On Tuesday after hours, Google surged +4% after reporting a superb Q1, with revenue and earnings both breezing past analyst expectations.
As investors, it's not too often too often we see a +$10 EPS beat hit the tape for any company, to say nothing for a company at Google's scale.
For Google this past quarter, that earnings outperformance amounted to a +67% beat in percentage terms, on the back of nearly across-the-board top line strength.
What we really witnessed this quarter is the power of operating leverage at scale as both the cloud and the ad business accelerated to growth rates approaching +50% year-over-year.
As a result of this, ad margins expanded by an impressive +8% over the past year, while cloud margins expanded by that amount just over the past quarter, inching the Cloud business ever closer towards profitability.
Since the Cloud business is still fairly small compared to the rest of Google, the dollar impact of this operating leverage is most evident on the ad side:
With the incremental $4 billion of services revenue outperformance Google reported in Q1, it was able to generate an incremental $3.6 billion of services segment profits.
Looking forward, we expect Google's fundamentals to remain strong as the company continues to drive improvements to its search and video platforms.
We're particularly optimistic on the ability of direct response to drive additional upside to YouTube, as a fairly new offering that barely existed a year ago but has to date seen incredible adoption across brands and advertisers.
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