains the case and Alphabet continues to foster its long-term-oriented plans to become ever more pervasive in our lives, investors should be happy with where it stands. 


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