GOOG Alphabet Inc

   (FROM THE WALL STREET JOURNAL 2/2/16) 
   By Alistair Barr 

Google parent Alphabet Inc. reported strong growth and rising profitability at its main Internet business, sparking an after-hours rally that propelled it past Apple Inc. as the world's most-valuable company.

Alphabet, after a corporate reorganization late last year, disclosed that revenue at Google's core Internet businesses, including search, YouTube and Android, rose 14% last year, to $74.54 billion, from $65.67 billion in 2014. Yearly operating income for these businesses totaled $28 billion, excluding stock-based compensation, up 23% from $22.69 billion a year earlier.

As a result, the operating-profit margin of the core Google unit rose to 38%, from 35% a year earlier.

"The core business is stronger than expected. It looks like the margins materially expanded, while revenue growth accelerated," said Mark Mahaney, an analyst at RBC Capital Markets.

Alphabet adopted the new structure, and agreed to disclose additional financial details, in part to respond to investor calls for more transparency as Google branched into new fields like health care, transportation and communications.

Monday, Alphabet for the first time reported revenue, operating income and other metrics for both its main Google business and for a group of moonshots it calls "Other Bets," such as self-driving cars.

The "Other Bets" unit posted an operating loss, excluding stock expenses, of $3.1 billion, nearly double the $1.6 billion loss in 2014. Revenue at those units, which includes its Nest home-automation unit, its Fiber high-speed Internet service and its Verily health-care subsidiary, rose 37%, to $448 million, from $327 million. In 2013, the moonshot units generated just $12 million in revenue.

For the company as a whole, Alphabet said fourth-quarter net income totaled $4.92 billion, or $7.06 a share, versus $4.68 billion, or $6.79 a share, in the same period a year earlier. Revenue rose 18%, to $21.33 billion, up from $18.1 billion a year earlier.

Excluding certain expenses, Alphabet said it would have earned $8.67 a share. That exceeded the consensus analysts' estimates of $8.10 a share on that basis, according to Thomson Reuters. The revenue total exceeded analysts' estimates of $20.8 billion.

Like other tech companies, Alphabet said the strong U.S. dollar had damped its growth. The company said currency effects knocked $1 billion off fourth-quarter revenue, after its hedging programs. Without that, revenue would have climbed 24%, rather than 18%, from a year earlier, it added.

In after-hours trading, Alphabet shares rose 4.2%, to $803.03, giving the company a market capitalization of about $560 billion. That vaulted Alphabet past Apple, which closed Monday trading with a market capitalization of $539.7 billion. The last time Alphabet's market cap exceeded Apple's was in January 2010.

The rally extended a long rise in Alphabet shares, which have climbed 43% in the past year as its Google business improved mobile search ads and cut costs. Apple shares have fallen roughly 18% in the past year, amid slowing growth in sales of its main product, the iPhone.

On a conference call, Chief Financial Officer Ruth Porat said Alphabet may borrow more money, despite having $73 billion in cash on its balance sheet. One reason: The majority of the cash, 58% as of Sept. 30, is held overseas and can't be brought back to the U.S. without incurring additional taxes.

The strong performance of the core Google unit reflected robust demand for ads for holiday shopping and the fast-growing YouTube digital-video service.

Revenue from Google's own online services rose 20% to $14.9 billion in the fourth quarter. That was up from year-over-year revenue growth of 18% in the final quarter of 2014.

Search marketing firm Kenshoo said clients boosted spending on Google's product ads by 81% in the fourth quarter, compared with the same period a year earlier. These ads work particularly well on smartphones, because they show up in the top of results pages when people search for things to buy.

Ms. Porat said YouTube revenue is growing at "a very significant rate," without being more specific.

Capital expenditures for the whole company dropped to $2.1 billion in the fourth quarter, versus $3.55 billion a year earlier. The finance chief said Alphabet is making some "tough calls" to reduce investments in some less promising areas.

Still, she warned that the company will keep spending on its core, not just moonshots. Areas of future investment for Google include virtual reality, cloud computing and artificial intelligence, she added.

"Our Q4 results show the great momentum and opportunity we have in mobile Search and across Google's range of businesses," said Sundar Pichai, chief executive of Google.

Gmail, the company's email service, passed one billion users in the fourth quarter, joining six other services with more than a billion users: Search, Android, Maps, Chrome, YouTube and the Google Play app store, he noted.

"We have only scratched the surface of truly being there for our users, anytime, anywhere, across all devices," Mr. Pichai added.

(END) Dow Jones Newswires

February 02, 2016 02:47 ET (07:47 GMT)

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