Google Announces Plans for New Operating Structure

August 10, 2015

G is for Google.

As Sergey and I wrote in the original founders letter 11 years ago, “Google is not a conventional company. We do not intend to become one.” As part of that, we also said that you could expect us to make “smaller bets in areas that might seem very speculative or even strange when compared to our current businesses.” From the start, we’ve always strived to do more, and to do important and meaningful things with the resources we have.

We did a lot of things that seemed crazy at the time. Many of those crazy things now have over a billion users, like Google Maps, YouTube, Chrome, and Android. And we haven’t stopped there. We are still trying to do things other people think are crazy but we are super excited about.

We’ve long believed that over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant.

Our company is operating well today, but we think we can make it cleaner and more accountable. So we are creating a new company, called Alphabet. I am really excited to be running Alphabet as CEO with help from my capable partner, Sergey, as President.

What is Alphabet? Alphabet is mostly a collection of companies. The largest of which, of course, is Google. This newer Google is a bit slimmed down, with the companies that are pretty far afield of our main internet products contained in Alphabet instead. What do we mean by far afield? Good examples are our health efforts: Life Sciences (that works on the glucose-sensing contact lens), and Calico (focused on longevity). Fundamentally, we believe this allows us more management scale, as we can run things independently that aren’t very related.

Alphabet is about businesses prospering through strong leaders and independence. In general, our model is to have a strong CEO who runs each business, with Sergey and me in service to them as needed. We will rigorously handle capital allocation and work to make sure each business is executing well. We'll also make sure we have a great CEO for each business, and we’ll determine their compensation. In addition, with this new structure we plan to implement segment reporting for our Q4 results, where Google financials will be provided separately than those for the rest of Alphabet businesses as a whole.

This new structure will allow us to keep tremendous focus on the extraordinary opportunities we have inside of Google. A key part of this is Sundar Pichai. Sundar has been saying the things I would have said (and sometimes better!) for quite some time now, and I’ve been tremendously enjoying our work together. He has really stepped up since October of last year, when he took on product and engineering responsibility for our internet businesses. Sergey and I have been super excited about his progress and dedication to the company. And it is clear to us and our board that it is time for Sundar to be CEO of Google. I feel very fortunate to have someone as talented as he is to run the slightly slimmed down Google and this frees up time for me to continue to scale our aspirations. I have been spending quite a bit of time with Sundar, helping him and the company in any way I can, and I will of course continue to do that. Google itself is also making all sorts of new products, and I know Sundar will always be focused on innovation—continuing to stretch boundaries. I know he deeply cares that we can continue to make big strides on our core mission to organize the world's information. Recent launches like Google Photos and Google Now using machine learning are amazing progress. Google also has some services that are run with their own identity, like YouTube. Susan is doing a great job as CEO, running a strong brand and driving incredible growth.

Sergey and I are seriously in the business of starting new things. Alphabet will also include our X lab, which incubates new efforts like Wing, our drone delivery effort. We are also stoked about growing our investment arms, Ventures and Capital, as part of this new structure.

Alphabet Inc. will replace Google Inc. as the publicly-traded entity and all shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights. Google will become a wholly-owned subsidiary of Alphabet. Our two classes of shares will continue to trade on Nasdaq as GOOGL and GOOG.

For Sergey and me this is a very exciting new chapter in the life of Google—the birth of Alphabet. We liked the name Alphabet because it means a collection of letters that represent language, one of humanity's most important innovations, and is the core of how we index with Google search! We also like that it means alpha‑bet (Alpha is investment return above benchmark), which we strive for! I should add that we are not intending for this to be a big consumer brand with related products—the whole point is that Alphabet companies should have independence and develop their own brands.

We are excited about...

• Getting more ambitious things done.
• Taking the long-term view.
• Empowering great entrepreneurs and companies to flourish.
• Investing at the scale of the opportunities and resources we see.
• Improving the transparency and oversight of what we’re doing.
• Making Google even better through greater focus.
• And hopefully... as a result of all this, improving the lives of as many people as we can.

What could be better? No wonder we are excited to get to work with everyone in the Alphabet family. Don’t worry, we’re still getting used to the name too!

Larry Page
CEO, Alphabet

Here's one giant winner in Google's rebranding announcement: Daniel Negari.

Negari is the founder and CEO of XYZ.com, an Internet domain registry that owns alternative suffixes like .rent and .college. His 10-person company also owns .xyz.

Abc.xyz is the web address for Google's new parent entity, Alphabet Inc.

"Our registry is lighting up right now," said Negari, in an interview Monday afternoon following Google's announcement. "I'm seeing all kinds of names being registered. I just got 250 names registered in the last 60 seconds. It's crazy."

In a full day, Negari said about 3,000 addresses are typically registered under .xyz. Domains with that extension can be purchased from services such as GoDaddy for $10 a year and Namecheap for a first-year fee of $1.

Negari is cashing in thanks to a 2011 decision by the Internet Corporation for Assigned Names and Numbers (ICANN) designed to expand access to extensions beyond .com, .org and .edu. The market opened up to those websites in 2014.

