• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Technology

Google's Strong Earnings Report: 6 Encouraging Things That Were Shared

Among other things, the web giant reported its ad price declines narrowed substantially and signaled that its Pixel and cloud sales grew strongly.
By ERIC JHONSA
Jul 26, 2019 | 04:16 PM EDT
Stocks quotes in this article: GOOGL, AMZN, MSFT, FB, AAPL

In addition to reporting strong revenue and EPS numbers, Alphabet/Google (GOOGL) made a host of other encouraging disclosures on Thursday afternoon.

Here's a look at six areas where Alphabet, whose shares are up around 10% post-earnings, shared one or more things that investors can take heart in.

1. Much Smaller Ad Price Declines

Three months ago, Alphabet's shares tumbled after the company missed first-quarter estimates, while indicating that "the timing of product changes in ads" was affecting the ad revenue produced by Google's own sites and apps (dominated by search and YouTube). CFO Ruth Porat added that the passing of the one-year anniversary of YouTube ad changes had the effect of lowering the growth rate Google saw for paid ad clicks on its properties, albeit while reducing the decline seen in its average ad price, or cost per click (CPC).

In the second quarter, annual paid click growth for Google properties continued slowing, dropping to 28% from a first-quarter level of 39%. But this was more than offset by the fact that CPC only fell 11% -- a much smaller decline than 19% in the first quarter and also the smallest drop Google has seen in three years.

Porat mentioned on the call that "the benefits of applying machine learning" have boosted ad sales on Google properties, but didn't offer additional details. In the past, Google has talked up its use of machine learning to help advertisers (including small businesses) optimize their ad campaigns based on goals such as maximizing ad clicks, sign-ups or revenue.

2. Favorable TAC Trends

Though total Google ad revenue of $32.6 billion (up 16%) beat consensus estimates by about $200 million, traffic acquisition costs (TAC - ad revenue-sharing payments to partners) of $7.24 billion (up 13%) were a little below expectations. As a result, TAC equaled 22% of ad revenue, down from 23% a year ago.

On the call, Porat stated once more that the ongoing shift in Google's ad sales to mobile devices was -- thanks to revenue-sharing deals with Apple (AAPL) and others -- boosting its TAC expenses, and that the ongoing shift towards ad revenue from Google properties relative to third-party sites and apps was keeping a lid on TAC growth. She also once more added that the ad growth seen by YouTube and other "TAC-free" properties was working in Google's favor.

3. Strong 'Cloud' Revenue Growth

Getting a lot of media attention: CEO Sundar Pichai disclosed that Google's "cloud" business reached an $8 billion annual revenue run rate in the second quarter. That compares with (based on a prior disclosure) a $4 billion run rate as of the fourth quarter of 2017.

Before one compares this figure (as some unfortunately have) with the $33.5 billion run rate Amazon.com (AMZN) just disclosed for Amazon Web Services (AWS), it's worth remembering that Google's cloud revenue covers not only the Google Cloud Platform (GCP), which competes against AWS and Microsoft's (MSFT) Azure cloud platform, but also its G Suite subscription business, which competes against Microsoft Office. With Google previously reporting that over 5 million businesses have become paying G Suite clients, G Suite's contribution to Google's total cloud revenue appears to be substantial.

Still, judging by both Google's disclosures and third-party estimates, GCP appears to be growing strongly off a relatively small base. Though its total feature set and ecosystem still can't match that of AWS and Azure, certain GCP services, such as its machine learning and big data/analytics offerings, have been widely praised. In addition, new Google cloud chief Thomas Kurian has signaled that his unit plans to invest aggressively in enterprise sales (seen as a weak spot), and Google recently inked a $2.6 billion deal (expected to close later this year) to buy business intelligence/analytics software firm Looker.

