Decoding the reasons behind Alphabet’s record high earnings in Q2 2018

Alphabet, Google’s parent company, saw its stock price rise quickly after it announced its Q2 2018 earning results, shocking analysts (in a good way) all over the world. Shares of Alphabet have jumped more than 5% in after-hours trading Monday, hitting a new record high.

Source: NASDAQ

It would seem that the EU’s fine of €4.34 billion on Google for breaching EU antitrust laws had little effect on its progress in terms of Q2 earnings. According to Ruth Porat, Google's CFO, Alphabet generated revenue of $32.66 billion during Q2 2018, compared to $26.01 billion during the same quarter last year.

Excluding the fine, Alphabet still booked a net income of $3.2 billion, which equals earnings of $4.54 per share. Had the EU decision gone the other way, Alphabet would have had $32.6 billion in revenue and a profit of $8.2 billion.

“We want Google to be the source you think of when you run into a problem.” - Sundar Pichai, Google CEO, in the Q2 2018 Earnings Call

In Monday afternoon’s earnings call, CEO Sundar Pichai focused on three major domains that have helped Alphabet achieve its Q2 earnings.

First, he claimed that machine learning and AI was becoming a crucial unifying component across all of Google's products and offerings helping to cement and consolidate its position in the market. Second, Pichai suggested that investments in computing, video, cloud and advertising platforms have helped push Google into new valuable markets. And third, the company's investment in new businesses and emerging markets was proving to be a real growth driver which should secure Google's future success.

Let us look at the various facets of Google’s growth strategy that have proven to be successful this quarter.

Investing in AI

With the world spinning around the axis of AI, Alphabet is empowering all of its product and service offerings with AI and machine learning. At its annual developer conference earlier this year, Google I/O, Google announced new updates to their products that rely on machine learning.

For example, the revamped Google news app uses machine learning to provide relevant news stories for users, and improvements to Google assistant also helped the organization strengthen its position in that particular market. (By the end of 2018, it will be available in more than 30 languages in 80 countries.) This is another smart move by Alphabet in its plan to make information accessible to all while generating more revenue-generating options for themselves and expanding their partnerships to new vendors and enterprise clients. Google Translate also saw a huge bump in volume especially during the World Cup, as fans all over the world traveled to Russia to witness the football gala.

Another smart decision was adding updates to Google Maps. This has achieved a 50% year-on-year growth in Indonesia, India, and Nigeria, three very big and expanding markets.

Defending its Android ecosystem and business model

The first Android Phone arrived in 2008. The project was built on the simple idea of a mobile platform that was free and open to everyone. Today, there are more than 24,000 Android-powered devices from over 1400 phone manufacturers.

Google’s decision to build a business model that encourages this open ecosystem to thrive has been a clever strategy. It not only generates significant revenue for the company but it also brings a world of developers and businesses into its ecosystem. It's vendor lock-in with a friendly face.

Of course, with the EU watching closely, Google has to be careful to follow regulation. Failure to comply could mean the company would face penalty payments of up to 5% of its average daily worldwide turnover of Alphabet.

According to Brian Wieser, an analyst at Pivotal Research Group, however, “There do not appear to be any signs that should cause a meaningful slow down anytime soon, as fines from the EU are not likely to hamper Alphabet’s growth rate. Conversely, regulatory changes such as GDPR in Europe (and similar laws implemented elsewhere) could have the effect of reinforcing Alphabet’s growth.”

Forming new partnerships

Google has always been very keen to form new partnerships and strategic alliances with a wide variety of companies and startups. It has been very smart in systematically looking for partners that will complement their strengths and bring the end product to the market. Partnering also provides flexibility; instead of developing new solutions and tools in-house, Google can instead bring interesting innovations into the Google ecosystem simply thanks to its financial clout.

For example, Google has partnered with many electronic companies to expand the number of devices compatible with Google assistant. Furthermore, its investment in computing platforms and AI has also helped the organization to generate considerable momentum in their Made by Google hardware business across Pixel, Home, Nest, and Chromecast.

Interestingly, we also saw an acceleration in business adoption of Chromebooks. Chromebooks are the most cost-efficient and secure way for businesses to enable their employees to work in the cloud. The unit sales of managed Chromebooks in Q2 grew by more than 175% year-on-year.

“Advertising on Youtube has always been an incredibly strong and growing source of income for its creators. Now Google is also building new ways for creators to source income such as paid channel memberships, merchandise shelves on Youtube channels, and endorsements opportunities through Famebit.”, said Pichai. Famebit is a startup they acquired in 2016 which uses data analytics to build tools to connect brands with the right creators. This acquisition proved to be quite successful as almost half of the creators that used Famebit in 2018 doubled their revenue in the first 3 months.

Google has also made significant strides in developing new shopping and commerce partnerships such as with leading global retailers like Carrefour, designed to give people the power to shop wherever and however they want. Such collaborations are great for Google as it brings their shopping, ads, and cloud products under one hood.

The success of Google Cloud’s vertical strategy and customer-centric approach was illustrated by key wins including Domino's Pizza, Soundcloud, and PwC moving to GCP this quarter. Target, the chain of department store retailers in the US, is also migrating key areas of it’s business to GCP. AirAsia has also expanded its relationship with Google for using ML and data analytics. This shows that the cloud business is only going to grow further. Further, Google Cloud Platform catering to clients from across very different industries and domains signals a robust way to expand their cloud empire.

Supporting future customers

Google is not just thinking about its current customer base but also working on specialized products to support the next wave of people which are coming online for the first time, enabled the rise in accessibility of mobile devices.

They have established high-speed public WiFi in 400 train stations in India in collaboration with the Indian railways and proposed the system in Indonesia and Mexico as well. They have also announced Google AI research center in Ghana Africa to spur AI innovation with researchers and engineers from Africa. They have also expanded the Google IT support professional certificate program to more than 25 community colleges in the US.



This massive uproar by Alphabet even in the midst of EU antitrust case was the most talked about news among Wall Street analysts. Most of them consider it to be buy-in terms of stocks. For the next quarter, Google wants to continue fueling its growing cloud business “We are investing for the long run.” Pichai said. They also don’t plan to dramatically alter their Android strategy and continue to give the OS for free. Pichai said, “I’m confident that we will find a way to make sure Android is available at scale to users everywhere.”

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