Alphabet Inc’s Expenses Rise As Earnings Drop In Second Quarter

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Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL), Google's parent company reported its earnings for the second quarter of the fiscal year 2020 today. During the period, the company has earned $38.9 billion in revenue, marking for a 2% year-over-year drop. Despite the decrease, which is the first for the company in its history, Alphabet nevertheless managed to beat analyst estimates for revenue and earnings per share.

The company's operating income dropped significantly year-over-year during the quarter as it experienced blooming operating costs in a time when consumer spending has been hit hard by the coronavirus pandemic. Today's results come a day after Google's chief executive officer Mr. Sundar Pichai appeared before American lawmakers to explain accusations of anti-competitive behavior that have been levied against his company.

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Alphabet Inc Witnesses Strong Dip In Operating Income Far Outpacing Revenue Drop During Q2 FY2020

In addition to having decreased year-over-year, Alphabet's revenues have also dropped sequentially, as the company earned $41 billion during the previous quarter. The rise in operating costs during the quarter was also reflected via a drop in operating margin for Alphabet. During the second quarter of the fiscal year 2020, the group's operating margin stood at 17%, having dropped by 6% year-over-year and 2% sequentially.

The group's net income stood at roughly $7 billion at the end of the previous quarter as it reflected a $3 billion year-over-year drop and stayed the same sequentially. Q2's revenue drop was fuelled by decreasing net sales for Google Search – which is the group's bread and butter and represents the biggest chunk of its earnings. Over the course of the last three months, Google earned $21 billion via Google Search, in a $2 billion year-over-year and $3 billion sequential drop.

Alphabet Inc's revenue breakdown for the second quarter of the fiscal year 2020 (Q2 FY2020)

YouTube advertisement and non-advertisement revenues grew in the quarter as they joined Google Could in being the only segments of Alphabet's revenue segment that did not exhibit year-over-year drops in the second quarter. Sequentially speaking, Google Cloud and Other Bets were the only operating segments to exhibit an increase, as revenue from Search, YouTube and other areas dropped.

Moving towards Traffic Acquisition Costs (TAC), these dropped both sequentially and year-over-year, spurred on by a slow down in overall spending in economies battered by the currently ongoing pandemic. A drop in these costs was normal during a quarter in which Google cut down marketing and other spending to deal with economic slowdowns all over the world.

“We’re working to help people, businesses and communities in these uncertain times. As people increasingly turn to online services, our platforms — from Cloud to Google Play to YouTube — are helping our partners provide important services and support their businesses,” commented Mr. Pichai in the press release. The executive was grilled for a wide variety of issues at yesterday's hearing as he clarified to lawmakers that employee opinion was only "one factor" in Google's decision to withdraw from the Department of Defense's (DoD) JEDI contract and that the company continued to work with government agencies through other projects.

Alphabet's Class A and Class C shares did not drop in aftermarket trading highlighting investor expectations for the drop.

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