Google Reports Rare Miss

Zacks

Google Inc’s (NasdaqGS:GOOG - News) fourth-quarter earnings of $8.22 missed the Zacks Consensus Estimate of $9.06, with revenues missing estimates by 9.7%. Shares were down 9.02% in after-hours trading.

Despite strong revenue growth across most geographies and stabilizing in Western Europe (except Germany), weak pricing and non-operating losses (the first time since the December 2009 quarter), resulted in the disappointing results.

Historically, Google has done much better than Yahoo Inc (NasdaqGS:YHOO - News), which has been struggling to hold its own and Microsoft Corp (NasdaqGS:MSFT - News), which has yet to gain critical mass. Google’s superior algorithms have consistently attracted more users and generated better conversions. 

Revenue

Google’s gross revenue touched a record $10.58 billion, representing sequential and year-over-year increases of 8.9% and 25.4%, respectively. Currency impact was neutral on a year-over-year basis and negative on a sequential basis.

Google is very strongly positioned in the mobile platform, where both smartphones and tablets have been making strong headway. The dominant position has enabled Google to generate very strong mobile revenue growth. In fact, the company’s position in mobile looks better than it was in traditional computing, which says something about its strategic planning and execution.

Additionally, Google continues to benefit from the secular shift in advertising spending from offline to online properties, increasing contribution from medium and small-sized advertisers, success of the DoubleClick ad exchange, improving search algorithms and better ad quality.

Revenues from both Google-owned and partner sites continued to grow double-digits on a year-over-year basis (they have grown double-digits each quarter over the last five years or so). Google websites accounted for around 69% of quarterly advertising revenue, while partner sites accounted for another 27%. Total advertising revenue was up 9.0% sequentially and 96.1% year over year. Google-owned sites were stronger than partner sites on a year-over-year basis.

Total traffic acquisition cost (the portion of revenue shared with Google’s partners) was up 35.1% sequentially and 44.0% from last year. Moreover, traffic acquisition cost as a percentage of total advertising revenue was up 567 basis points (bps) sequentially and 397 bps from last year. Net advertising revenue, excluding traffic acquisition cost was flat sequentially and up 18.0% year over year.

Licensing and other fees brought in the remaining 4% of revenue in the last quarter, up 6.5% sequentially and 50.2% from the December 2010 quarter.

Total revenue excluding total traffic acquisition costs came in at $7.60 billion, missing the Consensus Estimate of $8.41 billion by 9.7%.

The U.S. generated around 52% of revenue, up 4.2% sequentially and 36.1% from a year ago. The U.K., with a 10% revenue share was up 1.0% sequentially and 20.7% from last year. Other markets accounted for the remaining 38% of revenue, representing sequential and year-over-year increases of 18.7% and 14.2%, respectively.

Google stated that Western European countries, such as the U.K., France and Italy stabilized, while Spain grew for the third straight quarter. However, Germany disappointed.  Emerging markets saw growth across all product lines, according to Google.

Margins

The gross margin of 65.0% was down 22 bps sequentially and 7 bps from the year-ago quarter. The gross margin performance was the combined effect of revenue growth, a 17% sequential (34% year-over-year) increase in the number of paid clicks, and a 8% sequential decline (also 8% year-over-year decline) in the cost per click.

The number of paid clicks and cost per click appears significant, as they are indicative of higher volumes coming at lower prices. The mobile and emerging markets businesses are growing strongly, which could be the reason.

Other costs, associated with data center operation, amortization of intangible assets, content acquisition and credit card processing increased from the year-ago quarter, increasing the pressure on the gross margin.

Operating expenses of $3.38 billion were higher than the previous quarter’s $3.28 billion. The operating margin was 33.1%, up 167 bps from the 31.5% recorded in the previous quarter and down 220 bps from last year. R&D as a percentage of sales declined both sequentially and year over year.

S&M expenses declined as a percentage of sales from the previous quarter, but was up from the year-ago quarter. Google has added a large number of people in recent quarters (1,100 in the last quarter). Other than fresh recruits, the company typically adds quite a few through acquisitions (it added Motorola Mobility in the September quarter).

Non-operating losses were $18 million, down from income of $302 million in the previous quarter and $160 million in the December 2010 quarter.

