Just a day after Google (GOOG, Financial) announced the Nexus 6 release date, the management announced the third-quarter earnings that left analysts disappointed as it missed their estimates both in terms of top and bottom lines. Soon after the results were out, the company was down by more than 3% in after-hours trading. Let’s take a brief look at what got highlighted during the quarter’s conference call to gain better insight into the quarter earnings.
Cost per click slide continues
In a Forbes report while speaking on Google’s third quarter preview, it had been emphasized that all eyes were set to find out how the mobile advertising efforts of Google come through in the third quarter, mainly with respect to the cost per click which advertisers pay when users click on an ad posted on Google. The last few quarters have seen the cost per click decline, a signal that suggests that Google has not been able to adapt to an increasingly mobile world.
In the quarter, average cost per click fell by 2% from that noticed last year and was flat from the last quarter. This was the key element that contributed to weakening of the revenue. However, the aggregate paid clicks increased 17% year-over-year partially offsetting the cost per click slide. Breaking down Google’s revenue – site revenue saw a jump of 20% from last year’s similar quarter, network revenue was up 9% from the year-ago quarter and international revenue was up 2% from the preceding year’s quarter.
Revenue and earnings miss predictions
The tech titan reported consolidated revenue of $16.52 billion, and $6.35 per share adjusted earnings – revenue growing 20% and earnings per share by 13% from the last year’s similar quarter. However, on a GAAP basis Google’s EPS was $4.09 per share, down from $4.38 per share reported a year ago.
Despite solid growth on top and bottom lines, Google fell short of Wall Street’s expectations which had estimated $16.57 billion as consolidated revenue and $6.53 per share as earnings per share. As ad clicks grew at the slowest rate since the third quarter of 2010, Google’s results clearly missed the target estimates for the quarter.
Head count and costs on the rise
The cost and expenses at Google has literally gone up this quarter. The company’s earnings provides details on its increasing cost base. Operating expenses, other than cost of revenues, was $6.10 billion this quarter, or 37% of revenues, compared with $4.58 billion in the third quarter of last year which represented around 33% of revenues.
Other cost of revenue was also up from $2.44 billion a year ago to $3.35 billion in the third quarter of 2014. This was mostly attributed to data center operational expenses, hardware inventory costs and content acquisition costs.
The company has been on a hiring spree this quarter, with the head count showing a bump of 3,000 new employees being added this quarter. This brings the entire workforce count to around 51,000 workers, plus additional 3,000 or so Motorola workers.
Cash flow stability stays evident
Though the company apex was around $2.42 billion majorly due to new data center construction, production equipment and real estate purchases, the company still generated solid cash flow and the net cash generated from operating activities stood at $5.99 billion, up from $5.08 billion in the third quarter of 2013.
Also the free cash flow generation was strong with $3.58 billion generated as on this third quarter, compared to $2.79 billion in the third quarter of last year. The company remains cash rich with cash and cash equivalents of $62.16 billion at the end of the quarter, compared to $58.72 billion as on December 31, 2013.
Final takeaway
Google still remains an incredibly strong company having enough cash to reward its investors. But it is very much an advertising company with ad revenues accounting for the 88.9% of the total revenue earned during the quarter. Though the search engine giant was not able to meet the analysts' expectations, Google still has a lot of steam, and investors can just hold on to their investment positions to earn future returns.
