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Alphabet Inc’s Strong 23% Revenue Growth Offset By High Costs

Feb 4
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At its earnings call today, AI turned out to be the focus of Alphabet Inc’s presentation. The company believes that all of its products will use Artificial Intelligence to improve user experience and bring smaller companies forward in its advertising. Alphabet Inc (NASDAQ:GOOG) reports Revenue of $136 Billion for the Fiscal Year 2018 which is up by 23% Year-over-Year. The company’s Revenues also grew YoY for the fourth quarter, standing at $39 Billion after a 22% growth. However, as expected, the group’s operating costs also grew, and as a result, its margins declined.

Alphabet Inc Reports $136 Billion Revenue For FY18 For A 23% Growth; Group’s Cost Of Revenues Also Increase To $110 Billion, Leading To A Decrease In Operating Margin

Due to a cost increase, despite the fact that Alphabet’s Revenue grew by 23% over the year, the group’s Operating Income grew only by 175 million or 0.6%. According to Alphabet’s management, the driving force behind this expense increase is Google related expenses, The primary drivers behind this are content acquisition costs for YouTube, YouTube Premium and YouTube TV.

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Alphabet (NASDAQ:GOOG) remains optimistic about YouTube, as Google’s CEO Sundar Pichai mentioned how not only are content producers using unique methods to promote content but also how user engagement with the platform is also high. Mr. Pichai also believes that YouTube is a long-term opportunity and he hopes that Google can serve user needs of using the platform to acquire information and learn new things effectively.

Despite static year-over-year Operating Income, Other Income helped Alphabet’s Net Income grow to $30 Billion annually and to $8.9 Billion quarterly. Google’s Traffic Acquisition Costs (TAC) grew to $7 Billion driven by mobile search as mentioned above. Network TAC rate for Google declined due to programmable business. The biggest driver behind Alphabet’s Operating Expenses was R&D, reflected primarily by an increase in headcount. Headcount stood at 98,771, with the yearly increase consisting of engineers and product managers.

Google Remains Optimistic On YouTube As R&D Drives Up Alphabet Inc’s Operating Expenses – Company Will Utilize Machine Learning Across All Of Its Products Over The Coming Year

The biggest red flag in Alphabet(NASDAQ:GOOG)’s Q4 and FY18 earnings call is its Operating expense, which as mentioned above, eats into the company’s sizable revenue gain over the year. In addition to new engineering hires driving up this expense, Alphabet’s valuation of Other Bets for accrued compensation also increases R&D. Mr. Pichai remained optimistic about this increase and claimed that Google’s focus on hardware as a driver for its computing ecosystem (which also contributes to lower Operating Margins) improves the user experience. He used the variety of services offered by Google Home Hub as an example.

Alphabet’s Revenue growth for 2018 was powered by eight products with 1 Billion users each. Mr. Pichai also highlighted the potential of Machine Learning to improve nearly every Google product out there. Not only will it allow smaller companies to target Google’s large user base through advertisements, but it will also allow the company to moderate the content on YouTube. Google’s Operating Margin stands at 21% for 2018’s fourth quarter, down from 24% for the third quarter.

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Other Bets earned Google $525 million in Revenue over the year, up by 25%. However, operating loss for the segment was also up to $3.4 Billion. Revenues from US continued to contribute the greatest to Alphabet(NASDAQ:GOOG)’s overall Net Sales and stood at $19 Billion for the fourth quarter. Heading forward, Google believes that TAC will go up as operating in the mobile space continues to be costly. Additionally, the company also believes that costs related to headcount will stabilize over the year.

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