Alphabet jumps after big earnings beat

Key Points
  • Google parent company Alphabet reported its Q2 earnings Monday afternoon, with a big beat sending its stock jumping after-hours. 
  • Wall Street will be paying close attention to the company's traffic acquisition costs and capital expenditures.
Alphabet pops following earnings

Google parent company Alphabet just reported its second quarter earnings and the stock popped after-hours on a big bottom-line beat on estimates.

Here are the most important numbers:

Earnings per share (adjusted): $11.75 vs $9.59 expected by a Thomson Reuters consensus estimate

Revenue: $32.66 billion vs $32.17 billion expected by a Thomson Reuters consensus estimate

The stock soared more than 5 percent after-hours, and settled to about 3.2 percent up following the company's earnings call. Overall, Alphabet posted solid revenue growth, allaying fears about an immediate impact from Europe’s new privacy rules, and pleased Wall Street by spending slightly less to drive traffic to its search engine and ads than expected.

While Alphabet's adjusted earnings were rosy, it posted a non-adjusted EPS of $4.54, thanks to the European Union's decision to slap the company with a massive $5 billion fine for competition abuses related to its Android phone software.

Google paid clicks up 58 percent, according to earnings report

As usual, Google's advertising business accounted for most of its revenue, hitting $28 billion in the second quarter, up 23.9 percent year-over-year.

Meanwhile, its "other revenues" category, which includes its cloud business and hardware sales and is especially important to investors looking for Google's future beyond ads, hit $4.4 billion, or a 36.5 percent increase year-over-year.

On the company's earnings call, CEO Sundar Pichai said that the cloud business had "great momentum," though didn't provide any new revenue numbers to build on the $1 billion in revenue per quarter he announced in Q4.

Alphabet also breaks out the revenues and losses for its longer-term "Other Bets," like healthcare company Verily, internet service provider Fiber, and self-driving car company Waymo. Other Bets posted Q2 revenue of $145 million, up from $97 million the same quarter last year. Operating losses also grew, with the company posting losses of $732 million up from $633 million the year before.

Google’s traffic acquisition costs, which includes the money it pays to phone manufactures, like Apple, to use its services, like search, was $6.4 billion, or 23 percent of its advertising revenues. The company has warned for years that as mobile search drives its growth, TAC will continue to rise. Indeed, Alphabet's Q2 TAC was up year-over-year, but total TAC as a percentage of advertising revenue it was down slightly from 24 percent last quarter, and TAC to its network members as a percentage of revenue was 71 percent, down from 72 percent during the same period the year before, which aligns with Alphabet CFO Ruth Porat's advisement last quarter that the TAC as a percentage of revenue would slow beginning in Q2.

Porat said on the earnings call that "it is most instructive to focus on year-on-year changes" to TAC growth rate.

"TAC came in lower than expectations which is a clear positive takeaway from the quarter," GBH Insights analysts wrote in a note to clients following the earnings.

The company's capital expenditures jumped to $5.5 billion — nearly double last year's figure of $2.8 billion. On the company's earnings call, Porat attributed that increase to investments in data centers and facilities, as well as production equipment.

Porat said that the Cloud business's major computing needs are driving the data center build out, but that the machine learning that's part of all of Google's products is "compute intensive," too.

Excluding the impact of the European Union's fine, Alphabet's operating expenses were $10.9 billion, up 24 percent year-over-year, driven by increased investment in R&D.

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