Google

On Thursday, Google faced the embarrassing situation of seeing its Q3 financial results released prematurely. The stock tanked on the results, and Google asked to have trading stopped temporarily. I’ve already seen one story suggesting that the early release “wiped out $20 billion in valuation.”

But let’s get real. The loss has nothing to do with the accidental release. It was someone else’s mistake, not Google's, and anyone on Wall Street knows that the real reason Google was trading down was the quarterly miss.

More: Google's complete Q3 2012 earnings

Stocks -- or, more accurately, investors -- always react to quarterly results. Analysts keep detailed models of their expectations, and the average of these models is known as the “consensus estimate.”  If you miss consensus, as Google did, you get punished. It really means nothing in the long term, but it gives financial media types something to get excited about for a few days.

So, Google did something the pros call “shitting the bed.” The most important headline number is earnings per share, where Google came in at $9.03 (adjusted) versus the consensus estimate of $10.65. Big miss.

Of course the way Wall Street reacts is not in alignment with how long-term investors think. And as I’ll explain, Google’s actual results are just fine. The business is doing well. But the short-term thinking in the markets has people convinced that Google isn’t a growth company anymore. Depending on your perspective, this is either hilarious, or a truly sad sign of how bad humans can behave like sheep. 

Short-term lulz, not long-term analysis

I looked at the news posted on Google prior to the conference call earlier on Thursday afternoon. Sadly, more people were interested in talking about #PendingLarryQuote -- the telltale mark that the earnings were published unfinished --  than anything else. It just shows how much journalism has turned into entertainment, even (or maybe especially) on the financial side of things. 

My personal vote for “best blog post” on Google’s financial situation ahead of the conference call was from Barons. Mid-day, it was this blog post that made it quite clear how Google’s miss was largely a result of the Motorola acquisition.  Depreciation charges were higher than analysts expected (these are a non-cash expense), and Motorola lost money versus some analysts who expected the company to be profitable. 

Now that the trading day is over and I’ve put my kids to bed, I’ve had a chance to listen to Larry Page and Patrick Pichette discuss the financials on Google’s quarterly call. They did an exceptional job. 

One of the big items that never gets reflected in headline numbers is foreign exchange. Google is an international company -- but it reports in U.S. dollars. So fluctuations in currency exchange rates -- very much outside Google's control -- affect its financial results. That’s why most big global companies also report “constant currency” results. Because no public company can control currency rates, it’s helpful to know what growth would have been in the absence of currency movement. 

Google, as a standalone business and excluding Motorola, grew 19 percent year over year. That’s nothing to sneeze at.  But without currency fluctuations, that would have been an even more impressive 24 percent, a point the execs tried to drive home during the conference call. Not too shabby.

As an advertising company, people are happy to see that paid clicks are up 33 percent year over year. But with the revenue per click dropping 15 percent versus last year, Wall Street freaks out. So it’s nice to know that on a constant currency basis, the drop would be 8 percent. Not so bad. 

Now consider that Google sees a bit less revenue on mobile ads (growing faster) and less revenue from developing markets (also growing faster), the real issue is one of mix. Google’s revenue is more and more diversified from sources where revenue per click is lower than in the USA. That’s fine by me. It’s still profitable growth, and on the back of 24 percent constant-currency revenue growth, I’m very happy.

A 220 percent increase in mobile

Now let’s talk about mobile. Because monetization of mobile is a big issue. One year ago Google told the markets that its mobile advertising business was at a run rate of $2.5 billion per year. How about the most recent quarter? Well, Larry Page proudly announced that Google now does a run rate of $8 billion in mobile revenue. 

Repeat: That's $8 billion. Up from $2.5 billion. That's a 220 percent increase. How do journalists have the balls (or lack of intelligence) to say that revenue is dropping? Are they drunk when they write this stuff? 

