Friday 24 November 2017

Alphabet: Former Google beats profit forecast, introduces share buyback

Letters spell the word
Letters spell the word "Alphabet" as they are seen on a computer screen with a Google search page in this photo illustration taken in Paris, France, August 11, 2015. REUTERS/Pascal Rossignol

Alphabet, the new holding company for Google, introduced its first share buyback and beat Wall Street's profit forecast on Thursday, helped by solid progress in mobile and video advertising, sending the stock to its highest-ever level in after-hours trading.

Revenue and profit well above analysts' average forecasts, along with the unexpected buyback, was welcomed by Wall Street, which is now betting on further growth.

"They're in a great position in the overall advertising space, whether it's search, display or mobile," said Kerry Rice, a Needham & Co analyst. "They've got the right program to continue to grow at a solid pace and be dominant in those spaces."

The results come at a pivotal time for the company as it navigates the transition from desktop to mobile, where ads are generally less profitable, while facing growing competition from rivals like Facebook.

At the same time, it is moving into a new corporate structure that will put more visibility on parts of Alphabet such as its secretive research arm, Google X. Next quarter will be the first in which it reports results under that structure.

Company executives touted strength in mobile search for the strong results. "Search traffic on mobile phones have now surpassed desktop traffic worldwide," said Sundar Pichai, chief executive of Google Inc.

Shares of Alphabet rose almost 9pc in after-hours trading to $741, easily a record. At that level, the company's market value would be around $500bn, making it the second-most valuable company in the S&P 500 after Apple.

On a strong day for technology companies, Amazon and Microsoft shares also rose sharply after hours, following better-than-expected results.

Analysts generally welcomed Alphabet's performance.

"They seem to have a better hold on mobile and are navigating the transition to mobile usage better than expected," said James Cakmak, an analyst at Monness, Crespi, Hardt & Co.

Still, Mr Cakmak questioned how Google's internet-based business will fare in the long term in an app-based world. "Their primary strength in apps is YouTube and that's pretty much it," he said.

Investors have been pressing the company to return more of its $72 billion cash pile, but the announcement that Alphabet would buy back up to $5.09bn of its Class C shares came as a surprise.

Mature technology companies such as Apple Inc and Microsoft Corp have come under intense pressure in recent years to give back more cash to investors.

Third-quarter revenue rose 13pvto $18.68bn, above the $18.53bn that Wall Street expected, according to Thomson Reuters I/B/E/S.

Excluding one-time items, the company earned $7.35 per share, up 17.6pc from the year before. That was ahead of analysts' average estimate of $7.21 per share.

Expenses rose 9.1pc to $13.97bn but were 74.7pc of total revenue, compared to 77.4pc in the same quarter last year, reflecting new chief financial officer Ruth Porat's tight rein on spending.

"It's strong top and bottom line results," said BGC Partners analyst Colin Gillis. "It's great to see not only expense control - which is the new CFO - but also upside on the top line."

The company said the number of paid clicks, in which advertisers pay only if a user clicks on the ad, rose 23pc, compared to an 18pc increase in the previous quarter.

Cost-per-click, or the average price of online ads, fell 11pc in the quarter.

"Our value proposition to markets of all sizes is simple. Google can help you show the right ads to the right people at the right moment," Pichai said.

Under the Alphabet structure, search, advertising, maps, YouTube and Android will remain part of Google.

Alphabet's businesses will include connected home products maker Nest, venture capital arm Google Ventures, Google X, the company's secretive research arm, and Google Capital, which invests in larger tech companies.


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