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Q4FY19: Google’s ad revenues rose 16.5% to $32.6B, rising expenses

Google parent Alphabet Inc’s reported a 22% year-on-year increase in revenues to $39.2 billion in quarter ended December 31, 2018 (Q4FY19). Revenues stood at $32.3 billion a year ago in Q4FY18, and at $33.74 billion in the preceding quarter.

The company reported a net income of $8.9 billion, up from losses of $3 billion in the same quarter last year. Net income is largely stagnant from $9.1 billion in the preceding quarter.

Revenues

  • Google’s websites revenues stood at $27 billion, up 22% from $22.2 billion in the same quarter last year, “results were led again by mobile search, with a strong contribution from YouTube, followed by desktop search.”
  • Network revenue grew 12% year-on-year, with growth in Google’s ad tools AdMob and Ad Manager.
  • Other Revenue grew 31% year-on-year to $6.5 billion driven by Cloud, Hardware and Play

Advertising: ads prices fall as clicks rise  

Google’s advertising revenues soared by 16.5% year-on-year to $32.6 billion in this quarter, from $27.2 billion in Q4FY18.

The number of clicks on advertisements on Google’s websites like YouTube and Search increased 66% year-on-year, and 22% over the last quarter. At the same time, ad prices on Google websites fell 29% year-on-year. Although ad clicks are rising, the price of those ads are falling.

  • Google said that its machine learning investment has enabled innovation in “advertisers’ ability to match consumer intent and to bid more effectively for improved ROI”, and has helped smaller businesses benefit from advertising on Google’s platforms.
  • “We’re continuing to see tremendous opportunity in the Ads business, Search and Ads businesses. And beyond machine learning, we’re further investing to continue to enhance the experience for users and advertisers, and that’s across Mobile, Desktop and YouTube,” CFO Ruth Porat said in the investor call.

Expenditures on the rise

Total Cost of Revenue increased by 26% year-on-year to $17.9 billion.

  • In the concall, Porat explained that this was primarily driven by content acquisition costs for YouTube and subscription businesses like YouTube Premium and YouTube TV.
  • The second largest contributor was costs of data centers and other operations, and third was hardware-related costs for Made by Google and Nest products.

Traffic acquisition costs

Total traffic acquisition costs widened to $7.43 billion, reporting a 15% year-on-year increase from $6.45 billion in Q3FY18. Total TAC as percentage of Google’s advertising revenues was 24%, “reflecting a favorable revenue mix shift from Network to Sites.”

  • The increase in sites TAC rate YoY was driven by “the ongoing shift to mobile which carries higher TAC, followed by changes in partner agreements, offset by the seasonally higher proportion of YouTube advertising revenues in the fourth quarter.”

Operating expenses

Opex stood at $13.2 billion, reporting a 27% year-on-year increase. Porat said that this was driven by R&D expenses, growth in sales & marketing expenses (reflect increases in sales and marketing headcounts for Cloud and Ads), and advertising investments in Search and the Assistant.

Capex

The company’s capital expenditure, which includes the costs of its data centers and facilities, climbed to $6.8 billion (rise of 78%) from $3.8 billion in the same quarter last year. Capex for FY19 stood at $25.1 billion, nearly double the capex of FY18 ($13.1 billion).

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Alphabet also increased its headcount by 18,661 employees (increase of 23% year-on-year), bringing its total headcount to over 98,000 employees.

“Other Bets”

Google’s “Other Bets” segment includes Google’s self-driving car unit Waymo, the experimental tech lab X (which includes Wi-Fi initiative Project Loon and drone delivery project Project Wing), Google Fiber (now Access), healthcare units Verily Life Sciences, and Calico.

Segment revenue increased to $154 million from $131 million in the same quarter last year, but operating losses from the segment ballooned to $1.328 billion from $748 million in the same quarter last year. Google said that for FY18, Other Bets’ revenues were $595 million, drive by Verily and Fiber.

  • Launched Waymo One in December, it allows lets users hail and pay for ride in the app
  • Verily raised $1 billion from Silver Lake

Notes from the investor call

  • “… a big priority in 2018 was expanding the availability of content for what we called the Next Billion User markets, which are, for us, you know, a really important area. We’re excited about the growth and the opportunity to deliver experiences across markets.” – Porat
  • Google Assistant expanded from 8 languages in 14 countries to 30 languages in 80 countries
  • Google announced that Android will support foldable phones, as Samsung is set to introduce its first foldable device this year
  • YouTube Music and Premium are now available in 30 countries from 5 countries at the beginning of the year

Hardware

  • “Millions” of Google Home devices sold in the holiday season
  • One out of every seven Google Home devices activated over the holiday season was a Google Home Hub
  • Pixel became available in 4 more countries – Japan, France, Taiwan, Ireland

Cloud

  • 5 million paying customers on GSuite
  • € 4.3 billion investment in five data centers since 2007, new data center in Denmark announced in Q4

Download: Financials | Earnings Transcript

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