Yes, the $8 billion figure now incorporates Google Play (app sales and content sales). But Google’s CFO Pichette was very clear to say that the “vast majority” of the $8 billion is advertising revenue. And Larry Page has been clear in saying that monetization of mobile traffic is now a significant percentage of what they earn from desktop traffic. That, and he fully expects mobile traffic to end up being monetized to a greater extent than today’s desktop traffic.

Bold claim? Maybe. But Google is growing, Mobile revenue is on FIRE, and from where I set Google is still the only company that matters in online advertising. 

Overall, I’m happy with Google’s results (and I’m a shareholder). I’m not surprised at the Street’s short-term focus on headline revenue and earnings. I don’t see any chinks in the Google armor.

Search on.

 
There are 33 comments

Explicit says:

"I don’t see any chinks in the Google armor.

Search on."

You mean kinks?

Jet300 says:

Chink in the armor is a correct term...

chink
n
1. a small narrow opening, such as a fissure or crack
chink in one's armour a small but fatal weakness
vb
(tr) Chiefly US and Canadian to fill up or make cracks in
[perhaps variant of earlier chine, from Old English cine crack; related to Middle Dutch kene, Danish kin]
chinky adj

rdybala says:

If anything, he screwed up when said "But Google is growing, Mobile revenue is on FIRE, and from where I set Google is still the only company that matters in online advertising." Should have been "...from where I sit..."

I keep asking to be hired on as a copy editor, or even just a lowly proofreader...

If typos are my screw ups, I'll happily settle for that :)

(Yeah, I noticed that one today also.  Oops. )

rdybala says:

Sorry, no disrespect was meant; just trolling ;-)

mwara244 says:

Hire some interns man, they're free! So I don't have to read the grammar Nazi's leave comments because of a typo, I see the typo, I still understand the slip in the grammar, and I'm educated enough to still understand the error's between technology and humans and it's not like every article every day is plagued with them.

So anyways, kudos on the article, great explanation for people w/o business educations.

dovlek says:

Nice!

still1 says:

i was happy with the results but was sad to see stock coming down. hopefully it come up in few days.

Targon says:

Try one day, since I fully expect the stock price to jump today after the drop yesterday.

toukale says:

Google's problem is that everything they do is tied to search, because that's how they are setup. The problem with that is search is not as important on mobile as it is on desktop. Don't get me wrong, I am not saying search is less important on mobile, far from it. All I am saying is on mobile it's all about apps. I do a ton of search on my phone and tablet, but I don't do them on google's site, I do them in apps. I use yelp and tweeter for restaurants search. Transit apps for train times and info, the way I search have changed in the past year and I am sure a lot of people are doing similar things. Google needs to solve that, and I don't see how they can. On top of that on mobile you have less space for ads, and ads click on mobile pays less. Google's business model is under attack and they need to adjust to the mobile environment. I am not saying google is going under just that their business model is. Motorola in some ways in the future can help them generating money that's not link in some shape or form to search.

I think Google is addressing that very concern of yours with the introduction of Google Now. That is the place to do search on Jelly Bean and going forward. It is all tied together without the need to use multiple apps to search out your different needs. All of it can be done directly through Google Now. This is where I think they are hoping to monetize and utilize mobile search.

tyson.clarke says:

It's actually been like this since Voice Actions was introduced on Voice Search in Gingerbread - though obviously not as pretty.

It's just that Google are TERRIBLE at tooting their own horn. They'll plug everyone elses product, but seldom their own. I'm glad Google Now is starting to see some application on commercials now - but it is still a far cry from how much effort Apple makes at plugging their own stuff.

Really looking forward to the day they finally integrate bluetooth support and setting calendar appointments in Google Now.

I completely agree with this article in that we have to look at long term investments not the short term. Even Motorola can improve over time. Right now Motorola is fairly new in acquisition so Google hasn't begun to reap the benefits of them... However their Razr class phones open doors to a huge market and especially with the latest model the Razr i which also involved a coop with Intel I think they will get on their feet in time and even turn a good profit. One thing I think Google could consider also is to make the Razr available on all carriers. Currently it only resides on Verizon Wireless which is probably due to some exclusivity contract signed at the time of creation of the original Razr. However once that contract expires Google needs to look at the Razr like it did with the Nexus. Possible create a vanilla Android phone with the amazing battery life of the Razr Maxx and the processing power of the Razr i. That would be an amazing phone.

