- Alphabet, formerly Google, received a resounding pat on the back from investors post its Q2 earnings.
- Revenue and earnings were strong on the back of a 19% increase in ad revenues YoY.
- We take a closer look at the metrics underlying the advertising success for signs of instability.
Alphabet Inc-C (NSDQ:GOOG), Google’s parent company, reported better than expected Q2 results on Thursday, July 28, sending its stock over the top to reach all time highs of around $768 as of 5 am on July 29.
Alphabet reported earnings per share of $8.42 with a quarterly revenue of $21.5 billion, blowing analysts’ estimates of $8.04 and $20.76 billion out of the water.
The company’s revenues rose by 21.28% to reach $21.5 billion, a growth level that was previously seen way back in Q2-2014.
Key Advertising Metrics
We obviously have to look at their core revenue streams first. Google’s bread and butter - advertising revenues - accounted for 89.04% of total revenues, growing 19% compared to the prior period, thereby sending earnings over the top. That’s a positive sign considering that Google's aggregate CPC continued to show a decline this quarter, albeit at a much lower rate than the year-ago period, which reported an 11% decline from the period before that.
That said, Google is yet to snap out of the trend where CPCs (Cost Per Click) are inching lower and paid clicks are increasing. The trend that started in Q4-2014 has continued well into this quarter as paid clicks shot up by 29% while CPCs declined by 7% compared to last year. Sequentially, paid clicks grew 7% while CPCs declined 1% from Q1.
Traffic acquisition costs (the fees it pays to partner websites that run Google ads or services) as a percentage of total advertising revenues has been steadily coming down over the last few years, and that trend continued during this quarter as well.
Though their overall traffic costs have gone up considerably YoY, TAC as a % of advertising revenue seems to be headed for the sub-20% level for the first time.
These three metrics are critical to watch, as they indicate the overall health and sustainability of Google's core revenue streams.
Alphabet’s Other Bets
The other projects Alphabet is running collectively brought in $185 million. That’s twice as much as what they reported for the prior period. However, losses also expanded to $859 million this year, up from $660 million in the year-ago quarter.
With less than $200 million coming from other bets, it will take a very long time to realize any bottom-line benefits from this division - if ever that happens.
Of note here is that the company fully intends to push its advancements in artificial intelligence vide machine learning. Not only has it released two new APIs - for natural language and speech and on cloud machine learning, but is has also tested DeepMind in the data center environment. One of its tests has already shown that it is capable of effecting a 40% reduction in energy consumption used for cooling the servers.
This is a core strength for Google that can provide the firepower needed for their cloud business.
Another major cloud push is its announcement to invest in 12 new data centers - something the company sorely needs in order to compete with AWS’s 33 “availability zones” as well as Microsoft’s 100+ and IBM’s 47 data centers across the globe.
Though no mention was made of Android Pay’s performance, they are currently well over the 5 million user mark, but continue to face a threat from Samsung Pay, especially on the latter’s high-end devices that carry the app. Google Play downloads crossed 65 billion over the past year, and the company says that apps are reaching more than 1 billion users every month.
With revenues and earnings up, investors are on a high - and that’s reflecting in the current stock price. However, as I mentioned, we need to watch their advertising metrics closely quarter over quarter for signs of non-sustainability. With Facebook pushing hard in that space as well as in video advertising in the future, Google has more to lose than anyone else.