After a ‘not that great’ first quarter, Mountain View based tech goliath Google (GOOG, Financial) reported second quarter 2014 numbers on July 17 and this time the company was able to better impress the analysts. While the company was able to fair the revenue expectations, it missed out on the EPS estimates, similar to the first quarter. However, the numbers of the quarter suggest that much better days are ahead for the company. Let’s take a peek into the quarter’s performance.
A Peek Into The Numbers
The online search provider reported a robust top line. The consolidated revenues for Google were $16 billion that translates into a 22% surge compared to the prior year period’s $14.11 billion. For the quarter ended June 30, Google-owned site revenues were up 23% at $10.94 billion from $8.87 billion of 2013 second quarter, and revenues from partner sites increased 7% to $3.42 billion from $3.19 billion.
As always, the advertising revenues ($14.36 billion) were core to the company’s growth and dominated Google’s businesses by contributing almost 90% to the consolidated revenues. The remaining $1.6 billion came from Google Play. Though Google has made it pretty big in the smartphone and tablet markets, the company still derives the lion’s share of its top line from the search engine business, and that’s why talking about clicks makes sense. Google’s revenue based on paid clicks registered a more than decent year on year growth of 25%. On top of this, average cost per clicks shrunk 6% year on year.
Next, gross margins showed promising improvement with a 342 bps change from 2013 second quarter. However, the operating expenses increased by $1.13 billion to $5.58 billion during the quarter. Google made some solid spending on data centre construction, purchase of real estate, purchase of equipments, and on some major projects – such as Google driverless cars, Google Fiber, and a few more. Because of these spending, the net income was a little hit, and was lower than what it could have been. The Android maker posted net income of $3.42 billion and EPS of $6.08, compared to the street expectations of $6.25 a share. Nevertheless, the Wall Street was more than satisfied with the performance since net income improved year on year, and this was reflected in the stock price movements post earnings release.
At the end of the quarter, Google was sitting on a cash pile of $61.2 billion and has spent a total of $1.61 billion on capital expenditures and another $1.01 billion on inorganic growth, and got $2.31 billion from Motorola divesture.
Google’s Mega Plans for Android One
Last month, in the Google I/O, the company introduced the Android One smartphone project and has laid down some strong plans to make it successful. At the heart of the strategy lies the developing nations and particularly India. According to a latest report from IDC, the Indian subcontinent is a market where smartphone penetration was just 10% during the first quarter of 2014, despite shipments skyrocketing 186% year on year. On top of that, almost 80% of the smartphones shipped were sub-$200 devices. So, from this, it can be readily inferred that if Google can successfully crack the market with its Android One offerings, the company stands to benefit immensely.
Currently, the Indian smartphone market is dominated by the Korean phone giant Samsung (SSNLF, Financial). However, very recently Motorola was able to make its mark with Moto E and Moto G devices. In less than 6 months time, more than a million of Motorola handsets were sold. The major reasons for the success of the devices are - the build quality was great and specs were better than what competitors were providing, but price tag being the same. This is exactly what Google also plans to execute.
Google will be launching smartphones at extremely affordable rates and offer great specifications and support. The company plans to invest as much as $1 billion to promote Android One project and subsidize the devices to make them available for less than $100. Though Google Android is the dominant OS in the geographic space, Google’s device market share is negligible and this is something the company wishes to change. The tech giant plans to launch the devices in India in October, which happens to be the country’s biggest holiday season.
Departing Thoughts
Despite failing to meet the street estimates for EPS, Google has had a more than decent quarter. The company is heavily investing in technologies that will fuel its future growth and because of these investments the bottom line fell short of estimates. As the famous saying goes, a little needs to be given up at times to get even more. Google’s today’s pian will surely result in tomorrow’s gain.
