Excluding traffic acquisition costs (TAC, or ad revenue-sharing payments to partners), the Google parent reported Q4 revenue of $25.87 billion (up 22% annually) and EPS of $9.70. Revenue topped a consensus estimate of $25.57 billion, while EPS missed a $9.99 consensus. Alphabet also announced a new $8.6 billion stock buyback program.
On Friday afternoon, Alphabet's Class C shares were down 4.2% to $1,118.50 amid a broader market selloff. They're still up about 40% over the last 12 months, however. Here are some key takeaways from the report.
1. Ad sales were decent, but TAC trends have investors on edge.
On a gross basis including TAC, Google's ad revenue rose 22% to $27.23 billion, with 24% growth recorded for Google's sites and apps and 13% growth seen on third-party sites and apps. That beat consensus estimates by nearly $400 million.
Paid ad impressions and clicks rose 43% annually -- down a bit from Q3's 47% growth, but still impressive -- with YouTube and mobile search momentum driving a 55% increase on Google sites/apps. Google's average ad price (cost per click) fell 14%, a slightly smaller decline than Q3's 18%. Ahead of Google's report, online ad firm Merkle reported strong Q4 spending activity among its clients on Google Shopping ads, as well as growing uptake for Google search ad solutions that let clients leverage customer and website visitor data to improve targeting.
However, TAC rose to 24% of Google's ad revenue from 22% a year ago. And on a dollar basis, it grew 33% to $6.45 billion, exceeding a $6.28 billion consensus estimate. Google once more blamed a revenue mix shift towards mobile search and programmatic (automated) ad campaigns, which feature higher revenue-sharing payments.
On the earnings call, CFO Ruth Porat said Google expects TAC for Google sites/apps to continue rising as a percentage of revenue (it grew to 12% from 10% last quarter), although adding that the pace is expected to slow after Q1. A revised deal with Apple (AAPL - Get Report) that restored Google's status as the search engine for iOS' core search features -- it was already the default search engine for the Safari browser -- appears to be weighing here. Going forward, the EU's antitrust case over Google's Android bundling practices could also boost TAC, should it give Android OEMs the freedom to change the default search engine for their phones.
2. Google's non-advertising businesses turned in a solid quarter.
The Google Other reporting segment, which covers things such as hardware sales, Google Play and cloud apps and subscriptions, saw revenue rise 38% to $4.69 billion, topping a $4.58 billion consensus. Among the growth drivers: Pixel 2 and Google Home Mini sales, Google Play transaction growth and very strong growth for the Google Cloud Platform (GCP).
On the call, CEO Sundar Pichai said Google's total quarterly cloud revenue, which covers both GCP and G Suite (formerly Google Apps) subscriptions, is now above $1 billion. That suggests GCP is still a fraction of the size of Amazon Web Services (AWS), which posted Q4 revenue of $5.1 billion. That's especially true since a decent amount of Google's cloud revenue likely comes from G Suite. But GCP does appear to have cemented itself as a top-three cloud infrastructure player.
In addition, the Other Bets reporting segment, which covers businesses such as Nest, Waymo, Google Fiber and Google's investing arms, saw revenue rise 56% to $409 million. However, the segment also posted a $916 million operating loss, which is just a moderate improvement from a year-ago loss of $1.09 billion.
3. Hardware sales and capex are pressuring margins some.
After rising two percentage points annually in Q3 to 28%, Google's operating margin fell one point in Q4 to 24%. Rising TAC was one culprit for this. Another one: Google's "other cost of revenue," which covers product and service costs outside of TAC, rose 34% to $7.8 billion.
Rising hardware sales contributed to this, as did depreciation expenses for Google's giant data center capital investments. And those depreciation expenses are set to rise further still: Capex rose 40% annually last quarter to $4.31 billion, and Google said on its call it plans to build or open "five big new data centers in the U.S." this year.
Facebook (FB - Get Report) and Amazon.com (AMZN - Get Report) are also rapidly growing their capex; Facebook forecast earlier this week it will spend $14 billion to $15 billion on capex in 2018, more than twice 2017 spending of $6.73 billion. There's something of a cloud data center arms race going on. Hardware and chip suppliers such as Intel (INTC - Get Report) , Nvidia (NVDA - Get Report) , Broadcom (AVGO - Get Report) and Arista Networks (ANET - Get Report) can't complain.
Jim Cramer and the AAP team hold positions in Alphabet, Apple, Facebook, Nvidia and Broadcom for their Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells GOOGL, AAPL, FB, NVDA or AVGO? Learn more now.
Here comes a big market correction? TheStreet's Executive Editor Brian Sozzi and reporter Kinsey Grant discuss.
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