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Will Google Continue To Roll Smoothly After The Q2 Earnings?

August 08, 2014 | About:

Google (GOOGL) recently posted a solid set of numbers for the second quarter of the financial year, beating analysts’ revenue estimates but missing on the analysts’ profit estimates for the quarter. Reacting to the earnings release, Google’s stock price was also up about 1.5% in after-hours.

Google’s Q2 earnings came with no major disappointments, and whatever negative aspects were there were clearly offset by the major positives of the quarter. Let us take a quick peek into the key highlights of the period.

Revenue shows solid growth

Google’s revenue grew at 22% year over year to $15.96 billion, outpacing analysts’ estimates of 19% growth for the quarter ended June 30. Revenue showed a steep incline for both the core and non-core business units of Google. The Mountain View company, which makes over 90% of its core revenue through advertisements, saw its advertising revenue grow by an overall 19% when compared with the year-ago period. Ad revenue from Google Owned and Operated sites grew at a faster rate than that from Google’s network partners.

Source: Google Earnings Presentation

Another interesting trend in Google’s core business has been the decline in cost-per-click (CPC) through the last few quarters. Similar decline has been noticed for other operating search engines in the market as well. However, the positive side to this is that, in the second quarter, the decline in CPC for Google was just 6% as against the average decline of 10% noticed in the last two quarters for the company.

On the contrary, the paid clicks continue to show an uptick that has grown at 25% year over year this quarter against 23% growth a year ago. This brisk growth in paid clicks was primarily aided by Google’s owned sites, while the network partners did not contribute much.

So, the key take away from the revenue angle of Google has been the impressive growth rate of 22% seen this quarter, which surpassed its five year CAGR of 20.6% (excluding Motorola unit) and is only a distance away from the unadjusted five year CAGR of 22.4% (including Motorola).

Google’s cash flow and profits remains firm, though earnings slightly miss expectations

Google registered operating and net profit margins of 26.7% and 21.4% in the quarter. Operating profit was up by 22.7% standing at $4.26 billion, from $3.47 billion reported in the similar quarter of last year. Meanwhile, net profit increased 6% to $3.42 billion from $3.23 billion reported a year ago.

The earnings per share excluding one-off expenses came in at $6.08 compared to $4.96 a year ago but missed analysts ‘expectations of $6.25 per share. The increase in capital expenditure by 26% from the last year totaling $2.6 billion this quarter had a bearing on the earnings.

The chief spending has been around building data centers which forms the key for growing Google’s cloud services business, buying real estate and procuring machinery. The management has recently declared that capital expenditures would remain on similar lines in the upcoming quarters as well since Google is currently on a hiring spree and has already hired about 2,200 new employees during the quarter.

However, irrespective of the company costs, Google reported operating cash flow of $5.63 billion, up nearly 20% from that reported a year ago. Also, the free cash flow generation remains strong standing at $2.98 billion. This has in turn helped in maintaining a solid balance sheet with cash and short-term investments of around $61.2 billion as on June 30, up $1.83 billion during the quarter.

Wrapping up

Google’ growth story will continue as the company’s disciplined investment approach for future growth could possible yield better results and lead to overall increase in both its top and bottom lines in the upcoming quarters as well. Also, if mobile advertisement clicks increase in the coming years for Google, as predicted by analysts, it could ideally serve as an impetus for sustaining this growth momentum and to keeping its profit engine rolling.

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