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October 18, 2012

Google Faces Analysts After Earnings Problems: Did Wall Street Overreact?

By Peter Bernstein, Senior Editor

Earlier today I posted a piece on Google not only prematurely releasing its earnings ahead of its call with Wall Street analysts, but also noted the turmoil that was caused when they missed Street estimates. This sent the stock into a nosedive, caused a temporary halt in trading, and raised eyebrows not just about Google but Facebook as well. It is worth noting that the stock closed the day down 8.05 percent off its low of down 11 percent and is slowly coming back in afterhours trading. 

I am not going to produce the results again. These can be read in their entirety from the company’s statement on the subject. I will note that in the updated release, CEO Larry Page whose comments were “pending” in the SEC (News - Alert) filing is quoted in the final version saying, “We had a strong quarter. Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter…I am also really excited about the progress we’re making creating a beautifully simple, intuitive Google experience across all devices.” 

Is this a case of inhabiting what the reality distortion field that many have said the late Steve Jobs (News - Alert) was a purveyor of, or did Wall Street overreact? I think the latter and will explain.

Image via Shutterstock

A Page Turner

A still hoarse Larry Page met the analysts, along with Patrick Pichette, Senior Vice President and CFO and Nikesh Arora, Senior VP and Chief Business Officer. Below are some highlights of what they had to say.

Page started by stating, “Sorry for the scramble earlier today,” which it turns out was caused by human error at R.R.Donnelly. He reiterated the quote above about a strong quarter and said he thought this was “not bad for a teenager,” a reference to the fact that the company is 14 years old. 

Page then got down to business. After a short dissertation on how the world is going multi-screen, he outlined how and why "Screen independence is at the core of our strategy...Google is super well placed to take advantage of the opportunities” the multi-screen world will offer. He added that, “We took a big bet on Android…Most people thought we were nuts. There are not one half billion Android devices.”

In closing his remarks he noted that as we move to a multi-screen world Google is uniquely positioned because of its strengths in desktop search and Android to provide a super simple way for advertisers to better reach targeted customers and for users to have great experiences. “Tech should do the hard work… It is truly an exciting time to be at Google.”

Patrick Pichette, gave some much needed context to the numbers. The big one was that, “Cost-per-click was down 15%, but currency headwinds had a significant impact. In fixed foreign exchange standards, it would be down about 8% year-over-year and only 1 percent quarter to quarter.” He also noted that while the company is still early in the monetization of mobile, “Google now has $8 billion run rate in mobile. This year, it adds gross revenue from the mobile sales of Google Play content and consumer spending on the Play apps but overall this is up from roughly $2 billion from last year.”

Nikesh Arora, chimed in with a view on industry trends of which he sees four:

·         Multi-screen consumers, convergence will enable common campaigns. He noted that we are just the beginning and context sensitivity will lead to better monetization. He cited a T-Mobile example where click-to-call ads generated 20 million calls per month.

·         Deliver more precise ads to consumers. Google Now and other capabilities will do a better job of connecting marketers to consumers. In this area click to rates and conversion rates are going up. 

·         Real headway making offline ad campaigns tie into online ones. This drives engagement and they are already see metrics that YouTube (News - Alert) is more efficient than TV and has a larger addressable audience by far. 

·         Cloud computing in the enterprise. Retail and education sectors are growing, and all of the Google tools for collaboration are starting to be adopted.

Page noted a bit later that Chrome on mobile devices is hardly deployed and that the consolidation of Google capabilities into a simple easy to use integrated view on the world is going to make this a very important capability and an engine for sustained growth. 

The session then went into Q&A format, and as per usual the financial analysts picked over the various parts of the earnings. There were few surprises in the answers as the foreign exchange impact was again highlighted along with the fact that expenses are mainly in the U.S. while revenues are international and are impacted by the significant depreciation of the dollar. This was followed by a defense of the company’s hedging strategy which they say involves hedges using profits not revenues and has been stewarded well in terms of shareholder value. There was also sprinkled throughout observations that Motorola (News - Alert) is a work in progress and that hardware product cycles need to be viewed based on 12-18 month realities and hence there is “turbulence in the numbers” and that conclusions should not be drawn based on Google owning the asset for about 160 days.

Page concluded where he started stated saying while he is an impatient person, reality is that he is excited about the future because of his absolute belief about how well Google is positioned and its ability to innovate and compete.  

The Street Needs to Get a Grip

With the caveat that I am not a stockholder of Google and have been a critic over the years, as I noted at the top, I believe the financial analysts overreacted and actually believe this will show up in the next few weeks. For those of you who follow me, I refer you to my recent posting, “Apple (News - Alert) vs. Google vs. Microsoft: The Next Round in the Battle of the Ecosystems.” We are in a war of ecosystems for trying to provide an “E”vironment that you will never leave. Who is best positioned to dominate that war? Based on what I have observed it is hard to say — based on its power in Search, Android (aka mobile) and positioning for ads in a multi-screen world — that Google is not the front runner at the moment despite the success of Apple’s iPhone 5. 

The results for the quarter can at best be considered a hiccup, but only in the context of Street expectations. For the rest of us, we’d be proud of our teenager and would be looking forward to see how our investments in their future are realized. I fully expect Google to get multi-screen monetization very right. We shall see what the next quarter brings. One thing that is for certain is that it will not involve an early earnings release. That would be a good thing so that wiser heads have a chance to prevail. This seems to have been a version of crowd-sourcing gone a bit amok.   

Edited by Amanda Ciccatelli
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