DrDoppio says:

Thanks for the informative analysis. I thought that the most underappreciated part of the report was all the new products introduced this quarter - 19. They will take some time to generate revenue (even if the Nexus 7 was already mentioned in a positive note -- off-topic, but mine is in the mail as we speak, hehe). Looks like the drop in stock price can be used as an investment opportunity.

swyost says:

Actually they are every bit as bad as people think and are compounded by the botched release of the data.

brendilon says:

Thanks for the informed and well-reasoned insight.

papire says:

I read the statements, and then I "googled":
"Are Google earning so bad?", that is how I landed here.
I also thought that the earnings were not that bad, per se.

Always comparing to analysts estimates (15 October, upgraded up to $800.00!)is tricky: each time a stock nears a target, there is always an analyst ready to upgrade and up the target.
Google had not yet reached the last target, but on what was the target based?
We the "retail investors" do not know.
Just look at the crazy behavior of analysts for the NYT:
http://elite.finviz.com/quote.ashx?t=NYT&ty=c&ta=1&p=d

This is the problem when a stock is held by big institutions: they can afford analysts...

But, if I had owned shares of Google, I would be mad as hell: I always get off any position before the results come out, (for better or for worst).
How the markets react to earning releases is so unpredictable.

patfactorx says:

The real problem is that growth is slowing and Google is finding a hard time figuring out ways to actually make profit in mobile. Their margins aren't getting better.

papire says:

I guess Google will soon do like Apple, start a buyback program, and give a dividend and recognize it has turn into a blue chip and is less a growth company

Your assertion:  "Google is finding a hard time figuring out ways to actually make profit in mobile"

The numbers:  Google is doing $8 BILLION in annual revenue from mobile, versus $2.5 billion on year ago.  Ad revenue alone "only " trippled or so.  

toukale says:

That number is very deceiving, it includes everything on mobile not just ads. It include the play store which is consist of books, apps, music which they have to split with their partners. You do that when you have something to hide, same way amazon never release how many kindle fire they sell.

bworley50 says:

With all due respect, you're a moron. Revenue is revenue, the more Android devices that are activated, the more revenue they will receive from the Play Store. Apple make a lot of money on hardware, yes, but they also make a huge amount of revenue from iTunes. People made the same argument you're making about Amazon for the past several years, and look at it now. They're not hiding anything. Both companies have said they will trade short term hardware-related device losses for long term revenue streams. It's called COGS.

toukale says:

There is no need to call me a moron, we can disagree on how they make money. Amazon reported 13 billion on revenue and less than 8 million in profits. Are you kidding me? This is not a sustainable business model. Everyone keeps saying you have to go long with amazon, my question is how long is that? Their model is all base of hope of making a killing sometime in the future. We all know the future is not promised to anyone or any business. I like amazon btw, I buy from them all the time but their business model is questionable to me long term.

bworley50 says:

Sure, their business model to become the largest retailer the globe has ever seen is questionable, yeah right. There are systematically putting large corporations out of business. Next stop on their path of destruction is Best Buy and Wal-Mart. When people talk about Amazon, all they talk about is the Kindle and Kindle Fire, as if the rest of their business doesn't exist. Low profit margins on retail items are made up on volume. Also, you do realize that Amazon has ZERO short or long term debt. They have stated that they are doing this ON PURPOSE during the short-run. Google, conversely relies on ad revenue, but when they actually increase their revenue from Android, people bash them. You should probably re-evaluate and realize that these guys know exactly what they're doing.

toukale says:

Look you are not going to get anywhere on this site if you post anything that does not paint a rosy picture for google. I know google is not going to go bankrupt, but what I also know is that people's search habit on mobile is different than what it is on desktop. I still have google as my default search page on my mobile device, that's not going to change anything soon for me. The problem for google is that on mobile I do at least 50% of my search through apps. Every time I do that I am not generating them any money. They need to adjust their business model to the app world that we currently live on mobile.

