Alphabet Inc (GOOG)

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Alphabet Investors: What to Pay Attention to When the Latest Earnings Report Is Released
By: The Motley Fool | February 1, 2019

Things may look average, but there's a lot going on right under the surface for Google's parent company.

There wasn't anything to write home about for Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) investors in 2018. The Google parent saw its shares on either side of breakeven for the year, the result of the late-year market correction, though it was better than the 6% decline of the S&P 500 (SNPINDEX:^GSPC).

Alphabet will have another opportunity to impress investors when it reports the financial results of its just completed fourth quarter after the market closes on Monday, Feb. 4. Let's look at the company's previous quarter and what Alphabet had to say about the future to see if it provides any insight into what to expect when the company reports earnings.

A look back
For the third quarter, Alphabet reported revenue of $33.7 billion, an increase of 21% year over year, or 22% in constant currency. Diluted earnings per share of $13.06 grew by an even more impressive 36% compared with the prior-year quarter. Analysts' consensus estimates were calling for revenue of $34.05 billion and earnings per share of $10.40, so the company delivered much higher profitability than expected on lower sales.

It's important to note that foreign currency exchange rates took a toll on the top line, but Alphabet saw gains from its equity investments that added to the bottom line.

There were other notable happenings during the quarter. On the conference call to discuss the results, CEO Sundar Pichai revealed that Google Drive became Alphabet's eighth product to crack 1 billion monthly active users, and Gmail now exceeds 1.5 billion users per month.

Recent events
There were some troubling recent developments that Alphabet is sure to address during its quarterly report. France announced last week that it levied a fine of 50 million euros, or about $57.4 million, for Google's failure to fully comply with the European Union's General Data Protection Regulation (GDPR). In mid-2018, the EU enacted far-reaching regulations aimed at protecting the privacy rights and data protections of its citizens.

One of the segments of the regulation requires companies to gain a user's "genuine consent," requiring the person to explicitly opt in to data collection. France said Google hadn't provided consumers with sufficient information about what data was collected and how it was used.

While the amount of the fine is a drop in the bucket to Alphabet, the GDPR can fine a company up to 4% of its annual revenue for noncompliance. Expect to hear more from Alphabet regarding this ongoing issue.

Looking ahead
Alphabet doesn't provide specific quarterly guidance related to revenue or earnings but rather provides a few broad strokes to help investors assess the coming results. During the third quarter, the company reported that a strengthening U.S. dollar was acting as a headwind to the company's top-line results, a contrast to the first half of the year. That trend continued and the dollar grew stronger through the end of 2018, which portends a continued headwind to Alphabet's financial results.

Something else to look for in the fourth quarter is the results from the recently launched Made by Google family of products that were introduced just in time for the 2018 holiday shopping season. This will probably result in margin pressure, as hardware sales are typically higher in the fourth quarter. Content acquisition costs for YouTube will also affect Alphabet's results, as will higher sales and marketing expenses, which are more heavily weighted to the back half of the year.

Wall Street analysts were a bit more precise in their expectations for the quarter, and while we don't want to get caught up in their short-term mindset, it can help provide context concerning the overall market sentiment for the company. Analysts' consensus estimates are calling for revenue of $38.97 billion, a 20.6% year-over-year increase. Earnings per share are pegged at $10.85, which would represent growth of about 12%.

We'll know more when Alphabet reports earnings after the market close of Feb. 4.

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