Google Parent Alphabet Disappoints On Earnings, CEO Praises YouTube Subscription Biz

Google Alphabet
Courtesy of Alphabet

ABC, meet the harsh reality of your 123s: Google’s parent company Alphabet reported its Q1 2016 revenues Tuesday, and investors had expected a lot more, despite double-digit revenue growth. The company missed analysts’ earnings estimates by as much as $0.46 per share, sending the stock down sharply in after-hours trading.

Alphabet generated $20.26 billion in revenue during Q1 of 2016, compared to $17.26 billion during the same quarter last year. This marks an increase of 17 percent year-over-year, compared to 12 percent a year ago. In Q1, the company booked $4.2 billion in adjusted net income, compared to $3.59 billion a year ago. This equaled earnings of $7.50 per share, compared to $6.57 per share a year ago. Analysts had expected earnings of $7.96 per share on average.

Google officially restructured under the Alphabet umbrella last summer, and at the time told investors that one of the goals was to provide more insights into how much money company was making with its core Google businesses, and how much it was spending on what it calls “other bets.”

Investors have long been worried that Google / Alphabet has been spending too much money on self-driving cars, life extension bioscience and other far-out technologies that may not offer a direct financial benefits for years, if not decades.

But more recently, there has been an increased focus on another Alphabet unit that actually has been generating revenue for years: Nest, the company’s smart home unit, has been under scrutiny after insiders and former employees have sounded off against what they perceived as a broken leadership style that slowed down innovation.

Even with its new structure, Alphabet is still not telling investors how much money Nest is making. Instead, the company gave investors Thursday only grand totals, revealing that all of Alphabet’s “other bets” cost the company $802 million in Q1 of 2016, compared to $633 million in Q1 of 2015.

Revenue-wise, those other bets showed up with $166 million in Google’s balance sheets, compared to $108 million in Q1 of 2015. Alphabet CFO Ruth Porat said during the company’s earnings call that much of these expenses can be attributed to the build-out of its Fiber internet business, and warned investors that these expenditures would continue to increase as Google Fiber aims to go live in additional cities. She also said that Nest products are “bestsellers in the category,” but didn’t comment on any recent reports about the subsidiary.

Porat also said that the company is looking to “rationalize” its approaches in areas where multiple teams have been working on similar solutions. Google is known as a company that often hedges multiple bets, and for example developed Android TV and Chromecast as independent solutions for video in the living room. Porat didn’t say in which areas Google aims to change its approach, but her remarks suggested that the company may cut down on its number of products.

YouTube once again got a shout-out as a significant revenue driver for Alphabet, with Porat saying the video service’s revenue “continues to grow at a very significant rate.” Google CEO Sundar Pichai pointed out that YouTube once used to be a moonshot like the ones Alphabet now likes to call “other bets.” Asked about YouTube’s subscription business and original content, Pichai said that YouTube Red has been “very well received.”

YouTube has so far released 6 original movies for Red subscribes, and Pichai said that the company aims to launch an additional 15-20 movies and shows throughout the year. YouTube’s focus right now is on homegrown talent, but Pichai didn’t want to rule out more traditional content buys either. “We will keep an open mind about all other avenues as well,” he said.