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.
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 14
th 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
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.
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
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.
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.
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
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).FACEBOOK INC-A (FB): Free Stock Analysis ReportGOOGLE INC-CL A (GOOG): Free Stock Analysis
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