By Jeremy C. Owens, MarketWatch
After years of providing as little insight into the performance of its different businesses as it could, Alphabet Inc. executives finally divulged financial results from two of its most prominent segments Monday.
The reason? They had to.
Revenue-recognition rules that were approved in 2014 and went into effect at the end of 2017 call on companies to report financial results to their investors in the same manner that they are reported to the main decision-maker at the company, typically the chief executive. Basically, if a CEO sees numbers for a large segment of the company, the company should be reporting that segment’s results to investors.
From 2017: Why Google should report YouTube revenue to investors
As the revenue-recognition rules were being put in place by companies in 2017 ahead of the deadline, the Securities and Exchange Commission entered into communication with Alphabet specifically to discern why it was not providing revenue numbers for its segments, mentioning YouTube, Google Cloud and some other businesses, such as hardware. Google responded by saying that its chief decision-maker, Alphabet CEO Larry Page, did not see results parsed to that level, though Google CEO Sundar Pichai did.
All of that changed at the end of last year, however. Page and his co-founder, Sergey Brin, stepped down from active leadership at Alphabet and Pichai was promoted to CEO for all of Alphabet. That meant that Pichai would become the chief decision-maker for Alphabet, which had already admitted to the SEC that he saw results for YouTube and other Google businesses. In effect, Alphabet was caught in its own trap and would be forced to break out those businesses with Pichai in charge.
From 2018: The YouTube and Instagram secret that Google and Facebook don’t want you to know
On Monday, the first earnings report since Pichai was promoted, Alphabet /zigman2/quotes/202490156/composite GOOGL +1.05% /zigman2/quotes/205453964/composite GOOG +1.20% did provide results for YouTube for the first time, showing that gross YouTube ad revenue surpassed $10 billion in 2018 for the first time and topped $15 billion in 2019. Google Cloud was also individually reported, after Pichai had hinted at annual run rates in the past, with 2019 revenue of $8.9 billion increasing from $5.8 billion in 2018.
When asked for an on-the-record reason for disclosing YouTube results for the first time, an Alphabet spokesman said that the company did not have anything to share beyond comments made in the news release and conference call, in which both Pichai and Chief Financial Officer Ruth Porat said the move was made to give “insight into our business.”
“To provide further insight into our business and the opportunities ahead, we’re now disclosing our revenue on a more granular basis, including for Search, YouTube ads and Cloud,” Porat said in the announcement .
Investors have wanted and requested that insight for years and never received it. The only thing that has changed in 2020 is that Pichai is now in charge of Alphabet instead of Page, and that is the reason YouTube and Google Cloud results are now disclosed.