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The Science of Hitting
The Science of Hitting
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Google Q3 2011 Earnings

October 14, 2011 | About:

On Thursday, Google (GOOG) reported third quarter 2011 earnings. This is the second quarter in a row that the earnings report was met by support from the Street, with the stock climbing more than 5% in the next day of trading in both situations. Prepared remarks on the conference call were from CEO Larry Page, CFO Patrick Pichette, Senior Vice President of Advertising Susan Wojcicki, and Chief Business Officer Nikesh Arora; here are some of the highlights from the call and the press release:

Revenues came in at $9.72 billion for the quarter, an increase of 33% compared to the third quarter of 2010 ($7.29 billion) and 8% compared to Q2; in the words of Larry Page, “not bad for a 13-year-old.” Google-owned sites, which accounted for 69% of total revenues, increased 39% year over year to $6.74 billion (8% quarter over quarter); to date, this segment has generated $18.85 billion in revenues. Google’s partner sites, (through AdSense), which account for 27% of total revenues, increased 18% to $2.6 billion, bringing the year-to-date total to $7.5 billion. Other revenues, at just under $1 billion, made up the remainder.

Revenues from outside of the U.S. totaled $5.3 billion, representing 55% of total revenues in the quarter and up more than 40% year over year; this compares to 52% in the third quarter of 2010.

GAAP net income in the quarter was $2.73 billion (free cash flow of $3.3 billion), an increase of nearly 26% compared to $2.17 billion in the third quarter of 2010. GAAP EPS in the third quarter of 2011 was $8.33 on a slight increase in shares outstanding, an increase of 24% compared to $6.72 in the third quarter of 2010.

Like their competitors Apple and Microsoft, Google has a horde of cash on the balance sheet, which never seems to stop growing; as of September 30, cash/equivalents and short-term marketable securities were $42.6 billion, more than four times their total current liabilities.

With Google+, the company has launched 100 additional features in the past three months, and announced another milestone by surpassing 40 million users; in the words of Larry Page, “people are flocking into Google+ at an incredible rate and we're just getting started.”

On Android, the company continues to see widespread adoption, with over 190 million devices activated globally. This is important to Google for mobile advertising, which has grown 250% in the last 12 months to a revenue run rate of more than $2.5 billion.

In regard to emerging markets, management didn’t break out specific numbers, but had this to say: “What I can give you directionally is both of them are very, very important markets for us. Our products are successful. You see search traffic continuing to rise. YouTube is very popular. Chrome is very popular. So really, we're very happy with the usage of our products, and we believe there's tremendous sort of runway in product usage in those markets because of the changing characteristics of those markets, both from an online penetration perspective and the economic growth perspective of those markets… we're very, very happy with the success of those markets, with the progress of those markets. I'll just give you that as a directional statement.”

On Android, here is what Larry Page had to say about competitors: “And while [there have been] lots of people trying to attack that and so on, we see absolutely no signs that, that's effective. And ultimately, we think that other companies' actions there will alienate their customers and their relationships with the other companies. So if anything, we see our strategy is getting stronger there. Obviously, we announced our intention around Motorola, and we're serious about protecting the Android ecosystem, making sure that, that continues to be incredibly successful. But we feel good about our efforts there.” Despite what Mr. Page says, the agreements that Microsoft (MSFT) has signed with companies like HTC, Samsung, and recently Quanta, suggest that this may not necessarily be true.

As we’ve seen before, Google continues to be perturbed by Microsoft’s actions, saying, “Rather than seeing, for example, Microsoft compete in the marketplace with their own smartphones, they've really continued resorting to legal measures to hassle their own customers.” At the end of the day, there is no doubting Android’s success; it will be interesting to see how this plays out over the next couple of years between Google, Apple (AAPL), and Microsoft.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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