4. A Pixel Sales Rebound

In April, Pichai disclosed that Google's Pixel phone sales fell annually in the first quarter, something that was blamed on industry-wide "promotional activity" amid weak high-end smartphone demand. By contrast, on Thursday, Pichai said that Pixel unit sales more than doubled annually in the second quarter thanks to the May launch of the relatively cheap Pixel 3a and 3a XL phones.

Revenue growth was likely lower than unit growth, given the 3a and 3a XL's pricing, and only time will tell how demand for Google's latest phones holds up during the second half of 2019. But the second-quarter Pixel sales rebound is still encouraging to see for a business that -- in part due to limited carrier distribution -- has only claimed a modest smartphone share to date.

With the help of strong cloud and Pixel sales growth, as well as rising Google Play transaction revenue, the "Google Other" segment, which covers Google's non-advertising businesses, saw revenue grow 40% to $6.2 billion. That beat consensus estimates by about $600 million, and was the biggest factor behind Google's second-quarter revenue beat.

5. A $25 Billion Buyback Expansion

While Alphabet isn't a stranger to stock buybacks, its repurchases haven't been very large for a company of its size and financial resources, and for the most part have been similar to its stock compensation expenses. In 2018, the company spent $9.08 billion on stock repurchases, and $9.35 billion on stock comp.

But with Alphabet having disclosed in its second-quarter report that it just added $25 billion to its buyback authorization, things might be about to change. The company spent $3.58 billion on buybacks in the second quarter, which compares with stock comp of $2.76 billion.

6. Greater Capex Transparency

While Alphabet has been disclosing its quarterly capital spending, the company has often provided little or no color on how much of its capex goes towards data center-related investments versus real estate purchases. But that wasn't the case on the second-quarter call.

In addition to stating that Alphabet's accrued capex rose by about 30% annually to $6.9 billion, Porat indicated that about 40% of the capex consisted of office facility purchases. She added that over the last couple of years, about 70% of Google's capex has on average gone towards "technical infrastructure" such as data centers and the hardware inside of them, and about 30% has gone toward office facilities.

Porat also reiterated that Alphabet's capex growth is expected to "moderate quite significantly" in 2019, and that a greater portion of its "technical infrastructure" investments will go toward building data centers as opposed to buying servers. Overall, her comments, as well as the capex guidance cut announced by Facebook (FB) earlier this week, fit with what data center chip and hardware suppliers have been reporting about a cloud hardware spending pause.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

Employees of TheStreet are restricted from trading individual securities.

TAGS: Investing | Technology | Stock of the Day

More from Technology

Why I Would Be a Buyer of United Microelectronics

Bruce Kamich
May 26, 2022 1:14 PM EDT

Take a look at this chipmaker's charts.

Snowflake Continues to Melt

Bruce Kamich
May 26, 2022 8:45 AM EDT

With the stock lower again off earnings, we're checking the charts again.

Here's What to Do With QQQ After Earnings From Snowflake and Nvidia

Bob Byrne
May 26, 2022 8:30 AM EDT

Shares of the two big tech names sagged after Wednesday's close, but let's see how they and the Nasdaq 100 fare in trading here on Thursday.

4 Reasons to Be Cautiously Optimistic About the Tech Sector

Eric Jhonsa
May 25, 2022 5:15 PM EDT

Many tech valuations are now back to 2016 or 2017 levels, and quite a few contrarian indicators point to extreme bearishness.

Insiders Are Stepping Up and Buying Shares in These 2 Companies

Bret Jensen
May 25, 2022 11:30 AM EDT

A provider of technology for managing smart homes and a financial services concern are finding interests from directors and officers.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:46 PM EDT STEPHEN GUILFOYLE

    We're Shedding Some of This Holding on Strength

    Check out the Stocks Under $10 portfolio here!
  • 11:33 AM EDT PETER TCHIR

    Thoughts Ahead of the Fed Minutes

    Recent economic and earnings issues are convincing...
  • 02:24 PM EDT PAUL PRICE

    An Interesting Chart

    I'm betting heavily that stocks will be way up aga...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login