Alphabet (GOOGL) after the closing bell on Tuesday reported a top- and bottom-line beat for the fourth quarter.
On the top line, revenues of $56.898 billion (+23% year over year, +23% YoY constant currency) outpaced the $52.673 billion consensus. On the bottom line, earnings per share of $22.30 (+45.3% YoY) exceeded the $15.77 per share consensus.
Total operating income of $15.651 billion exceed the $11.874 billion consensus, representing a 28% operating margin. Total company operating margin is the number to keep in mind from quarter to quarter, as it will give us a better indication of how growth in the various operating segments will impact overall profitability going forward. It is, however, a bit less relevant in the near-term as Alphabet is playing catch up on the cloud front and must therefore invest heavily right now.
On the release, Alphabet and Google CEO Sundar Pichai said the "strong results this quarter reflect the helpfulness of our products and services to people and businesses, as well as the accelerating transition to online services and the cloud. Google succeeds when we help our customers and partners succeed, and we see significant opportunities to forge meaningful partnerships as businesses increasingly look to a digital future."
Before getting into the results, we remind members that management changed up the release this quarter to increase transparency by providing additional detail on individual segments (most notable being the cloud operation). On the release, management provided a deeper breakdown of each segment, most notably, it appears that "Google Other" has been rolled into Google Services.
- "Google Services includes products and services such as ads, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube. Google Services generates revenues primarily from advertising; sales of apps, in-app purchases, digital content products, and hardware; and fees received for subscription-based products such as YouTube Premium and YouTube TV."
- "Google Cloud includes Google's infrastructure and data analytics platforms, collaboration tools, and other services for enterprise customers. Google Cloud generates revenues primarily from fees received for Google Cloud Platform services and Google Workspace (formerly known as G Suite) collaboration tools."
- "Other Bets is a combination of multiple operating segments that are not individually material. Revenues from the Other Bets are derived primarily through the sale of internet services as well as licensing and R&D services."
We also got more disclosures in terms of profitability, as management now provides operating income for each of the new reporting segments. We remind members that we believe these updates are crucial to shares realizing a higher valuation, as it provides deeper insight and the numbers required to develop a true sum-of-the-parts valuation, a preferable methodology, given regular bi-partisan calls for a corporate breakup. With that, let's look under the hood.
As members can see, the "Google Properties" segment is no longer reported, however, since consensus estimates were still provided as Google Properties for this quarter, we backed into the metric to provide members an apples-to-apples compare vs. expectations.
So, revenues for what was be Google Properties advanced 21.6% YoY to $38.788 billion and outpaced estimates of $35.932 billion.
Breaking this down further (staring with this quarter Alphabet has simply gone straight to disclosing these broken-down figures and we will change up the formatting of our analysis going forward once analysts modify their models for this new presentation format), Google Search and other was $31.903 billion, up 17.4% YoY. At YouTube ads, revenue was $6.885 billion, up about 46% YoY.
"At YouTube, we are building products to help creators benefit from two important trends: live video and short-form video," said Pichai on the call. "More than a half million channels live streamed on YouTube for the first time in 2020 and from artists performing in their living rooms to churches moving their services online. And videos in our new Shorts player are receiving 3.5 billion daily views. We are looking forward to expanding Shorts to more countries this year."
Specific to the revenue growth, Chief Business Officer Philipp Schindler added that in YouTube, direct response "had a substantial year-on-year growth throughout the entire year, including the fourth quarter."
After a substantial pullback at the outset of the pandemic, Schindler said, brand spending began to recover in the third quarter.
"Marketers realized that even if there was a pullback in consumer demand in the short term, they need to keep their brands in front of people to stay top of mind when spending picked back up," he said.
Google Network Member properties saw revenue increased 22.9% YoY to $7.411 billion and outpaced estimates of $6.484 billion.
This puts total Google advertising (Google Search & other, YouTube ads, Google Network Members' properties) at $46.199 billion, up 21.8% YoY vs. expectations of $42.16 billion.
