Google Inc. (GOOG) reported another strong quarter, with earnings beating the Zacks consensus by 44 cents and revenue beating by around 37%. Shares were on an uptrend during the day, but fell off slightly after hours.
Revenue
Gross revenue of $6.67 billion was up 12.3% sequentially and 17.1% year over year. Management stated that strength was broad-based, with search, display, apps and mobile registering growth. Seasonal strength, economic recovery across many markets and favorable foreign exchange impact also contributed.
Traffic continues to improve, with total traffic acquisition cost (the portion of revenue shared with Google’s partners) increasing 10.5% sequentially. However, traffic acquisition cost as a percentage of total advertising revenue was down 48 basis points. Net revenue, excluding traffic acquisition cost was down 1.8% sequentially.
Revenue by Segment and Geography
Advertising revenue increased 12.3%, with the Google website component increasing 11.8% and the partner website component increasing 13.5%. Licensing and other revenue was also strong, growing 10.8% sequentially.
By geography, the U.S. generated 47% of revenue (increasing 12.5% sequentially), the U.K. generated 12% (up 0.9%), while other countries accounted for the balance (up 15.6%).
Margins
The pro forma gross margin for the quarter was 63.9%, up 136 basis points (bps) from the previous quarter’s 62.6%. The improvement was related to higher volumes, as the number of paid clicks increased 9% sequentially. The average cost per click increased just 2% sequentially, a further positive.
Operating expenses of $1.78 billion were higher than the previous quarter’s $1.02 billion. The operating margin was 37.2%, up 109 bps from the 40.2% recorded in the previous quarter. The increase was due to the higher gross margin, partially offset by higher R&D, S&M and G&A as a percentage of sales.
Including stock based compensation and the associated tax impact, the GAAP EPS was $6.13 compared to $5.13 in the September 2009 quarter and $1.43 in the December quarter of last year. Profit in the year-ago quarter was impacted by the $1.09 billion ($0.46 per share) impairment charge on equity investments.
Balance Sheet
The company has a solid balance sheet, with cash and short term investments of $24.48 billion, up $2.49 billion during the quarter. The company generated $2.7 billion from operations in the last quarter and spent $221 million on capex, netting a free cash flow of $2.5 billion. The company is on an acquisition spree and we may expect more acquisitions over the next few months.
Long-Term Risks
The after-market sell-off was a small decline overall and probably did not reflect the market sentiment at large. Prices could be up today. That said, we feel there are a few uncertainties.
For example, Google probably should have launched its own phone before the mobile OS. This created some problems with respect to development of apps. Now that they have, they are up against well-entrenched players in the smart-phone market. Mobile search is going to grow faster and without a strong position here, the company’s growth could slow down. This is a longer-term sort of pressure.
In January 2010, Google also parted ways with AP and is not hosting any more new articles. It is also facing problems with News Corp. (NWS).
And now China. Although Google is not going to pull out, there will be compromises and no one really knows what they will be. So its uncertain.
We think these are general reasons why people could feel a bit cautious about Google right now.
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