Stock Update (NASDAQ:GOOGL): Alphabet Inc Announces Fourth Quarter And Fiscal Year 2015 Results


Alphabet Inc (NASDAQ:GOOGL) announced financial results for the quarter and fiscal year ended December 31, 2015.

“Our very strong revenue growth in Q4 reflects the vibrancy of our business, driven by mobile search as well as YouTube and programmatic advertising, all areas in which we’ve been investing for many years. We’re excited about the opportunities we have across Google and Other Bets to use technology to improve the lives of billions of people,” said Ruth Porat, CFO of Alphabet.

Q4 2015 financial highlights

The following summarizes our consolidated financial results for the quarters ended December 31, 2014 and 2015 (in millions, except for per share information; unaudited):

  Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
Revenues $18,103   $21,329  
Increase in revenues year over year 15 % 18 %
Increase in constant currency revenues year over year 18 % 24 %
         
GAAP operating income $4,399   $5,380  
GAAP operating margin 24 % 25 %
Non-GAAP operating income $5,600   $6,816  
Non-GAAP operating margin 31 % 32 %
         
GAAP net income* $4,675   $4,923  
Non-GAAP net income $4,654   $6,043  
         
GAAP diluted EPS for Class A and B common stock and Class C capital stock* $6.79   $7.06  
Non-GAAP diluted EPS for Class A and B common stock and Class C capital stock $6.76   $8.67  
Diluted shares (in thousands) 688,491   697,025  
*For the three months ended December 31, 2014, GAAP net income and diluted EPS includes net income from discontinued operations.

Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense from continuing operations. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense from continuing operations, net of the related tax benefits, as well as the impact from net income from discontinued operations. These non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, and non-GAAP constant currency revenues and growth, are described and reconciled to the corresponding GAAP measures at the end of this release.

The following summarizes our full year segment results where Google is presented as a single segment and all other Alphabet businesses are combined as Other Bets (in millions; unaudited). For additional information on segment results, please see the tables captioned “Segment results” included at the end of this release.

  Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31, 2015
Google segment revenues $65,674 $74,541
Google operating income $19,011 $23,425
     
Other Bets revenues $327 $448
Other Bets operating loss ($1,942) ($3,567)

Q4 2015 consolidated financial summary

Revenues (in millions; unaudited):

  Three Months Ended
December 31, 2015
Change from Q4 2014 to Q4 2015 (YoY) Change from Q3 2015 to Q4 2015 (QoQ)
Revenues $21,329 18% 14%
Constant currency revenues (YoY) $22,330 24% N/A
Constant currency revenues (QoQ) $21,208 N/A 15%

Our revenues and constant currency revenues are reconciled in the financial tables following this release.

Costs and expenses

Cost of revenues, operating expenses, SBC expense, and depreciation, amortization, and impairment charges (in millions; unaudited):

  Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
Cost of revenues $6,921   $8,188  
Cost of revenues as % of revenues 38 % 38 %
         
Operating expenses (other than cost of revenues) $6,783   $7,761  
Operating expenses as % of revenues 37 % 36 %
         
SBC expense* $1,201   $1,436  
Tax benefit related to SBC expense $(255)   $(316)  
Depreciation, amortization, and impairment charges $1,267   $1,404  
*Excludes the impact from discontinued operations for the three months ended December 31, 2014 and expense for awards accounted for as stock-based compensation that will ultimately settle in cash.

Supplemental information (in millions, except for headcount data; unaudited)

Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
Cash, cash equivalents, and marketable securities $64,395   $73,066  
Net cash provided by operating activities $6,364   $6,415  
Capital expenditures $3,551   $2,100  
Free cash flow $2,813   $4,315  
Effective tax rate (ETR)* 18 % 5 %
Headcount 53,600   61,814  
*For Q4 2015, our effective tax rate reflects impact of certain one-time items in the U.S., specifically the resolution of a multi-year audit with an ETR impact of 9%, as well as the full year impact of the R&D tax credit with an ETR impact of 8%.

Q4 2015 Google segment summary

Revenues and monetization

Google segment revenues by source (in millions; unaudited):

Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
Change from Q4 2014 to Q4 2015 (YoY)
Google segment      
          Google websites $12,429 $14,936 20%
          Google Network Members’ websites 3,880 4,142 7%
     Google advertising revenues* 16,309 19,078 17%
     Google other revenues 1,688 2,100 24%
Google segment revenues $17,997 $21,178 18%
       
*Advertising revenues are generally reported on a gross basis, consistent with GAAP, without deducting TAC.

