Google Tops Ests, CPC Still Under Pressure

Zacks

Google Inc (GOOG) reported solid first-quarter earnings of $10.07, exceeding the Zacks Consensus Estimate by $1.24, or 14.0%. Shares had dropped 2.1% during the day, but gained back 1.4% after the company announced results.

Revenue

Google’s gross revenue came in at $13.97 billion, representing sequential and year-over-year growth of -3.1% and 31.2%, respectively. Excluding the $1.1 billion contribution from Motorola, revenue was up 21.7% from the year-ago quarter. The Mar quarter is typically a slow one for Google, since it follows the seasonally stronger Dec quarter.

As a result, revenue from both Google-owned and partner sites softened sequentially. While Google sites were flat, partner sites declined 5.1%, resulting in a total ad revenue decline of 1.4%. Both segments continued to grow very strongly (18.2% and 12.1%, respectively) from the year-ago quarter, the 14th straight quarter of double-digit year-over-year growth. Overall, Google-owned and partner sites brought in 62% and 23% of quarterly revenue, respectively.

Other revenue grew 26.5% sequentially and 146.8% year over year to around 8% of revenue. Management attributed the increase to higher Play Store sales (including hardware and ecommerce) but admitted that the very strong year-over-year growth was partially attributable to a change in the Play app revenue recognition policy. App revenues are now being recorded on a gross basis, with carrier/OEM payments included in the cost of sales whereas previously, just the net amount was included in total revenues.

The Hardware and Other segment (Motorola) accounted for a little over 7% of revenue, down 32.8% sequentially. Management expects the business to remain lumpy in the near term, although the last quarter likely included some seasonality.

Total traffic acquisition cost, or TAC (the portion of revenue shared with Google’s partners and amounts paid to distribution partners and others who direct traffic to the Google website) was down 3.9% sequentially and up 18.0% from the year-ago quarter. However, while the increase in TAC related to AdSense arrangements is declining, distribution-related TAC is on the rise. This is significant, as it indicative of growing competition for the Google platform. Net advertising revenue, excluding TAC was flat sequentially and up 15.9% year over year.

Total revenue excluding total traffic acquisition costs came in at $11.0 billion, 12.7% lower than our estimated $12.6 billion.

The U.S. generated around 45% of Google standalone revenue, down 2.6% sequentially and up 19.7% from a year ago. The U.K., with an 11% revenue share was up 6.3% sequentially and 20.6% from last year. Other international markets accounted for the remaining 44% of revenue, representing sequential and year-over-year increases of 0.4% and 21.7%, respectively. Motorola derives more than half its revenue from the U.S. and has a limited presence in the U.K.

Margins

The gross margin of 57.9% expanded 101 bps sequentially, while declining 648 bps from last year. The lower-margin Motorola and other hardware revenue played a major role, since Motorola didn’t contribute to the year-ago quarter and declined sequentially, positively impacting the mix of business in both comparisons.

The standalone Google gross margin was 60.3% (down 120 bps sequentially) compared to standalone Motorola’s 20.6% (up 319 bps sequentially). The advertising gross margin was the combined effect of revenue growth, a 3% sequential (20% year-over-year) increase in the number of paid clicks, and a 4% sequential (4% 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. This is most likely because of the increasing contribution from the mobile and emerging markets, as well as growing distribution costs.

Other costs, associated with data center operation, amortization of intangible assets, content acquisition, credit card processing and manufacturing and inventory-related costs increased significantly as a percentage of sales, which also negatively impacted the gross margin in the last quarter.

Operating expenses of $4.55 billion were down 5.5% sequentially and up 31.2% from the Mar quarter of 2012. The operating margin was 25.4%, up 182 bps sequentially and down 647 bps from last year. All except G&A costs declined sequentially as a percentage of sales although cost of sales also increased from the year-ago quarter.

Non-operating gains were $134 million, down from $152 million in the previous quarter and $156 million in the Mar 2012 quarter.

Google reported net income of $3.39 billion excluding $66 million in restructuring charges, or 24.3% of sales, compared to $2.91billion, or 20.2% of sales in the Dec 2012 quarter and $2.89 billion, or 27.1% of sales in the year-ago quarter. GAAP earnings of $9.94 a share were up from $8.62 in the previous quarter and $8.75 in the Mar quarter of 2012.

Balance Sheet

Google has a solid balance sheet, with cash and short term investments of nearly $50.10 billion, up $2.01 billion during the quarter. The company generated around $3.69 billion from operations in the last quarter and spent $607 million on capex, netting a free cash flow of $3.09 billion.

Our Take

Google’s results are indicative of continued growth coming at lower prices. The competitive landscape has changed a lot in the last few years and the company needs to do all it can to maintain its lead in the advertising market. Its traditional competitor Yahoo (YHOO) is pulling up its socks and Microsoft (MSFT) should also not be discounted. But the most dangerous of all is likely to be Facebook (FB), which has crept up on the online advertising market.

Facebook’s Home has the potential to be a game-changer and Google+ just hasn’t gained enough momentum to counter this move in kind. We are still waiting for Google to come up with something, but we are incrementally cautious given the changing competitive environment. We also anticipate margin pressures as a result of the increasing competition and a growing hardware business.

At the same time, we note that Google’s initiatives in the ecommerce segment (both retail and payment platforms), its Google Fibre initiative, its Nexus and Chromebook platforms, the GDN and DoubleClick platforms and the success of YouTube make it a power to reckon with.

Google generates revenue primarily from the sale of advertising space on its online properties. It has therefore focused on protecting and growing its position in the search market through continued innovation and quality improvements. This focus has ensured that it remains the dominant player in search across desktop and mobile platforms.

Google’s Android OS has gone a long way toward cementing its position in the mobile segment. Google has also made acquisitions over time that have augmented its in-house capabilities.

To top it all, Google has shown superb execution to date have kept the shares buoyant. As a result, its share price has appreciated more than 27.8% over the past year.

Google shares therefore carry a Zacks Rank #2 (Buy).

Read the Full Research Report on GOOG

Read the Full Research Report on FB

Read the Full Research Report on YHOO

Read the Full Research Report on MSFT

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
  • Our Best-Ever Value Plan for Your Business

    New prices on our Mobile Share Value Plans on the nation's most reliable 4G LTE network.

    AdChoicesAT&T® Small BusinessSponsored
  • 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
  • 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
  • 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
  • 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
  • "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
  • Accomplish your career goals

    At Capella University, you can learn the skills you need to succeed. Why wait another day? Get started today.

    AdChoicesCapella UniversitySponsored
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 1 Tip To Lose Belly Fat

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

    AdChoicesagoodcooksSponsored
  • 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
  • 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
  • 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
  • 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.
  • 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
  • Top 3 Reasons To Open A Fidelity 529 Account

    1. Tax advantages. 2. Flexible options for your savings. 3. Any child can benefit. Start saving for college with the UNIQUE College Investing Plan.

    AdChoicesFidelity InvestmentsSponsored
  • 6 Things Debt Collectors Wish You Knew

    The work debt collectors do is not popular, and has become increasingly derided by those who don’t like what we do or simply don’t know the facts about debt collection. Too often, debt collection is painted with a broad brush to create a portrait that isn’t accurate, and doesn’t properly educate…

    Credit.com