Alphabet Drops on Earnings Miss, Cash Flows Turn Negative
Alphabet ($GOOGL) shares are down over 8% in after-hours trading Wednesday after third-quarter revenue and earnings missed expectations, and a blowout quarter from Google Cloud was overshadowed by softer core advertising and a swing to negative free cash flow.
Revenue climbed 24.7% year over year to $127.58 billion, missing expectations of $127.96 billion, according to TipRanks.
Earnings came in at $2.12 a share against the $3.02 consensus estimate. Much of that gap came from about $8.66 billion in losses on stakes Alphabet holds in other companies, which cut 55 cents from earnings per share after taxes. Without that hit, earnings would have been about $2.67 a share, still short of the estimate. That marks a sharp reversal from the second quarter, when other income was a $98.0 billion gain, mostly from gains on its equity holdings that added $6.26 to earnings per share, according to the company’s second-quarter release.
Cloud was the standout. Google Cloud revenue more than doubled to $30.7 billion from $15.16 billion a year earlier, topping the $29.15 billion analysts expected, per TipRanks. The unit’s $11.1 billion in operating income puts its margin at about 36%. The company said its custom-chip business was a “meaningful contributor to revenue growth.”
The rest of the business was mixed. Search revenue rose 12% to $63.35 billion but missed the $64.96 billion estimate, according to CNBC. YouTube ad revenue of $11.21 billion fell short of the $11.5 billion Wall Street expected, per TipRanks. Subscriptions, platforms and devices revenue grew 11% to $14.29 billion. Cloud revenue has now climbed past YouTube’s ad revenue, per TipRanks’ segment data.
Operating income still grew 30% to $40.58 billion, even as research and development spending jumped to $20.64 billion from $15.15 billion, TipRanks noted. That operating income figure missed the $43.19 billion FactSet forecast, though, per CNBC.
Cash flow was the sore spot. Capital expenditures more than doubled to $51.36 billion from $23.95 billion a year earlier, and free cash flow fell to negative $9.07 billion, against the negative $2.70 billion analysts expected, according to CNBC. Alphabet bought back no stock in the quarter.
“Google Cloud revenues grew 103%, powered by huge demand for our AI infrastructure and AI solutions,” CEO Sundar Pichai said in the earnings release. He added that the Gemini app has reached 1 billion users, making it the company’s fastest-growing product ever.
I’ll put an update out in the morning if anything notable comes out on the call.
