) second quarter earnings missed the Zacks Consensus Estimate by 8
cents, on revenue that beat by 2.5%. Earnings did, however, exceed
year-ago levels by 20.3% on revenue that increased 21.7%. Google
shares were down 1.7% during the day but made up for most of the
decline after the company reported results.
While the CPC and click volume story remains more or less the
same, it is very good to see the strength in "Other" revenue, which
is an indication of the effectiveness of its diversification
This is particularly significant given the growing challenges in
its core search business. Not that its search business will go away
any time soon (or at all), but the growing use of mobile means a
greater reliance on apps than browsers, which could mean relatively
lower search traffic. In this environment, the pressure from
) is not letting up - in fact Microsoft seems to be getting ever
), which has for long kept Google as the default search option on
its devices. In this environment, social networking companies like
) are capturing user attention for increasing periods of time and
attempting new technologies like graph search and deep linking that
are keeping users away from Google.
The numbers in detail:
Gross total revenue was $15.96 billion, which was a 3.5%
sequential and 21.7% year-over-year increase, driven by stronger
revenue from Google websites.
sites was up 4.5% sequentially, while that from
was up 0.8%, resulting in a total advertising revenue increase of
3.6%. Both segments continued to grow (23.3% and 7.2%,
respectively) from the year-ago quarter. Overall, Google-owned and
partner sites brought in 69% and 21% of quarterly revenue,
revenue was up 2.7% sequentially and 52.6% year over year to around
10% of revenue. Management attributed the increase to higher Play
Store sales (apps, content and chromecast).
Total traffic acquisition cost, or
(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 1.8% sequentially and 9.4% from the year-ago
quarter (down 40 bps and 202 bps, respectively as a percentage of
TAC related to AdSense arrangements has been declining in recent
quarters, although distribution-related TAC has been increasing
steadily. The steady increase in distribution-related TAC is
significant, as it is indicative of growing competition for the
Net advertising revenue, excluding TAC was up 4.1% sequentially
and 22.3% year over year.
excluding total TAC came in at $12.66 billion, up 3.9% sequentially
and 25.4% year over year, better than our estimated $12.35
The U.S. generated around 42% of Google revenue, down 0.5%
sequentially and up 12.2% from a year ago. The U.K., with a 10%
revenue share was up 2.5% sequentially and 22.7% from last year.
Other international markets accounted for the balance, representing
sequential and year-over-year increases of 7.4% and 31.1%,
The gross margin of 61.7% expanded 34 bps sequentially and 342
bps from last year, with the year-over-year improvement positively
impacted by the exclusion of Motorola. Pricing remained a negative
as explained above. The increasing contribution from the mobile and
emerging markets, as well as growing distribution costs were other
Other costs, associated with data center operation, amortization
of intangible assets, content acquisition and manufacturing and
inventory-related costs increased slightly as a percentage of
sales, which negatively impacted the gross margin in the last
The cost per click (CPC) was flat sequentially with the 2%
decline at Google-owned sites offset by the 3% increase at network
sites. The 6% year on year decline was mainly because of the 13%
decline in network CPC (Google-owned sites were also down).
This did however generate paid click growth of 2% and 25% from
the two periods, respectively. Click volumes at Google sites were
much higher (up 6% sequentially and 33% year over year). Network
click volume growth was much slower at 5% and 9%, respectively.
Compare this with
) search, where a 15% year-on-year increase in prices allowed for a
mere 3% increase in paid clicks. So Google appears to be picking up
a lot of lower-priced clicks that Yahoo is leaving on the table
(note that Google seeing strongest growth in non-U.S, non-U.K.
Operating expenses of $5.58 billion were up 4.5% sequentially
and 25.5% from the Jun quarter of 2013. The operating margin was
26.7%, flat sequentially and down 43 bps from last year. On a
sequential basis, the higher R&D and S&M more or less
offset the stronger gross margin and lower G&A. The year on
year increase in R&D and G&A as a percentage of sales was
more significant than S&M.
Non-operating gains were down significantly to $145 million
compared to $357 million in the previous quarter and $236 million
in the Jun 2013 quarter.
Google reported net income of $3.49 billion, or 21.9% of sales,
compared to $3.65 billion, or 23.7% of sales in the Mar 2014
quarter and $2.86 billion, or 21.8% of sales in the year-ago
quarter. GAAP earnings of $4.99 a share were down from $5.04 in the
previous quarter and to from $4.77 in the June quarter of 2013.
Google has a solid balance sheet, with cash and short-term
investments of around $61.20 billion, up $1.83 billion during the
quarter. The company generated around $4.71 billion from operations
in the last quarter and spent $1.61 billion on capex, netting a
free cash flow of $3.09 billion. Google also spent $1.01 billion on
acquisitions and generated $2.31 billion from the divestiture.
Google introduced "AdWords Enhanced Campaigns" last year, which
enables advertisers to run each campaign across multiple platforms
(desktop/mobile), helping them make use of location-based data,
generate fresh leads, increase click through rates, improve
conversion and increase ROI. The longer-term impact of the
initiative should be positive because advertisers stand to gain.
Also, despite the growing competition, it is significant that
Google continues to see very strong volumes particularly from
Additionally, Google's initiatives in the ecommerce segment
(both retail and payment platforms), its Google Fibre initiative,
its Nexus, Chromebook and Chromecast 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 even after
the mobile revolution. 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
To top it all, Google has shown superb execution to date, which
makes us optimistic about its future growth.
Google shares have a Zacks Rank #2 (Buy).
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