) reported fourth-quarter earnings of $8.68, exceeding the Zacks
Consensus Estimate by 7 cents. Shares appreciated 5.0% in
Google's superior algorithms have consistently attracted more
users and generated better conversions. Therefore, the
company has generated much stronger revenues than competing
search engines from
). While margins have thus far been far superior, the scenario is
changing now because of the addition of Motorola.
Google's gross revenue touched a record $14.4 billion,
representing sequential and year-over-year increases of 2.3% and
36.2%, respectively. Excluding the $1.5 billion contribution from
Motorola, revenue was up 21.9% from the year-ago quarter.
Google is very strongly positioned in the mobile segment,
where smartphones and tablets from
), Samsung and others have been making strong headway. This
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 on traditional computers, 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 few years). Google
websites accounted for around 60% of quarterly revenue, while
partner sites accounted for another 24%. Total advertising
revenue was up 11.2% sequentially and 18.7% year over year.
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
up 11.2% sequentially and 3.1% from the year-ago quarter.
However, we do not consider this a reason for concern since the
traffic acquisition cost as a percentage of total advertising
revenue was consistent sequentially and down 384 bps from the
While both items in TAC went up in the last quarter,
distribution payouts were up more significantly. Net advertising
revenue, excluding TAC was up 11.2% sequentially and 25.2% year
Other revenue accounted for 6% of the total in the last
quarter, up 24.5% sequentially and 102.2% from the Dec 2011
The Hardware and Other segment (Motorola) accounted for more
than 10% of revenue in the last quarter. The 14.8% sequential
decline was because of the sale of the home business, which the
company treated as discontinued operations in the last
Total revenue excluding total traffic acquisition costs came
in at $11.3 billion, 8.3% lower than our estimated $12.4
The U.S. generated around 46% of Google standalone revenue, up
10.6% sequentially and up 20.3% from a year ago. The U.K., with a
10% revenue share was up 7.3% sequentially and 22.7% from last
year. Other international markets accounted for the remaining 44%
of revenue, representing sequential and year-over-year increases
of 14.6% and 23.5%, respectively.
Motorola derives more than half its revenue from the U.S. and
has a limited presence in the U.K. Both the U.S. and other
international markets were impacted by the decline in Motorola
revenue in the last quarter.
The gross margin of 56.9% declined 811 bps from the year-ago
quarter, but expanded 339 bps on a sequential basis. The decline
in Motorola revenue share resulted in a positive mix, which
helped the sequential comparison in the last quarter. However,
the absence of any Motorola revenue in the year-ago quarter had a
negative impact on the year-over-year comparison.
The standalone Google gross margin was 61.5% (up 6 bps
sequentially) compared to standalone Motorola's 17.4% (down 47
bps sequentially). The advertising gross margin was the combined
effect of revenue growth, a 9% sequential (24% year-over-year)
increase in the number of paid clicks, and a 2% sequential
increase (6% 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 and distribution costs are increasing, which
could be the reasons.
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 $4.81 billion were flat sequentially and
up 42.6% from the Dec quarter of 2011. The operating margin was
23.5%, again impacted by the higher hardware-related costs. All
except G&A costs declined sequentially as a percentage of
sales although all costs were up from the year-ago quarter.
Non-operating gains were $152 million, up from $63 million in
the previous quarter and a loss of $18 million in the Dec 2011
Google reported net income of $2.9 billion, or 20.2% of sales,
compared to $2.2 billion, or 15.4% of sales in the Sep 2012
quarter and $2.7 billion, or 25.6% of sales in the year-ago
quarter. GAAP earnings of $8.62 a share were up from $8.53 in the
previous quarter and $8.22 in the Dec quarter of 2011. There were
no special items in the previous and year-ago quarters.
Google has a solid balance sheet, with cash and short term
investments of nearly $48.1 billion, up $2.4 billion during the
quarter. The company generated around $4.7 billion from
operations in the last quarter and spent $951 million on capex,
netting a free cash flow of $3.0 billion.
Google reported solid fourth-quarter results that were
stronger than the Zacks Consensus Estimate indicated. The
strength was broad-based across Google and partner sites and
driven by growth across geographies. Motorola remains a drag,
although management has disposed of some of the business and has
a specific strategy with respect to the rest. Google's growth
strategies are clearly paying off despite the deterioration in
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.
Despite the many legal entanglements related to competitive
matters, Google's initiatives to drive growth and superb
execution to date have kept the shares buoyant. As a result, its
share price has appreciated more than 20% over the past year.
Google shares therefore carry a Zacks Rank #2 (Buy).
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