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Google Parent Alphabet's Earnings: What to Watch on Thursday

Beth McKenna, The Motley Fool

Tech titan Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is slated to report its second-quarter 2019 results after the market closes on Thursday, July 25. 

The parent company of search engine giant Google is going into its report on a mixed note. Last quarter, adjusted earnings per share (EPS) rose 19.8% to $11.90, easily beating Wall Street's consensus estimate of $10.58. However, revenue of $36.3 billion -- which represents 17% year-over-year growth -- fell about $1 billion short of expectations because of decelerating ad sales growth and soft hardware sales. 

Alphabet Class A and C shares have gained 8.3% and 9.1%, respectively, in 2019 through Friday, July 19. The S&P 500 has returned 20.1% over this period. Shares are trailing the broader market's performance largely due to dropping nearly 8% after last quarter's results were released and declining in early June after news surfaced that the U.S. Justice Department was considering launching an antitrust probe into Google.

Here's what to watch when Alphabet reports.

A dinosaur head with the multicolor Google "G" hanging from its open mouth and a man sitting on a chair in front of a glass-walled building on the Googleplex campus.

Image source: Getty Images.

Key quarterly numbers

Here are Alphabet's year-ago results and Wall Street's estimates to use as benchmarks. The company doesn't provide guidance.

Metric Q2 2018 Result Wall Street's Q2 2019 Consensus Wall Street's Projected Change (YOY)

Revenue

$32.7 billion

$39.7 billion

21.4%

Adjusted earnings per share (EPS)

$11.75

$11.33 

(3.7%) 

Data sources: Alphabet and Yahoo! Finance. YOY = year over year.

Adjusted earnings are expected to tumble due in part to continued foreign currency headwinds.

The year-ago period's adjusted EPS result excludes a fine of 4.34 billion euros (about $5.1 billion at the time) by the European Commission. The EC determined that Google engaged in anticompetitive practices related to the company's mobile search business, stemming from "certain contractual provisions in agreements between Google and Android partners," according to Alphabet. Including this fine, Alphabet's GAAP (generally accepted accounting principles) earnings were $4.54 per share. 

Segment results

For context, here are last quarter's results by segment:

Segment Q1 2019 Revenue Growth (YOY) Q1 2019 Operating Income  Growth (YOY)

Google

$36.17 billion

16.7%

$9.33 billion*

11.4%*

Other bets (formerly "Moonshots")

$170 million

13.3%

($868 million)

Loss increased by 52%, or $297 million

Total segment

$36.34 billion

16.7%

$8.46 billion 8.5%

Data sources: Alphabet and Yahoo! Finance. YOY = year over year. *EC fine is not allocated to Google for segment reporting purposes. 

On a constant currency basis, revenue grew 19% -- a deceleration from the previous quarter's 23%. Within Google, revenue breakdown was as follows:

  • Google properties ("sites"): a 16.7% increase to $25.68 billion
  • Google network members' properties: a 8.5% increase to $5.04 billion
  • Total Google advertising (above two categories): a 15.3% rise to $30.72 billion
  • Google "other revenue": a 25.1% jump to $5.45 billion

Last quarter, Alphabet's costs continued to increase faster than revenue. This resulted in the adjusted operating margin declining to 23%, down from 25% in the year-ago period.  

Other bets' revenue primarily came from Alphabet's Fiber high-speed internet business and its Verily life science business.

Google: Ad revenue growth

Investors' top focus should be on advertising revenue growth. After all, digital ad sales account for the bulk -- 85% last quarter -- of Alphabet's revenue. Ad revenue growth has been decelerating. In the first quarter, ad sales increased 15.3% year over year, down from growth of 19.9% in Q4 2018, 20.3% in Q3 2018, 23.9% in Q2 2018, and 24.4% in Q1 2018.

Management "attributed the slowdown to three factors: an unfavorable foreign exchange impact versus a favorable one in the year-ago period, a tough comparable because ad revenue growth was particularly strong in 2018, and the timing of product changes in ads, which can affect year-over-year growth rates," as I wrote after last quarter's earnings. While some of this explanation is reasonable, part of its seems a bit weak.

Google "other revenue": Have hardware sales bounced back? 

Investors will also want to home in on growth in "other revenue" -- which primarily includes hardware, Google Cloud, and Google Play -- and particularly take in comments on the earnings call about the hardware business. Last quarter, other revenue's growth was a strong 25.1% year over year, but this was down from the previous quarter's growth of 30.7%. The slowdown was due to a decline in year-over-year sales of the Pixel smartphone, which CFO Ruth Porat attributed in part to "heavy promotional activity industrywide, given some of the recent pressures in the premium smartphone market."

Other bets: Waymo update

On the earnings call, management is sure to provide an update on Waymo's progress, particularly with respect to its ridesharing service Waymo One in Phoenix. This service began operating on a limited basis in December, representing the starting line for monetization of Alphabet's autonomous vehicle subsidiary.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.