Shareholders, investors and analysts were surprised when Alphabet delivered stronger-than-expected earnings for the past quarter, despite the heavy fine imposed by the European Commission.
Alphabet reported numbers after the market closed last night, posting revenue that was up 26% (up 23% in constant currency) from Q2 2017.
Last week, Alphabet was found to be in contravention of European Union anti-trust laws and fined 4.34 billion euro for abusing the dominance of its Android operating system.
Excluding the fine, net income rose to $8.266 billion from $6.26 billion, and if the fine is factored in, net income dipped to $3.195 billion from $3.524 billion.
Operating income fell to $2.81 billion and the operating margin dropped to 9% from 16%.
"We delivered another quarter with strong operating performance, reflecting our focus on building great experiences for users, advertisers and enterprise customers around the world," says Ruth Porat, CFO of Alphabet and Google.
"In aggregate, we had substantial revenue growth, up 26% year-on-year and up 23% in constant currency. Sites revenue continued to exhibit strong year-on-year momentum, benefiting from innovation and secular growth, with mobile search again leading the way."
During an earnings call, Porat noted that operating expenses, including the impact of the fine, amounted to $16 billion.
"Excluding the impact of the European Commission fine, operating expenses were $10.9 billion in the quarter, up 24% year-over-year. Once again, the biggest increase was in R&D expenses. The growth in sales and marketing expenses reflects increases in sales and marketing headcount, primarily for cloud, followed by advertising investments in cloud and the Assistant.
"Revenues were $32.5 billion, up 25% year-over-year. In terms of revenue detail, Google Sites revenues were $23.3 billion in the quarter, up 26% year-over-year. In terms of dollar growth, results were led again by mobile search, with strong contributions from both YouTube and desktop search.
"We're pleased with the ongoing momentum in our advertising businesses. We continue to identify new opportunities through innovation, including the benefits of applying machine learning to create more useful experiences for users and advertisers."
Including fine (GAAP) | Excluding fine | |||
2017 | 2018 | 2017 | 2018 | |
Revenue | $26.01 billion | $32.66 billion | $26.01 billion | $32.66 billion |
Operating income | $4.13 billion | $2.81 billion | $6.87 billion | $7.88 billion |
Operating margin | 16% | 9% | 26% | 24% |
Net income | $3.52 billion | $3.20 billion | $6.26 billion | $8.27 billion |
AI leading the way
Google CEO Sundar Pichai said during the earnings call that the company is focusing on how artificial intelligence (AI) can be incorporated into all of its offerings to improve products.
"We revamped the Google News app in May to create reviews. It uses machine learning to highlight top stories organised for users to explore topics more deeply with articles from a range of clustered news sources.
"We believe in the need to deliver high-quality information and news to users, and to support the news industry as we do so.
"The Google Assistant is another great product based on machine learning. By the end of this year, it will be available in more than 30 languages and 80 countries.
"We have worked with partners to expand the number of smart devices that are now compatible with the Google Assistant, like doorbells, dryers, refrigerators and more, and connect with more than 5 000 devices in the home."
Porat said Alphabet will invest heavily in AI and machine learning. "The investment pace also reflects the importance of machine learning across all of our products, including search and ads.
"Although machine learning is more compute-intensive, it is increasingly core to businesses across Alphabet, and opens up the possibility of accelerated innovation in products and services."
Touching on local markets, Pichai said: "To help spur AI innovation in Africa, we recently announced the new Google AI research centre in Ghana, with the goal of bringing together top machine learning researchers and engineers to explore AI research and applications in Africa and beyond."
Other bets pay off
Alphabet separated itself from Google and became the parent company two years ago, to pursue its ambitious 'other bets' without them interfering with the core business.
'Other bets' is a term used by Alphabet to describe all its business that is not core-Google-related. This includes Calico, Nest, Google X labs, Fiber, Verily and Google Ventures. The core Google business consists of Android, Google Search, YouTube, Apps, Google Maps and Ads.
During the earnings call, Porat said revenue from other bets was $145 million for Q2, and this was primarily generated by Fiber and Verily. The operating loss was $732 million and its accrued capex was $10 million.
"We're pleased with our progress across other bets. A couple of updates: Waymo expanded its partnership with Fiat Chrysler, with the option to add up to 62 000 Chrysler Pacifica minivans to its self-driving fleet. Waymo announced it has driven more than eight million fully autonomous miles, with most of those on city streets," said Porat.
"A couple of weeks ago, X announced that Loon and Wing have graduated to become independent companies under Alphabet. Graduation from X signals that these companies have reached certain technical and business milestones and that their focus is shifting toward commercialisation. And just last week, Loon indicated it is partnering with Telkom Kenya to launch commercial service in regions of Kenya by early 2019."
Summing it up
Arthur Goldstuck, World Wide Worx MD, says: "Part of what has driven Alphabet earnings upward is its new approach to reporting investments on its books, which boosted revenue by more than a billion dollars from growth in investments over the quarter.
"This shows the extent to which Alphabet is making bets outside its own business, and making good bets at that.
"The leap in the share price tells us that investors remain enthusiastic about the prospects of the business. It is not just the growth in advertising revenue, which hit an all-time high of $28 billion for the quarter, but also the fact that it is rapidly growing other revenues.
"It hopes to compete in cloud with Amazon, which has turned AWS into the world leader in the category, and it is likely that other investments will also pay off massively in future.
"Expect areas like AI, in particular, to present new growth opportunities. Even if advertising growth does flatten, these other categories will keep pushing revenue higher, and market cap will follow," comments Goldstuck.
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