Of the more than 350 new extensions that are now available, .xyz is by far the most popular, with 1.14 million domains having been registered, according to nTLDstats. The next most active is .science with over 326,000, followed by .club with over 278,000.

Negari, who turned on .xyz to the public in June 2014, declined to say how much Google paid for abc.xyz, citing a confidentiality agreement. To acquire the .xyz extension, Negari paid a mere $185,000 application fee. There were no other applicants, so Negari didn't have to bid in an auction.

A spokesperson from Mountain View, California-based Google said "we have nothing to add here."

Google announced on Monday a dramatic restructuring that breaks out the Web giant's core business into a separate company under a new umbrella called Alphabet. Other companies that will be part of Alphabet are the life sciences unit and Calico, which is focused on longevity.

Larry Page, co-founder and CEO of Google, will assume the CEO role of Alphabet, with Google co-founder Sergey Brin serving as president. Sundar Pichai, head of product and engineering, is now CEO of Google. Alphabet is replacing Google as the publicly-traded entity.

Currently, abc.xyz is just a landing page, with a letter from Page explaining the changes and some blocks with letters.

That's providing plenty of attention for Negari.

"It's a big deal for new top-level domains as a whole," said Negari, who has operations in Santa Monica, California, and Las Vegas. "It's a big signal that Google, which is the largest search engine in the world, believes in it enough to switch to one."

Google passes Apple as most valuable company

Google-parent Alphabet passed Apple as the most valuable company in the world. At current after-hours levels, Alphabet's market cap would roughly be $570 billion, eclipsing Apple's current market cap of about $535 billion.

The last time Google was more valuable than Apple was in February 2010, when both companies were worth less than $200 billion. At the time, Apple had yet to release its first iPad, the newest iPhone on the market was the 3GS, and the Mac was the company's biggest product line, accounting for one-third of revenue. Steve Jobs was still at the helm.

Google was being guided by Eric Schmidt, who would hand control back to co-founder Larry Page the following year. The company was a little more than half its current size.

Apple and Google actually flip-flopped multiple times between 2008 and early 2010, before Apple went on a historic tear, jumping from $180 billion in value to over $650 billion in September 2012. At that point, the two companies were separated by over $400 billion. In 2011, Apple passed Exxon to become the world's most valuable company.

Google's latest rise versus Apple began in July. From that point through the end of 2015, its shares soared 44 percent, while Apple's sank 16 percent.

Apple's main problem is its reliance on the iPhone, which now accounts for two-thirds of revenue. It's a massive business, but sales in the fiscal first quarter increased only 1 percent from a year earlier, while iPad and Mac revenue dropped. Investors are concerned that unless Apple changes course and decides to compete with lower cost Android manufacturers on price, the iPhone's best days are in the past.

Meanwhile, Google is convincing investors that in the transition from Web to mobile it will maintain its dominance. According to eMarketer, Google is poised to capture 32 percent of the mobile ad market this year and next, staying well ahead of Facebook, which is around 20 percent. The company generates so much profit from its digital ad business that it can invest in all sorts of potential growth areas, namely autonomous driving and extending life.

EPS: $7.73 vs. $7.39 a share, according to a Thomson Reuters consensus estimate

Revenue: $24.75 billion vs. $24.22 billion, according to a Thomson Reuters consensus estimate

Advertising revenues rose to $21.4 billion during the quarter, up from a little over $18 billion a year ago. Net income was $5.43 billion, up from $4.21 billion a year ago.

Earnings: Analysts surveyed by FactSet on average expect Alphabet to report earnings of $8.25 per share, compared with the $8.42 per share the company reported in the year-earlier period. The Estimize consensus, made up of estimates from sell-side and buy-side analysts as well as hedge-fund managers, academics and others, calls for earnings per share of $8.13.

As evidenced by MKM Partners, some analysts have already priced in the EU fine into their earnings forecast. MKM broke down the charge into a negative impact of $3.89 per share.

Alphabet beat earnings expectations last quarter, but missed fourth-quarter adjusted-earnings expectations after a large tax charge related to stock-based compensation.

Revenue: Analysts on average predict revenue of $20.9 billion, according to FactSet, up from $17.5 billion in the year-earlier period. The Estimize consensus also calls for revenue of $20.9 billion.

Alphabet has surpassed revenue expectations in the past four quarters.

Alphabet shares drop after it reports lower profit on huge EU fine

July 24, 2017

Alphabet reported a drop in second-quarter profit thanks to a $2.74 billion fine European antitrust regulators slapped on its Google unit.

Here are the numbers:

• EPS: $5.01 versus $4.49 expected
• Revenue: $26.01 billion, up from $21.5 billion a year ago
• Google sites revenue: $18.3 billion
• Google network revenue: $4.0 billion
• Traffic acquisition costs: $4.8 billion
• Cost per click: (14.6%) from last year
• Paid clicks: +35.2% from last year

Alphabet has been adding new content as it races Facebook and traditional TV networks for a share of the surging market for digital video ads.

YouTube said in June that it had reaches 1.5 billion monthly users and would add 12 new TV shows to the 37 it already has on its YouTube Red service.

