Google parent Alphabet sees earnings, revenue beat and announces $7 billion buyback

Stocks to Watch: October 28, 2016
Stocks to Watch: October 28, 2016

Alphabet reported quarterly earnings that topped analysts' estimates and revenue that beat expectations on Monday, and announced a more than $7 billion stock buyback authorized this month.

The primary driver was strength in search and YouTube, Ruth Porat, Alphabet's chief financial officer, told investors in a conference call. Google Cloud is also seeing "substantial revenue growth," Porat said.

Google's parent company posted third-quarter earnings per share of $9.06, adjusted, on revenue of $22.45 billion. The technology titan was expected to report fiscal third-quarter earnings of $8.63 a share on revenue of $22.05 billion, according to a Thomson Reuters consensus estimate.

That's up against the comparable year-ago figure $7.35 a share, with revenue up 20 percent from last year's $18.68 billion.

The company also approved a stock repurchase up to $7,019,340,976.83 of its Class C shares. This quarter last year, the company repurchased $5,099,019,513.59 of its Class C capital stock. (5.099019514 is the square root of 26 — the number of letters in the alphabet).

"I think that the buyback outlook is important. People are looking for more balanced return profile out of Google now: a little bit of growth, a little bit of margin, and a little bit of capital return. So I think it all makes sense," Michael Graham, senior internet analyst at Canaccord Genuity, told CNBC's "Closing Bell" on Thursday.

Shares initially rose 2 percent after hours, but were last up less than 1 percent.

"Mobile search and video are powering our core advertising business and we're excited about the progress of newer businesses in Google and Other Bets," Porat said in a statement.

The Google parent company updated investors on the state of its behemoth advertising business, as well as projects like cloud, phones and internet. Google's quarterly growth reflects strength in mobile search, Google Play and cloud, Porat said.

Google's websites saw sales increase 23 percent to $16.09 billion, above the $15.79 expected by a StreetAccount consensus estimate, while advertising revenues rose 18 percent to $19.82 billion.

Total traffic acquisitions costs were 21 percent of revenues, the same as this quarter last year.

Traffic acquisition costs to Google Network Members rose to $2.62 billion, 70 percent of revenues from Google Network Members. Meanwhile TAC to distribution partners rose to $1.56 billion, 10 percent of Google website revenues.

"We do continue to expect ongoing gross margin pressure from higher TAC associated with mobile search and with programmatic," Porat said. "That does still result in more revenue and more gross profit dollars, but at a lower margin."

Co-founders Sergey Brin and Larry Page changed Google's corporate structure last year, creating a collection of companies called Alphabet and naming Sundar Pichai head of Google. The move was praised for adding transparency between core businesses — such as search, Android and YouTube — and its more creative endeavors, "smaller bets in areas that might seem very speculative or even strange when compared to [Google's] current businesses."

During the quarter, Google's revenues rose to $22.25 billion, while "other bets" revenue rose to $197 million, thanks to Nest, Fiber and Verily, Porat said.

Google is second only to Facebook when it comes to 2016 display ad revenue worldwide, and is the leader of search ad spending, eMarketer estimates. And after search traffic on mobile surpassed desktop last year, ads followed suit, eMarketer estimates.

About 59.5 percent of the company's net global ad revenues will come from mobile internet ads this year, up from about 45.8 percent in 2015, according to eMarketer.

It's no coincidence, then, that Google has introduced new businesses this fall, including a house-designed mobile phone, Pixel. CEO Sundar Pichai highlighted Android's "open, horizontal, free" platform, which he said spurs innovation, during a conference call with investors.

"The new devices are not only aimed at diversifying Google revenues but also at enriching Google's advertising targeting capabilities as consumers engage and share information with Pixel, Google Assistant, Daydream View, Chromecast and other Google ecosystem devices," eMarketer senior forecasting analyst Martín Utreras said in a statement.

The company has also spent on key hires in priority areas like cloud, and in acquiring YouTube content.Still, the non-Google businesses have reportedly seen some setbacks, with high-profile departures, most recently from Google's fiber unit for high-speed connectivity. Porat highlighted Nest and self-driving cars, and said that they were focusing on Fiber's potential in light of other bets' "10x opportunities."

"As we reach for moonshots that will have a big impact in the longer term, it's inevitable that there will be course corrections along the way, and that some efforts will be more successful than others," Porat said. "Over the past year, for example, you've seen us make progress and accelerate our efforts in some areas, while re-positioning or taking a pause in others. We are taking the steps necessary to lay the foundation for a stronger future."

Google's Class A shares have risen more than 11 percent over the past year, amid a bullish response on Wall Street. Pichai highlighted the company's artificial intelligence vision.

"We are very focused on our core mission, and we see a huge opportunity to do that in a unique way," Pichai said. "Refocusing the companies on the set of initiatives, recognizing that point of inflection, is what has really helped us focus on things … In terms of hardware, in our vision computing is becoming more and more integral, so to really think and evolve it, you need to think about software and hardware together."

— CNBC's Ari Levy and Aaron Coleman contributed to this report.

Disclosure: Canaccord Genuity or one or more of its affiliated companies is a market maker or liquidity provider in the securities of Alphabet or in any related derivatives

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