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Alphabet (NADDAQ:GOOG,GOOGL) announced fourth quarter results on February 1st, for the first time breaking out both core Google’s results and its “Moonshot” business as separate businesses. In toto, the company reported 18% year-on-year growth in revenues to $21.2 billion, in line with our expectation. On a constant-currency basis, revenues grew 24%. Google segment revenues for the year totaled $74.5 billion and were up 13.5% over the prior year. Core Google is solidly profitable, sustaining and operating margin of 31.3%. In contrast, Alphabet’s many venture businesses generated revenues of $48 million and operating losses of $3.6 billion.

Pricing pressure on online ads resulted in a 13% year-over-year decline in aggregate cost-per-click. Aggregate paid clicks, which represent the number of ads served across Google properties and its member website, grew by 31% year over year. The movement in Google Sites paid clicks and CPCs primarily reflects the continued growth in YouTube TrueView. Furthermore, the company said that the momentum in its mobile and programmatic platform was instrumental in revenue growth in Q4 . In this note, we will discuss Google’s results.

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Number of Clicks Grows Due To Programmatic Buying Even As Cost-Per-Click Continues To Decline Due To TrueView

We currently estimate that PC search ads and mobile search ads contribute approximately 70% to the firm’s value. Cost per click, a metric that measures the price paid for the number of times a visitor clicks on a search ad, has been on a steady decline for the past few years, and it declined by 16% on Google websites and 8% on network member sites. The recent trend is indicative of geographical mix, device mix, currency headwinds and property mix, though the company has stated that it will continue to monetize mobile devices effectively. Note that a key part of the decline has resulted from the rapid growth of YouTube, where a majority choose to use TrueView ads, which monetize at lower rates than ad clicks on Google.com.

Additionally, Google is looking to monetize its properties through its programmatic platform, which matches relevant ads with content, as well as through an increase in user-generated online content. The number of advertisers using Google’s programmatic solutions has nearly doubled in the last year-and-a-half. However, this is negatively impacting Google’s CPC as the programmatic platform does away with inefficiencies of improper ad matching. As a result, the company’s top line growth from search ads has failed to match the growth in search volume. Google is focusing on its programmatic businesses including AdMob, AdExchange, DoubleClick Bid Manager, and these continue to grow at a strong rate. Going forward, as Google improves its programmatic platform, we expect that the growth in online advertising will grow but continue to weigh on CPC.

Revenues From Mobile Ads To Grow

The mobile search ads division is the second largest division for Google and makes up approximately 37.3% of its total value, according to our model. Google, with 90% market share, dominates the mobile search engine market. One of the key reasons for this dominance is its flagship Android OS, which has witnessed excellent adoption and penetration in the smartphone space. A user with an Android phone is more likely to use Google search compared to a user using another OS. In Q4, Google reported that shoppers searched aggressively for product on their mobiles. In fact, in the U.S., looking just at product listing ads, revenue from mobile phones exceeded desktop on Thanksgiving, Black Friday, and through the weekend.

As part of its strategy, it remains focused on building the mobile ecosystem that has the right ad formats and measurement to take advantage of all the platform ads. It launched deep links to surface app content during mobile search. Its mobile services like Now on Tap, which is essentially uses machine learning, lets user access additional useful information based on recent search and present location. We believe that as Google’s mobile ads strategy continues to evolve, the aggregate paid clicks will increase and boost the number of ads sold in coming quarters.

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