How does Wall Street respond if it has no idea what’s coming?
We’ll find out today.
Alphabet, the company formerly known as Google, releases its fourth-quarter earnings today, the first reporting split into two segments: For Google and “Other Bets,” the wide accounting bucket for its eight (for now) other subsidiaries.
Analysts have a good idea of what Google’s segment will look like, with its reliable ad sales chugging along. But unless you’re a high-ranking Alphabet official, no one really knows how the other line will read.
We know what to look at, though, thanks to a cheat sheet the company put out last week. Each segment will disclose six metrics. The most critical are revenue, operating loss and capital expenditures — what they’re making, losing and costing.
Remember, though, we won’t see those for each segment’s component parts, i.e. the (probably) most costly Alphabet units, like X, home to the self-driving cars, or the ones earning money, like Access, home to the Fiber business.
Look for Google CEO Sundar Pichai and CFO Ruth Porat to lead the call. Expect the pair to dwell on the health of the core Google business, particularly on mobile ads, which have shown signs of a strong holiday quarter. And expect an emphasis on how spending on the “Other Bets” is becoming more disciplined, but remains very worthwhile, very long-term and very expensive.
Last quarter, Alphabet handed the Street a double treat: Reporting profit and net sales ($15.1 billion) that beat expectations, and announcing an unprecedented shareholder buyback. For this quarter, analysts are looking for sales, minus partnership payouts, of $16.9 billion with earnings per share of $8.10.
Three parts of Pichai’s company, distinct from search ads, will get loads of attention today, although likely not any new financial disclosures. Play, the media arm, has a high growth trajectory and a new product boss. Same for the cloud business, which Google is emphasizing more and more. And there’s YouTube — a business that Google, employing considerable verbal gymnastics, has been telling investors is growing without showing any real numbers.
YouTube will still sit in Google’s website revenue line, and we probably won’t see more than before. But here are two lines to watch:
- Other revenue: This has been a catchall bucket for Google. It includes sales from Play, hardware devices and enterprise, along with things like Nest thermostats and Fiber connections. Those latter things are out, moved to “Other Bets.” So the new figure can give us some better sense of how the secondary businesses within core Google are doing. Last quarter, other revenue accounted for $1.89 billion, or a tenth of gross sales, an 11.2 percent year-on-year increase.
- Operating margins: Here’s where the Alphabet reorg could have the biggest impact on Google. With spending on the moonshots stripped away, investors expect the fat of Google’s profits to be even fatter. Last quarter, Google’s operating income was $6.14 billion, a 14.6 percent annual increase, and its margins have floated around 33 percent for the past two years. Today, Alphabet will give historical data for 2013 through 2015, giving us a look at just how solid those margins are and were.
All the Other Bets
This is where the fun begins, because few analysts have a precise guess at the cost structure of Alphabet’s diverse ventures outside of Google Inc.
RBC’s Mark Mahaney pegged the operating losses for 2015 for the “Other Bets” between $3 billion and $6 billion. From my reporting on the priciest Alphabet operations — the cost-intensive Fiber broadband, the life science lab Verily and robotics money-hole X — this range seems fair, maybe conservative.
Here’s what else to watch:
- Revenue: This line will reflect those Alphabet operations with existing sales streams — Nest, which sells devices; Fiber, which sells cable subscriptions; and Verily, which has a few pharmaceutical deals. Analysts have pegged Nest sales at roughly $450 million and Fiber at shy of $200 million for 2015.
- Capital expenditure: Just how much do the moonshots cost? Now we’ll know. Google’s capex was $2.37 billion last quarter, down around 2 percent annually and its lowest level in six quarters. Not all of that spending went to other Alphabet companies, though. Three costly sectors — the data centers, the heavily staffed research division and the rapidly growing virtual reality arm — all remain within Google proper.
Lastly, Alphabet is introducing a new consolidated line called “Reconciling Items.” It’s partially an accounting maneuver and a place to slot the corporate costs (administrative, marketing, etc.) that still don’t fall neatly in either Google or the remainders. Also, this line will include any income raked in from Alphabet’s two investment vehicles, Google Capital and GV.
This article originally appeared on Recode.net.