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ALPHABET EARNINGS PREVIEW: A monster quarter tainted by YouTube's nasty year

Feb 1, 2018, 18:30 IST

Justin Sullivan / Getty Staff

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  • Alphabet, Google's parent company, reports earnings Thursday.
  • Wall Street is expecting $26.23 billion in net revenue, and EPS of $10.04.
  • Google may have to address questions about abuse of its platforms, even as it continues to deliver impressive financial results.


Google's parent company Alphabet will report its fourth-quarter earnings on Thursday after the markets close.

Like the other top Big Tech firms, Alphabet is expected to have notched strong revenue growth for the final three months of the year even as it grapples with thorny challenges like platform abuse that are rippling across the broader internet industry.

Here's what to look for.

The scoreboard

First, here are the results Wall Street expects Alphabet to deliver. These numbers come from Bloomberg's estimates Wednesday afternoon:

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  • Net Revenue: $26.23 billion, up 24% year-on-year
  • EPS (GAAP): $10.04

Now for everything else you should pay attention to.

Increased traffic costs

Google

Traffic acquisition costs (TAC) have become an increasingly large expense for Google in recent years. These are the payments Google makes to third parties like Apple and Firefox to make sure web searches on those platforms go to Google instead of rival search engines.

Alphabet's CFO Ruth Porat does not like being asked about rising TAC, but it'll be the top of everyone's mind anyway.

As more web searches shift to mobile, TAC continues to increase for Google. The company paid $4.84 billion in total TAC in the year-ago quarter. Expect to see that number go up again and expect to hear Porat brush it off as just the cost of doing business.

Beyond advertising

While the vast majority of Alphabet's revenues come from Google advertising, but Google has been bullish in recent quarters over other areas of growth like cloud services and hardware.

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Last fall, Google introduced new hardware products like the Pixel 2 smartphone, Google Home Mini connected speaker, and Pixelbook laptop. Google's "Other Revenues" category should give a strong indication how well those products sold. There's also a chance Google provides more detail on the hardware division's growth.

AI, AI, and more AI

If you're going to play a drinking game during Alphabet's earnings call Thursday, downing a shot every time Google CEO Sundar Pichai mentions the promise of artificial intelligence could make you woozy very quickly.

Artificial intelligence and voice-controlled computing are two big bets that Google thinks will power its future, and Pichai and company have been hyping it even more than ever during the past year.

Google Assistant, Google's version of Apple's Siri and Amazon's Alexa assistants, is now present in practically all its products from Pixel phones to the online Google Photos service. Google's promise is to make products that work better for you automatically, all powered by AI and machine learning. Google believes this is an area where it has a big competitive advantage, but investors may soon put pressure on the company to show how it's paying off.

YouTube's reckoning

YouTube/Logan Paul

YouTube is the Google property that has suffered the most from Big Tech's reckoning with abuse across various platforms: Child abuse videos; Fake news in search results; Extremist videos; And some of its biggest stars like Logan Paul and PewDiePie posting inappropriate content that most advertisers would never want to go near.

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It just keeps getting worse.

YouTube has announced numerous plans to tackle the abuse of its platforms. It says it will use AI to identify fake stories and promote videos from trusted sources in search. It's booted abusers like Paul from its preferred advertising platform, which helps YouTube creators earn more money. And it says it will hire 10,000 human moderators to help weed out all the bad stuff.

So far, none of these initiatives have completely worked. Once one hole gets plugged, another seems to form. It's likely something Pichai and Porat will have to address during the earnings call.

Other bets

Outside the core Google business, Alphabet has several companies called "Other Bets" such as Waymo for self-driving cars, Nest for connected home products, and Verily for health and life sciences. When lumped together as a single category, Alphabet's Other Bets lose a lot of money, and the company has come under pressure to reduce losses.

So far, none of the Other Bets have generated significant revenue. The hope is that a few of them eventually become successful businesses. In the meantime, investors are tracking how much red ink these bets continue to bleed.

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Business Insider will have Alphabet's results as soon as they come in shortly after 4 p.m. Eastern Thursday.

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