Paid clicks and cost-per-click information (unaudited):

  Change from Q4 2014 to Q4 2015 (YoY) Change from Q3 2015 to Q4 2015 (QoQ)
Aggregate paid clicks 31% 17%
Paid clicks on Google websites 40% 22%
Paid clicks on Google Network Members’ websites 2% 1%
     
Aggregate cost-per-click (13)% (5)%
Cost-per-click on Google websites (16)% (8)%
Cost-per-click on Google Network Members’ websites (8)% 7%

Traffic acquisition costs (TAC) and operating income

TAC to Google Network Members and distribution partners, operating income, and SBC expense (in millions; unaudited):

  Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
TAC to Google Network Members $2,656   $2,864  
TAC to Google Network Members as % of Google Network Members’ revenues 68 % 69 %
TAC to distribution partners $968   $1,191  
TAC to distribution partners as % of Google website revenues 8 % 8 %
Total TAC $3,624   $4,055  
Total TAC as % of Google advertising revenues 22 % 21 %
         
  Three Months Ended December 31, 2014   Three Months Ended December 31, 2015  
Operating income, excluding SBC expense $6,301   $8,043  
SBC expense $1,078   $1,271  
Operating income $5,223   $6,772

Supplemental information (in millions; unaudited)

  Three Months Ended
December 31, 2014
Three Months Ended
December 31, 2015
Capital expenditures $3,755 $1,781
Depreciation, amortization, and impairment $1,214 $1,313

Full year 2015 Other Bets summary

Revenues and operating results

Other Bets revenues, operating loss, and SBC expense (in millions; unaudited):

Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31, 2015
Other Bets revenues $327 $448
Operating loss, excluding SBC expense $(1,595) $(3,069)
SBC expense $347 $498
Operating loss $(1,942) $(3,567)

Supplemental information (in millions; unaudited)

  Twelve Months Ended
December 31, 2014
Twelve Months Ended
December 31, 2015
Capital expenditures $501 $869
Depreciation, amortization, and impairment $148 $203

Stock repurchase

During the fourth quarter of 2015, we repurchased 2.4 million shares of Alphabet stock for an aggregate amount of $1.8 billion. In January 2016, the board of directors of Alphabet authorized the company to repurchase an additional 514 thousand shares, with a total remaining authorization for future purchases of approximately $3.7 billion. The authorization has no expiration date.

Adjustments to previously reported financial information

In the fourth quarter of 2015, we elected to early adopt Accounting Standards Update 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes, on a retrospective basis. Prior period amounts have been adjusted accordingly.

In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015 in the cumulative amount of $711 million. The income tax amount is not material to the periods impacted and consolidated revenues are not impacted. We elected to revise previously issued consolidated financial statements for the periods impacted.

In the first quarter of 2015, we reclassified revenues primarily related to DoubleClick ad serving software revenues from Google other revenues to Advertising revenues from Google Network Members’ websites. Prior period amounts have been adjusted to conform with our current period presentation. (Original Source)

Shares of Alphabet are up nearly 7.5% in after-hours trading. GOOGL has a 1-year high of $798.69 and a 1-year low of $521.72. The stock’s 50-day moving average is $750.91 and its 200-day moving average is $708.08.

On the ratings front, Alphabet has been the subject of a number of recent research reports. In a report released today, Cantor Fitzgerald analyst Youssef Squali maintained a Buy rating on GOOGL, with a price target of $880, which implies an upside of 14.1% from current levels. Separately, on the same day, Piper Jaffray’s Gene Munster maintained a Buy rating on the stock and has a price target of $812.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Youssef Squali and Gene Munster have a total average return of 14.0% and 18.0% respectively. Squali has a success rate of 57.7% and is ranked #25 out of 3622 analysts, while Munster has a success rate of 57.6% and is ranked #7.

The street is mostly Bullish on GOOGL stock. Out of 20 analysts who cover the stock, 19 suggest a Buy rating and one recommends to Hold the stock. The 12-month average price target assigned to the stock is $870.38, which represents a potential upside of 12.9% from where the stock is currently trading.