- More volume, stable ad prices and cost controls fuel results
- Company announces new $5.1 billion share buyback program
Google parent Alphabet Inc. reached a record share price a day after reporting better-than-projected quarterly revenue and profit fueled by increased ad sales and a tighter lid on costs.
The strong growth, plus a cash balance of $72.8 billion, gave Google’s board enough confidence to authorize $5.1 billion in share buybacks, the first ever.
All this shows how Chief Executive Officer Larry Page and new Chief Financial Officer Ruth Porat are bringing more operational and financial discipline to the sprawling Web enterprise. As part of that, the business will become a new holding company called Alphabet to separate Google’s main business from various new endeavors, and the new structure will be reflected in results starting next year.
"It’s moving in the right direction," said Kerry Rice, a senior analyst at Needham & Co. who has a buy rating on the stock.
Revenue, excluding sales passed on to partners, rose 15 percent to $15.1 billion in the third quarter, the company said in a statement Thursday, compared with analysts’ average estimate for $15 billion, according to data compiled by Bloomberg. Profit, excluding some items, was $7.35 a share, beating predictions of $7.20. The figures are still being reported in line with past quarters -- before the final transition in the coming months.
A key challenge for Google’s management is to control spending on initiatives to boost Web traffic, which are aimed at making up for declining ad prices on mobile devices. Those efforts are paying off, with total clicks on ads up 23 percent, even as the average price for ads fell 16 percent on Google’s websites.
"You’re seeing stabilization on the pricing side, you’re seeing clicks accelerate, and at the same time they’re performing on a more profitable basis than the street expected," said James Cakmak, an analyst at Monness Crespi Hardt & Co. who has a buy rating on the stock. "Putting all that together, it’s a pretty clean beat."
The shares of Mountain View, California-based Alphabet climbed 5.6 percent to $719.33 at the close Friday in New York, its highest price since the stock hit the public market in August 2004.
Under Alphabet, Google’s search-ad business is one among many. Other initiatives range from computers and fast Internet services, to projects such as product-delivering drones, life sciences products, airborne wind turbines and self-driving cars. Revenue from these outside efforts rose 11 percent to $1.89 billion. While the new areas have yet to rival Google’s core operations, they’re being given room to operate and grow as distinct units. The structure also gives the business the flexibility to do more spin-outs and acquisitions, while making it a more attractive place for brainy engineers.
"What we want with Alphabet is to be an extraordinary magnet, the best magnet for entrepreneurs, to be an accelerant for their development," Porat said on a conference call.
At the same time, Porat has tempered this expansion by focusing on controlling costs. Operating expenses rose 14 percent during the third quarter to $6.93 billion, in line with a climb of 13 percent in the prior period -- which was the slowest pace since 2013. Third-quarter net income was $3.98 billion, compared with $2.74 billion a year earlier.
Porat said, however, that capital expenditures were likely to expand next year, after describing the latest quarter’s $2.37 billion in spending as "muted." Research and development spending rose to $3.23 billion, or 17 percent of revenues, from a threshold of about 16 percent previous quarters. One of the main areas of investment is machine learning and artificial intelligence, which Google’s leadership sees as a point of differentiation from its competitors.
"We believe we are state of the art here," said Sundar Pichai, CEO of the main Google search business. "Machine learning is a core transformative way by which we are rethinking everything we are doing."
The actual figure that the company announced for the share buyback was unusually specific: $5,099,019,513.59. Turns out, those numbers correspond to the square root of 26, or the number of letters in the English alphabet.