Google Inc. (GOOG) reported third quarter results that blew away all estimates. Earnings beat the Zacks Consensus Estimate by a dollar and 20 cents. Revenue beat the consensus by around 40%.
Revenue
Gross revenue of $5.94 billion was up 7.6% sequentially and 7.3% year over year. Management stated that strength was broad-based, with all served markets showing signs of exiting the recession.
Traffic continues to improve, with traffic acquisition cost (the portion of revenue shared with Google’s partners) increasing 7.7% sequentially. However, traffic acquisition cost as a percentage of total advertising revenue was down 15 basis points. Net revenue, excluding traffic acquisition cost was flattish sequentially (down 0.6%).
Advertising revenue increased 7.9%, with the Google website component increasing 8.3% and partner website component increasing 7.0%. Licensing and other revenue was flattish (up 0.8%).
By geography, the U.S. generated 47% of revenue (increasing 7.3% sequentially), the U.K. generated 13% (up 7.0%), while other countries accounted for the balance (up 8.2%).
Operating Results
The pro forma gross margin for the quarter was 62.8%, up 72 basis points (bps) from the previous quarter’s 62.1%. The improvement was related to higher volumes, as the number of paid clicks increased 4% sequentially. This was partially offset by the average cost-per-click, which increased 5% sequentially.
Operating expenses of $1.34 billion were higher than the previous quarter’s $1.26 billion. The operating margin was 40.2%, up 99 bps from the 62.1% recorded in the previous quarter. The increase was mainly on account of the higher gross margin and helped by lower R&D, S&M and G&A expenses.
Excluding the impact of stock compensation expenses and the associated tax impact, the pro forma net income was $1.88 billion or 31.7% net margin, compared to $1.72 billion or 31.1% in the previous quarter and $1.56 billion or 28.2% in the year-ago quarter.
Including the special items, the GAAP EPS was $5.13 compared to $4.66 in the June 2009 quarter and $4.06 in the Sep quarter of last year. Profit in the year-ago quarter was impacted by the $95.1 million (30 cents per share) settlement amount paid to the Authors Guild and the Association of American Publishers.
Balance Sheet
The company has a solid balance sheet, with cash and short-term investments of $21.99 billion, up $2.65 billion in the last quarter alone. The company generated $2.7 billion from operations in the last quarter and spent $186 million on capex, netting a free cash flow of $2.5 billion. Capex in the last quarter was related to its data center operations. Management has stated that it is ready to make suitable acquisitions as it deems fit.
Read the full analyst report on “GOOG”
Zacks Investment Research