Google reported net income of $2.71 billion, or 25.6% of sales, compared to $2.73 billion, or 28.1% of sales in the September 2011 quarter and $2.54 billion, or 30.1% of sales in the year-ago quarter. GAAP earnings of $8.22 a share were down from $8.33 in the previous quarter and $7.81 in the December quarter of 2010. There were no special items in the last quarter.

Balance Sheet

Google has a solid balance sheet, with cash and short-term investments of nearly $44.6 billion, up $2.1 billion during the quarter. The company generated around $3.92 billion from operations in the last quarter and spent $951 million on capex, netting a free cash flow of $2.97 billion.

Our Take

Google generates revenue primarily from the sale of advertising space on its online properties. The company is therefore, focused on protecting and growing its position in the search market through continued innovation and quality improvements.

This focus has ensured that the company remains the dominant player in search, not just in the traditional computing segment, but even more so in the emerging mobile space. Google’s Android OS has gone a long way to cementing its position in mobile. Google has also made acquisitions over time that have augmented its in-house capabilities.

Google remains focused on growth through search, mobile, display and social. With the growing importance of social networking, Google introduced Google Plus. While some have commented that Google will not be as popular as Facebook, this is really not that much of a concern and remains to be proved.

In the meantime, it is obvious that social data will be an additional tool for Google, which has been making a number of acquisitions and innovations in the space. Management stated that social relevance in search was already resulting in better conversions, although data is naturally limited given the stage of the business. We feel optimistic about Google’s current efforts in social. 

Toward the end of last year, Google stepped up efforts targeting the small and medium business (NYSEArca:SMB - News) segment. The SMB segment has played a key role in elevating Google’s position in display and we expect the company to continue chipping away at Yahoo’s market share. Google’s success in display is very encouraging, since display advertising is expected to grow very strongly over the next few years, surpassing search advertising by 2015.

Despite the initiatives to drive growth and superb execution to date that have enabled the company to maintain share in a fast-growing market, the company is now seeing weak pricing, which could continue to impact results.  Additionally, Google shares have been range-bound, as investors remain concerned about legal matters and China.

China in particular has been a sore point, since the country’s Internet usage has been growing exponentially and local players such as Baidu (NasdaqGS:BIDU - News) and Sohu.com (NasdaqGS:SOHU - News) have been the main beneficiaries. The fact that they remain in government favor is also a point to consider.

Google shares carry a Zacks Rank of #3, implying a short-term Hold recommendation.

Zacks Investment Research



More From Zacks.com

Rates

View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • Enjoy this refreshing Triple Play offer!

    Get FIOS TV Mundo starting at $79.99/mo. w/ no annual contract + 2-yr. price guarantee. Or sign for 2 yrs. & get a $300 prepaid Visa. Click here.

    AdChoicesVerizon FiOS ®Sponsored
  • Tycoon's arrest sends shock wave through Russia

    Tycoon's arrest sends shock wave through Russia MOSCOW (AP) — The arrest of a Russian telecoms and oil tycoon has sent shock waves through the country's business community, with some fearing a return to the dark days of a decade ago, when the Kremlin asserted its power by imprisoning the country's…

    Associated Press
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Costco Stores in Canada to Stop Taking American Express

    “The credit card relationship between American Express and Costco Wholesale Canada will not be renewed when it expires” on Dec. 31, the company said today in an e-mail to Canadian customers. The message was attributed to Lorelle Gilpin, vice president of marketing and membership for Costco…

    Bloomberg
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Norwich Information Security MS

    Online, accredited, top ranked. NSA Center of Academic Excellence. Recognized by the Department of Homeland Security. Download your free brochure!

    AdChoicesNorwich UniversitySponsored
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • 10 rock-solid stocks for conservative investors

    10 rock-solid stocks for conservative investors Shares with low volatility can beat their indexes with less risk Bloomberg News/Landov U.S. Bancorp is the cheapest S&P 500 stock

    MarketWatch
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

    AdChoicesBellaLabs.comSponsored
  • Don't buy Alibaba stock: 'Dean of Valuation'

    Investors should steer clear of Alibaba , valuation expert Aswath Damodaran said Wednesday. On CNBC's " Fast Money ," Damodaran, a professor of finance at New York University's Stern School of Business, noted that he was looking at Alibaba stock from the perspective of a long-term investor, not a…

    CNBC