Alphabet Stock Soared During First Quarter Earnings Call: Why?

Here's the good news that Alphabet executives delivered during its First Quarter earnings call, pushing up the title

The company's shares climbed nearly 10% in after-hours trading, as company officials spoke to investors during the earnings call. It had only increased by 3% at the exit.

Although the company experienced a sharp drop in advertising revenue in March, the drop did not worsen in April, executives said.

Consumer engagement has increased on Google’s software services as home orders persist.

When Alphabet announced its first-quarter 2020 results on Tuesday, investors were expecting the worst, given the sinister spillover effect of Covid-19 on the advertising and travel industries as well as budget cuts by the company.

However, they have obtained assurances that the economic effects of the coronavirus pandemic will not be as severe as they feared. This triggered a large increase in after-hours inventory, reaching a peak of almost 10%.

The company announced earnings per share of $ 9.87 and revenue of $ 41.16 billion on Tuesday - shortfall and revenue decline, according to analysts expectations summarized by Refinitiv. Investors seemed relieved with revenue growth of 13% over the previous year, pushing the stock up by around 3% as it was released.

But the headline really started to skyrocket during the Q&A portion of the company's conference call where CEO Sundar Pichai and CFO Ruth Porat gave a little more color to the quarter and the first two weeks of the second trimester.

While the outlook was not all optimistic, while executives promised a "difficult" quarter to come, here is the good news that they shared.

March may have been the worst. Porat admitted that there was a "sharp" drop in advertising revenue in March, but suggested that things would not get worse in April.

Based on our research estimates from late March to last week, we have not seen any further deterioration in the percentage of year-over-year revenue decline.

At another point, she said that "we are seeing early signs at this point that users are returning to more commercial behavior", while warning "it is not clear how sustainable or monetizable it will be".

YouTube direct response ads remained solid throughout the quarter. YouTube’s advertising revenue was $ 4.04 billion, up 33% year-on-year. Executives said strong growth in YouTube revenue continued until mid-March, when the coronavirus officially became a global pandemic.

However, Porat noted a performance split between brand advertising and direct response advertising (which aims to entice viewers to take specific action, such as visiting a website or making a purchase). As brand advertising slowed, direct response ads "continued to experience substantial annual growth throughout the quarter".

The shelters in place lead to massive online engagement. Pichai said that people are highly dependent on Google services because restrictions on staying at home change people's behavior. Coronavirus research activity was massive, peaking at four times the maximum activity during the Super Bowl, he said. Android app downloads are up 30% from February to March, and the time spent watching YouTube "has increased dramatically". He also said that 100 million students and teachers are now using Google Classroom, double the number since early March.

Research should recover quickly. Pichai also noted that search engine advertising is driven much more directly by ROI than other forms of advertising because advertisers can see exactly what type of results they are getting and adjust quickly. As the 2008 recession has shown, when the economy returns, research spending should recover quickly.

It is an extraordinarily effective system," he said. “It is a transparent system. You have a very clear sense of ROI. It is very measurable, very profitable. And so we have always seen in these orders in 2008 too, people react in the short term but the recovery is also rapid when it comes back.

The company controls costs. The on-call leaders promised to slow the workforce and cut capital spending. Global investments will experience a “modest decline” in 2020, as the company reduces office space around the world and slows the rate at which it buys office buildings and delays construction of the floor, said Porat. She also said that the company had adjusted its staffing expectations, which had previously planned to increase by 20%. The deceleration would appear in the third quarter, she added.

Porat also confirmed the previous CNBC report that the company was going to cut certain marketing budgets. “With regard to the marketing component, namely announcements and promotional expenses, we reduced it compared to our plans at the beginning of the year…. And with physical events canceled for much of the year, marketing expenses are also reduced."

The buyouts are continuing quickly. Porat also noted that the company's share buybacks would continue as planned, which should help the share price by increasing earnings per share. "At the beginning of the year, I indicated that we expected to buy back shares at a pace at least consistent with the fourth quarter on the remaining authorization, and this remains our opinion for the second quarter," she said.