diskoman69 says:

Actually, through the many diverse deals that Google has you probably ARE generating revenue for Google. Many apps have their search functions powered by Google. In addition, the advertising network that many apps use (AdMob) is Google. The way things are looking, Google will have MORE revenue streams on mobile, not less. Yes, each stream may generate less per user, but if there are more streams, more users, and more time of use, Google is then positioning itself very well for the mobile computing era. I actually think this is also the reason they have slowly but surely stepped further and further into offering their own hardware: lock-in of platform and content, generating more revenue for their core business.

toukale says:

The thing is this is turning into a platform fight between apple, google and microsoft. Microsoft will be using bing, apple by all indication will dump google eventually sometimes in the future if and when that happens that will be 2/3 of mobile devices that will not be powered by google search. All the android activation that people keep yelling about, are very misleading because they are cheap feature phones. Most of those number are coming from asia in places like china and india and those places use their own local search instead of googles. Baidu is king of search in china and that's home to worlds biggest mobile users and google is not there. Once you have a platform war, google will have no access to search those platform which will hurt them. Google know this is coming. That's the reason earlier this year Sergey Brin sounded the arlarm about having an open internet, not beacuse he cares so much about you are I but because mostly it would put a big hurt on google's bottom line. http://www.guardian.co.uk/technology/2012/apr/15/web-freedom-threat-goog...
http://www.cbsnews.com/8301-501465_162-57414594-501465/apple-facebook-th...

TenshiNo says:

"...and when that happens that will be 2/3 of mobile devices that will not be powered by google search."

Please cite your source on this number. This contradicts every pole and market survey that's come out in the last year by a *wide* margin.

Google's profit was less than expected, but that doesn't necessarily mean their model isn't working. Like a previous comment said, Google powers *many* search engines, licenses out their maps and makes money from numerous places. And lets not forget that searching from Google.com is not the only way they make ad revenue. All those people playing free versions Angry Birds and Plague Inc are using Google's ad sense system, which makes them money.

Also, there is no such thing as an Android-powered "feature phone". Yes, there are low-end phones out there that are Android-powered, but (almost) all of them are still able to do everything a high-end Android phone can do, including search using Google's engine.

Also, with your references to Sergey Brin, I'm sure he does see that aspect of it, but everything I have read about the man (all of the Google founders, actually) leads me to believe that they are tech nerds who do actually, genuinely want to see the web remain open. And I think both of those articles somewhat miss the point of his words. They portray his comments as if he was trying to say that "Apple and Facebook will kill the internet" when that's really not what he said. Imagine if Apple decided with iOS 7 that they dislike Google *so* much that they were going to add code to iOS to make it so that no iPhone or iPod touch was able to communicate with any of Google's servers. Yes, that would be bad for Google, but it would also be bad for us. Imagine if Google did the same thing to Apple's servers. Then Microsoft prevented access to Google and Apple. This is an idea that has been bantered around in one form or another for years. His comments reflect his fear that maybe, one day, something like that will actually come to pass and companies will begin trying to actively close off their users from the rest of internet.

You can say it's simply greed talking, but you have to remember that the model on which he advocates means that people could also just as easily not use Google.

toukale says:

.

fillossofer says:

Mobile is the new Internet. Google is going to RULE mobile.

Motorola is for Google Goggles. Once they release Goggles, Motorola will slay. In the mean time they'll shed the set-top box business and make some phones.

Anyone who thinks yesterday wasn't a ripe buying opportunity can sell me their shares.

TenshiNo says:

lol +1

Although I think you're mistaken in one comment:

"Google is going to RULE mobile."

Google has been ruling mobile for a little while, now ;)

My head hurts after reading that lol...

OK, then what's with this info that Google will take a dive in 5 years? The Big Goog has been losing money month after month since so many of us are using cell phones & no one can or wants to get their advertisements into our cell phones?