Alphabet (GOOG) Mixed Q1 From Slower Network Growth & Higher TAC; PT Cut to $825 - Needham & Company
Needham & Company analyst, Kerry Rice, maintained his Buy rating on Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) but cut the PT dramatically to $825 from $910 as higher TAC pushed operating income below expectations.
Overall paid clicks grew 29% y/y, decelerating from 31% y/y in 4Q15, but above consensus of 27%. Growth in YouTube's TrueView ads is the primary growth driver of Websites' Paid Clicks, which increased 38% y/y, down from 40% y/y growth in 4Q15. Network paid clicks were up 2% y/y. Overall, CPCs continued the downward trend, decreasing 9% y/y vs. a 13% decline in 4Q15. Google Sites' CPCs fell 12% y/y, and Network CPCs declined 8% y/y.
Alphabet posted mixed 1Q16 results with revenue (ex-FX) above expectations, but pro forma EPS below consensus. Consolidated revenue was $20.3B, growing 17% y/y (23% ex-FX), below consensus of $20.4B. Strong growth across the globe (US +21% y/y, UK +21% y/y, ROW +25% y/y) was offset by negative FX impact of $592M after hedging.
Per segment, Google revenue was $20.1B, +17% y/y. Google Websites revenue was $14.3B, +20% y/y, driven primarily by strong mobile search, which benefited from ad format improvements and Accelerated Mobile Pages launched in 3Q15, as well as continued momentum in YouTube video advertising across TrueView and Google Preferred formats. Desktop search growth also picked up modestly due to ad format changes and improved ad loads. Network revenue was $3.7B, +3% y/y, with programmatic display advertising offsetting the traditional network business. Other Bets revenue was $166M, +108% y/y, driven primarily by Fiber, Nest, and Verily
Non-GAAP operating income (excl. SBC) was $6.8B, up 34% y/y, above consensus of $6.7B, and non-GAAP operating margin was 33%. In particular, Google segment reported a non-GAAP operating income of $7.6B, up 22% y/y with an operating margin of 38%, representing an expansion of 150bps versus last year, primarily driven by improving operating efficiency especially in sales and marketing and G&A. Google SBC was totaled $1.3B, up 15% y/y, primarily reflecting the increase in headcounts in engineers and product managers. For Other Bets segment, non-GAAP operating loss was $657M, compared with a loss of $516M in 1Q15. Overall, the company reported non-GAAP EPS of $7.50, below consensus of $7.96.
The new $825 PT is based on 25x FY16 pro forma EPS.
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Shares of Alphabet closed at $759.14 yesterday.