The company is also updating its core search product as more consumers use its service via smartphones.

Still, its drive to innovate has run into a regulatory wall in Europe, where regulators ruled Google used its monopoly position in search advertising to hurt rivals by favoring its online shopping service over competitors, and fined the company $2.74 billion.

Alphabet Earnings: What to Watch

Oct. 25, 2017

Google parent Alphabet Inc. is scheduled to announce third-quarter earnings after the market closes Thursday. Here’s what you need to know:

Earnings forecast: Alphabet is expected to report per-share earnings of $8.31, according to analysts polled by FactSet, compared with $7.25 on that basis a year earlier.

Revenue forecast: Analysts expect revenue of $21.93 billion excluding payments to advertising partners, compared with $18.27 billion on the same basis in the year-earlier period.


WHAT TO WATCH:

TAC: The fees Google pays to distribution partners -- called traffic acquisition costs -- have been steadily rising in recent years, swallowing up a bigger share of its revenue. Google pays the fees to keep its search engine and other apps front and center on smartphones made by other companies, and analysts attribute the recent TAC increase to pricier contracts with Apple Inc. Google paid those distribution partners $2.05 billion in the second quarter, or 11.1% of the revenue from Google websites -- up from 7.6% two years prior. Analysts expect those distribution fees to increase to $2.37 billion in the third quarter, or 12.3% of Google sites’ revenue.

Google’s total TAC, including payments to third-party sites where it places ads, is expected to increase 25% to $5.24 billion from $4.18 billion a year prior. Investors are watching TAC closely to see if it will continue to eat up more revenue. Some analysts warn potential regulatory action in Europe could further increase TAC by forcing Google to pay Android phone makers more to promote its services.

MARGINS: While Google’s ad operation continues to be a robust and stable business, Google’s net operating margin has declined year-over-year for four consecutive quarters. Excluding the loss-making “other bets” segment of Alphabet -- and the impact of a $2.7 billion fine from the European Union -- Google’s net operating margin declined to 37.7% in the second quarter from 40.3% a year prior.

It could dip again in the third quarter: Mark Mahaney of RBC Capital Markets estimates a 36.5% margin, down from 37.5% a year prior. The shrinking margins are in part because of increasing TAC and growing investment in YouTube and its Google Cloud business, two major bets for its future. “Although Alphabet’s revenue is growing at a healthy rate, growth areas are increasingly coming from lower margin businesses like mobile search and programmatic, putting increased pressure on profits,” eMarketer analyst Martin Uteras said in an email.

OTHER REVENUES: Google is eager to build another booming business alongside advertising, and its main bet to do it is via the cloud. Google is battling with market leaders Amazon.com Inc. and Microsoft Corp. to sell computing power and storage over the internet to corporations. Revenues from its cloud division are wrapped into its “other revenues” segment, along with sales of apps and its new hardware devices. Investors watch that segment for signs of progress in its cloud effort -- and its renewed push into hardware, which is more likely to show movement in the fourth quarter, with the launch of new products. After “other revenues” increased by 42% in the second quarter to $3.09 billion from a year prior, analysts expect the segment to grow by 39% to $3.39 billion in the third quarter.

Alphabet earnings: Google will offer a gander at its Uber investment

April 22, 2018

Alphabet Inc. has adopted a new accounting standard that will result in a number of changes in its earnings results, one of which could bring the value of its investment in Uber Technologies Inc. into public view.

Previously profits or losses from nonmarketable stock—as in, privately held companies, such as startups—wasn’t recorded in companies’ financial statements but because of the new rules, Alphabet will now include such investments on its income statement in the “Other Income and Expense” line item. That change begins Monday, when the Google parent company expects to report first-quarter earnings after the bell.

Back in 2013, Alphabet’s venture capital arm known now as GV, dropped $258 million into Uber’s war chest at a $3.76 billion valuation, and Alphabet gained an additional 0.34% of Uber’s equity, equal to about $245 million, as part of a settlement of the self-driving lawsuit between the two Silicon Valley companies.

With Uber’s current valuation of $48 billion for secondary shares most recently bought by the Softbank-led funding round and $70 billion for the remaining primary share, Alphabet’s stake may get recorded as more than $3 billion, according to Barlcays analyst Ross Sandler.

Excluding the Uber investment, Sandler would expect $377 million in other income and expenses, but taking it into account bumps the number up an eye-popping 1,131.9% to $4.36 billion. The resulting change would also push earnings up 50% to $13.85 a share, compared with $9.28 a share without the impact, Sandler wrote.

Earnings: On average, analysts polled by FactSet model earnings of $9.28 a share and adjusted earnings of $11.75. Contributors to Estimize, which crowdsources estimates from analysts, fund managers and academics, predict earnings of $9.35 on average.

Revenue: For the first quarter, analysts model sales of $24.26 billion after accounting for traffic-acquisition costs. Analysts estimate TAC costs of $6.03 billion for the quarter. The “Other Bets” segment is expected to bank $355 million in the first quarter. Estimize contributors predict overall Alphabet sales of $24.54 billion on average, without TAC.