Google Inc. (GOOG, Financial) reported its first quarter revenue of $17.26 billion, a whooping 10.5% increase over the first quarter 2014. However, if not for the negative effects of the strong US dollar, the internet giant could have reported around 17% increase in revenues. Stocks witnessed an increase of 3.5% to $577 after the financial report for the first quarter was revealed.
Number mix
According to a data compiled by Bloomberg, analysts estimated net revenues to be $14.04 billion for the first quarter this year. However, the net revenue earned by Google was $13.9 billion as compared to the $12.2 billion earned in the same period last year. The company is said to have missed analysts' expectations for over six out of nine consecutive quarters. The net revenue does not include the payments made to the advertising partners. For the first quarter, the computer software giant reported net income of $3.6 billion, or $5.20 per share. For the same period ended 31st March 2014, Google reported net income of $3.5 billion, ie $5.04 per share. On a profit basis, without including the cost of stock options & tax benefits, analysts' had expectations of $6.63 per share. Google, however, did not live up-to the expectations as the profit earned was $6.57 per share.
What also saw a decrease was the average price of online ads. In other words, the CPC (Cost per click) reduced 7%. Cost per clicks is the amount that advertisers are willing to pay when a particular ad is clicked. The main reason for the decrease was the increasing use of smartphones and tablets. When users access Google's services through these mediums, revenue decreases as ad rates on mobile devices are lower than that of desktop and PC's. Paid clicks, however, saw an increase of 13%. The advertising sales increased to $15.51 billion. Around 55% revenue is earned from other countries across the world other than US. Hence, the strong dollar affected the world's No. 1 internet giant. If not for the dollar's rising value, revenue would have increased 17%.
Management Views
CFO Patrick Pichette said that the company has great strengths in its mobile search area. Though the ad rates are lower on smartphones, the increasing number of people using smartphones have proved to be the main source of revenue. Ad revenue from the video-sharing platform YouTube has also increased over the years, Mr. Pichette said. Google is facing extreme pressure from competitor Facebook Inc. (FB, Financial) in the mobile ad sector. In order to counter this, Google adjusted its algorithm to boost the rankings for sites that meet its criteria for mobile display and penalize those sites which are not user-friendly.
The company has its own share of problems as well. The EU trading bloc alleged that Google was abusing their power to push their products. Besides, officials from India's Competition Commission also conducted a probe for unfair trade practices. Following their footsteps, Argentina, Russia, Canada among many others have also started conducting investigations.
Investor’s take
Investors have shown mixed reaction towards the reports. Colin Gillis, an analyst at BGC said that the results could have been worse. Some investors are relieved that the performance was above-the-mark, he said while some are not so happy with the performance. Investors have a reason to worry as regulations would reduce the growth rate for Google or would affect its chances to undertake acquisitions. On the other hand, investors could be positive given the valuation relative to other mega-caps. The new CFO Ruth Porat, who succeeds Patrick Pichette could either introduce more product metrics or could provide her valuable guidance to increase quarterly earnings. She could also change the way the company currently shares dividends and repurchases. Let's wait to see if Ms. Porat earns the confidence of investors and shareholders by her effective management as a CFO.
