Google’s parent company, Alphabet, reported Q4 earnings last night with revenue ex-TAC (excluding traffic acquisition cost) at $31.8bn beating estimates of $31.3bn. Looking at the gross revenue number (so not taking out TAC) it came out at $39.3bn up 22% y/y while EBITDA at $10.8bn was only up 11% y/y. The Q4 2018 EBITDA margin was 27.5% which is actually the lowest in Alphabet’s history as a publically listed company and the worst since Q1 2004.
The reason for this margin squeeze is an astronomical rise in capital expenditure on datacentres related to the Google search engine, YouTube video streaming service, Waymo (autonomous car service) and cloud infrastructure. The company said in the conference call that YouTube is driving the majority of the rise in capital spending. 12-month rolling capital expenditure has gone from around $10bn in 2016 to $25bn in 2018. As a result, the free cash flow generation has declined the past two years, which is longest streak since the period 2013-2014 where Alphabet had a mild contraction in free cash flow generation. Investors were concerned over these developments sending the shares down 4% in after-market trading.