Rounding out the Services segment, Google other revenue of advanced 26.8% YoY to $6.674 billion, however, was marginally short versus the $6.657 billion consensus.
On the call, Pichai reminded investors that the company has officially closed its acquisition of Fitbit, noting that it will improve Alphabet's product pipeline and "help make health and wellness accessible to more people."
And, of course, given what Apple (AAPL) has been able to do with the Apple Watch, we wouldn't be surprised to see the company leverage the new hardware line into additional service revenue streams over time.
Adding it all up, Google Services revenue of $52.873 billion advanced 22.4% YoY and exceeded the $49.073 billion consensus.
As for profitability, Google Services operating income came in at $19.066 billion, representing a strong 36% operating margin.
Speaking the strong Google Services performance, Schindler commented on the call that "two trends drove the strong results across Search: YouTube and network advertising. Consumers continued to move more of their activity online, and advertisers responded to the shift in consumer behavior by reactivating spend that they had paused earlier in the crisis."
Breaking the ad spend dynamics down further, Schindler noted that "In the fourth quarter, retail was the largest contributor to the year-on-year growth of our ads business. Tech, media and entertainment and CPG [consumer packaged goods] were also strong contributors."
At Google Cloud, revenue advanced 46.6% to $3.831 billion in line with expectations. The segment reported an operating loss of $1.243 billion (vs. $1.194 billion in the year-ago period).
On the call, management was sure to once again call out that Google Cloud Platform's (GCP) remained "meaningfully above the growth rate for cloud overall," while noting that the backlog was up to "nearly $30 billion" vs. $19 billion in the prior quarter with the growth "nearly all attributable to cloud."
In Other Bets, the segment reported an operating loss of $1.036 billion vs. expectations for a $1.074 billion loss, on revenue of $196 million vs. a $181 million consensus. As a reminder, this segment covers businesses such as Waymo, Google Fiber, and Verily.
As members know, we believe that given the company's balance sheet strength, management is right to invest in new industries to increase revenue diversification and avenues for longer-term growth.
Looking at Traffic Acquisition Costs (TAC), or what Alphabet pays partners to support its advertisements, total TAC came in $10.466 billion (+23.1% YoY), vs. estimates of $9.414 billion. However, despite the annual increase, total TAC as a percentage of Google Advertising revenues was down slightly year-over-year at about 18.4% compared to 18.45% in the year-ago period.
Capital and Cash Flows
On the capital expenditure side, the $5.479 billion spent in the quarter was less than the $6.271 billion estimated, however, it was up slightly from the $5.406 billion spent in the third quarter. It was also less than the $6.052 billion spent in the year-ago period.
Cash flow was strong, with net cash provided by operating activities of $22.677 billion (vs. a $16.14 billion consensus), and free cash flow (defined as net cash provided by operating activities less capital expenditures) of $17.198 billion (vs. a $12.411 billion consensus).
Alphabet ended the quarter with $136.694 billion in cash, cash equivalents, and marketable securities. That's up from $119.675 billion at the end of 2019.
As for the buyback plan, the company repurchased $7.9 billion worth of stock in the quarter.
Overall, it was once again an incredibly strong quarter from Alphabet, and we believe the new reporting format will be highly received by analysts and serve as a form of support whenever the calls for a breakup from the political sphere return.
That said, while some may call the company a monopoly (to be clear, we do not believe that to be the case), we think management is doing all it can to help its partners and customers succeed as the team acknowledged several times on the call that "that the future of Google and the future of [its] partners are fundamentally linked," adding that at its core, the company is ultimately built on a "revenue share models that support a broad range of partners including large and small online publishers, individual YouTube creators broadcasting from their homes, and global music labels as well as Google Play developers of all sizes. We only succeed when our customers and partners succeed."
Lastly, we want to highlight that management once again demonstrated their commitment to cost management though capital expenditure will take a step up in 2021 as the team further invests in its cloud platform and while we would never want to see them take their foot of the innovation pedal, we believe that this combined with the added disclosures, will make for less choppy price action in the future as the path forward becomes a bit easier to model. Our rating and price target are under review.