Following a healthy run-up over the last three months, Alphabet (GOOGL) is seeing profit-taking in response to a Q4 revenue miss.
On Monday afternoon, Alphabet reported Q4 revenue of $46.08 billion (up 17% annually) and GAAP EPS of $15.35. Revenue missed a $46.93 billion consensus, while EPS, which benefited from a near-0% tax rate (the result of one-time events) and investment and accounting gains, beat a $12.49 consensus.
Excluding traffic acquisition costs (TAC - ad revenue-sharing payments to partners), revenue was $37.57 billion, up 18% and below a $38.42 billion consensus.
Alphabet's Class A and C shares fell more than 4% apiece in after-hours trading, after having risen about 3.5% in regular trading. Here are some notable takeaways from the Q4 report and earnings call.
1. Alphabet Made a Host of New Disclosures...and Removed Some Existing Ones
Two months after Sundar Pichai (formerly just Google's CEO) was named Alphabet's CEO, YouTube ad revenue was broken out for the first time. So was revenue for the Google Cloud unit, which covers both the Google Cloud Platform (GCP) and G Suite app subscriptions.
YouTube ad revenue was up 31% annually in seasonally big Q4 to $4.72 billion, and was up 36% annually in 2019 to $15.15 billion (a little below what some analysts have estimated in recent years).
Google Cloud revenue rose 53% in Q4 to $2.61 billion, and it grew 53% in 2019 to $8.92 billion. GCP's growth rate was said to be "meaningfully higher" than Google Cloud's overall, and to have accelerated in 2019 relative to 2018. For comparison, Amazon.com (AMZN) reported last week that its AWS revenue rose 34% annually in Q4 to $9.95 billion.
- YouTube's non-advertising revenue, which is dominated by subscription services, is now on a $3 billion annual revenue run rate.
- YouTube Music and Premium collectively have over 20 million paid subscribers globally, while the YouTube TV service (available only in the U.S.) has over 2 million paid subs.
- Google's revenue backlog, nearly all of which stems from Google Cloud, totaled $11.4 billion at the end of 2019.
- Google Play now has more than 2 billion monthly active users (MAUs), and more than $80 billion has been cumulatively paid out to developers via Play transactions.
But while becoming more transparent in many areas, Google also stopped breaking out its ad click and price growth for Google websites and apps, as well as its ad impression and price growth for third-party properties. And while Google is still sharing a total TAC figure, it's no longer breaking out how much of its TAC respectively comes from Google properties and third-party properties.
2. Ad Sales Were a Little Below Expectations
Google properties ad revenue rose 18% to $31.9 billion, missing a $32.09 billion consensus. YouTube ad sales (as previously noted) were up 31%, while "Google Search & Other" ad revenue, which is dominated by Search, rose 17% to $27.91 billion.
Ad revenue from third-party properties, which carries lower margins due to high TAC expenses, came in at $6.03 billion -- up 8% and slightly below a $6.06 billion consensus.
3. Hardware Sales Slumped, While Other Non-Ad Businesses Did Well
Previously, Alphabet placed all of Google's non-advertising businesses within the Google Other segment. Based on this definition, Google Other revenue came in at $7.88 billion, below an $8.65 billion consensus and responsible for the lion's share of the Q4 revenue miss.
Based on Alphabet's new definition for Google Other, which excludes Google Cloud, Other revenue rose 10% to $5.26 billion.
With Google Cloud up 53% and Google also indicating that it's still seeing strong growth for Play transactions and YouTube subscriptions, the blame for the Google Other shortfall lies with hardware sales, which were said by CFO Ruth Porat to be down annually. And with Pichai indicating that the Nest Mini smart speaker and Nest Hub Max smart display sold well over the holidays, Pixel phone sales appear to be the main culprit here.
4. 'Other Bets' Losses Swelled
The Other Bets segment, which among other things covers Waymo, Google Fiber, the Verily life sciences business and Alphabet's investment arms, posted a $2.03 billion operating loss on revenue of just $172 million. This follows a $1.33 billion operating loss on revenue of $154 million in the year-ago period.
Notably, a month after Verily announced it has closed a $1 billion funding round led by PE firm Silver Lake, Pichai said Alphabet "will consider opportunities for some of our Other Bets to take similar steps over time."
For her part, Porat said that Alphabet is "sharpening our focus on the metrics and milestones against which capital allocation is determined" when it comes to Other Bets, and that it continues assessing "where external capital is additive to governance and execution."
5. Google Plans to Keep Investing Aggressively in 2020
Alphabet's headcount rose 20% in 2019 to 118,899 employees. And on the call, Porat forecast that 2020's headcount growth will be slightly higher, thanks to investments in Google Cloud and other "priority areas," the pending Fitbit acquisition and plans to move certain activities currently performed by third parties in-house.
The company also plans to once more grow its capital spending on both data center infrastructure and office facilities. In comments that Google's chip and hardware suppliers must be pleased to hear, Porat noted that relative to 2019, data center capex will skew more towards servers than data center construction in 2020 (as it is, Intel's (INTC) Q4 report suggests cloud server spending has begun rebounding strongly).
6. Stock Buybacks Rose Slightly, and Are Promised to Continue
$6.1 billion was spent on stock repurchases in Q4, up from $5.7 billion in Q3. Porat mentioned that Alphabet had $21 billion remaining on its buyback authorization (an authorization that it can always add more funds to if it wishes), and that it's "focused on executing on the remaining authorization at a pace that is at least consistent with what you saw in the fourth quarter."
Eric Jhonsa previously covered Google's earnings report and call through a live blog.