GOOG Q3 Earnings Update

Current Price: $1,609      Price Target:$1,650

Position Size: 4%              TTM Performance:+35%

 

Key takeaways:

• Broad beat – Alphabet reported better than expected results. Revenues +14% YoY (a return to growth after being down 2% last quarter).
• Rebound in ad spending – Advertising +10% (after being down 8% last quarter).
• YouTube ad revenue exceptionally strong – YouTube ad revenues were up 32% YoY
• Continued strong growth in non-Ad revenues – particularly from Cloud, Google Play and YouTube Subscriptions.
• Margin improvement on slower spending – mgmt. responded to Covid by making tactical adjustments to slow the pace of spend in certain categories – slowing headcount growth, sales and marketing spend, travel spend and capex which all aided margin improvement as sales rebounded.

 

Additional Highlights:

 

• Saw broad-based improvement in advertiser spend across all geographies and nearly all verticals. This is reflected in both Search results as well as the rebound in brand advertising spend on YouTube. Also saw ongoing strength in their non-advertising revenue lines, in particular Google Cloud and Play.
• Regarding the DOJ’s lawsuit, they didn’t say too much “scrutiny is not new for us. And in some ways, it’s now sector wide, and not surprisingly so. We will engage constructively, where possible. And as we’ve shown through some of the past cases…we’re confident about the benefits we bring to our users. We’ll make our case. Where there is feedback or rulings, we’ll be flexible and adapt.”
• TAC – Total traffic acquisition costs were $8.2B or +9% YoY, above consensus of $7.6B. TAC ticked down slightly from 22.4% to 22.0% of ad revenues.
• Op margin expansion (+160bps): higher costs associated with depreciation, data centers, higher content acquisition costs for YouTube were offset by lower R&D (primarily due to slower headcount growth), lower sales & marketing, lower G&A and lower T&E expenses due to Covid. Lower capex mostly driven by reductions in real estate acquisitions as they adjust given WFH.
• New disclosures coming. More transparency is obviously a positive. Starting next quarter they will break out Cloud and at that time will also be reporting, not just the Q4 results, but will be providing full year results for 2018, ’19 and ’20. They’ll be providing not just the revenue disaggregation data that they expanded on earlier this year, but they’ll also be adding operating income for each of their segments.
• Search revenue ($26.3B) +6.5%. Advertiser spend began to pick up in August. They made some improvements to search including “hum to search,” which will identify a song and artist based only on humming. So, try that out…
• YouTube ad sales ($5B) were +32%, growing faster than search revenues. Driven by ongoing substantial growth in direct response, followed by a rebound in brand advertising. Interesting data points… “guided meditation videos are up 40% since mid-March and DIY face-mask tutorials have been viewed over one billion times.”
• Network ad revenues: $5.7B, +9% YoY, trends improving somewhat towards the end of the quarter.
• Google cloud (GCP and Google Workspace): was $3.4B, +45%. A slight acceleration from last quarter. GCP maintained the very strong level of revenue growth it delivered in the second quarter and its revenue growth rate was again meaningfully above Cloud overall. Growth in Google Workspace revenues was driven by seat growth, followed by growth in average revenue per seat. Significant growth in Meet as well as other products, like Docs, Drive and Chat. Meet saw a peak of 235 million daily meeting participants in Q3. “The fact that we were later relative to peers, we’re encouraged, very encouraged, by the pace of customer wins and the very strong revenue growth in both GCP and Workspace.”
• Other Revenues ($5.4B, +35%) – primarily driven by growth in Play and YouTube non-advertising revenues. Within Play, app revenues in the third quarter benefited primarily from an increase in the number of active buyers, as well as increased spend per buyer. Within YouTube subscription revenues, they continued to benefit from subscriber growth across its various offerings. YouTube’s non-advertising business metrics have benefitted from the current environment. YouTube now has 30mn+ music and premium paid subscribers and 35mn+ including users on free trials. Additionally, YouTube TV has 3mn+ paid subscribers.
• Other Bets (178m, +15%) – Op loss expanded slightly to >$1B. Waymo announced that its fully autonomous ride-hailing service in suburban Phoenix will open to the public, making it the only company to offer a fully autonomous service for riders. Waymo also entered into a strategic global partnership with Daimler Trucks to enable fully autonomous trucking.
• Q2 FCF was $11.6B and they ended the quarter with cash of $133B. They have ~10% of their market cap in net cash. The stock is still reasonably valued, trading at a ~4% FCF yield on 2021.

 

 

$GOOGL.US

[category earnings ]

[tag GOOGL]