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April 12, 2012

Google Earnings Please Street and Surprise with Stock Split Proposal

By Peter Bernstein, Senior Editor

So Google (News - Alert) came out with its earnings today and the question was, in line with all of the fun people have been having writing stories about the Google Glasses Project (including me), the degree to which the company is dealing with an augmented reality and whether Wall Street had the same view. For the moment at least, the Street is pleased as the stock closed up 2.37 percent in front of the earnings and continued with a slight rise in afterhours trading.

What they reported

Hot off the wires are the details of the results. 

 “Google had another great quarter with revenues up 24 percent year on year,” said Larry Page (News - Alert), CEO of Google. “We also saw tremendous momentum from the big bets we’ve made in products like Android, Chrome and YouTube. We are still at the very early stages of what technology can do to improve people's lives and we have enormous opportunities ahead. It is a very exciting time to be at Google.”   

Also noted was the other big news of the day—the Google Board’s decision to unanimously approve a stock dividend (see Google’s Investor Relations site, which includes a letter from founders Larry Page and Sergey Brin).  This is a special new non-voting form of stock. Investors will get one new share for each current share they hold. It is a 2-for-1 split designed to reward shareholders, without diluting the control of the cofounders and early investors.

The good news for Google investors was that while it was strong on revenue and a bit weak on income, the news was positive, especially in light of last quarter’s miss and concerns of a repeat performance because of fears about falling ad margins.  

Here in brief is why the Street is ok:  

  • Non-GAAP EPS: $10.08 vs $9.65 expected with at GAAP EPS: $8.75
  • Net revenue minus traffic acquisition costs (TAC); $8.14 billion vs $8.15 expected
  • Google Sites revenue: $7.31 billion, up 24 percent from last year
  • Google Network revenue: $2.91 billion, up 20 percent from last year.
  • CapEx: $607 million, which is down from recent quarters.
  • Cost per click: -12 percent from last year
  • Paid (News - Alert) clicks: up 39 percent

What they said

CEO Page started the call with the analysts; by saying he was pleased with the results. He noted that, “Google is a large company no but still wants to operate with the passion and soul of a startup." He continued on by saying the past quarter was done cleaning up the organization, including closing or combined more than 30 products, and that concentration was on making sure, "our products work seamlessly together so people don't have to navigate Google to get stuff done."  

In this regard he was particularly pleased with:

  • The new UI for Google+
  • Over 170 million people having upgraded to Google+
  • Chrome has over 200M users and depending on the month has passed Microsoft’s IE as the number one browser
  • YouTube traffic continuing to explode
  • The company’s long-term prospects, especially given its strong cash position, although he and his team cautioned against people thinking there was a big acquisition in the works.   

His take on this was summed up with the phrase, “We pass the toothbrush test.” In other words, people use a Google product more than twice a day, and getting away from hygiene they also like to stay. On the latter he remarked that he looked at Google+ as having two parts: "our social spine” where once upgraded and logged in the user experiences only one Google and not disconnected products; and, the "social destination" part whose growth he says is impressive. In fact, Page noted that some people have amassed more than 1 million followers, and he just passed more than 2 million.

A few other things on Page’s mind were his praise of the company’s continued penetration of the enterprise market and their concentration on metrics for businesses which they see already helping drive offline sales.

On the analyst call what followed was an involved explanation by Chief Counsel David Drummond and then CFO Patrick Pichette that highlighted why the stock split was both common practice, good for investors, and gave the founders the control they needed to be able to do long-term projects. Pichette then went through the numbers.

The most interesting comment from the CFO was that, “Our business is healthy." Shift in CPC (News - Alert) and paid clicks, taken independently, do not reflect the health of our businesses.” He cited a number of factors such as foreign exchange rates, mix effects of mobile vs. iPad displays, emerging markets vs. developed markets, vs. other Google Sites searches, and ad quality changes. Showing that it is nice to be the king, he chided analysts who say, “It's all about mobile while others say it's weakness in demand for Google advertising. No. It's not.”

Pichette believe that actually bidding behavior is a good signal for demand, and that bidding among advertisers is, “very strong, growing.” That was the wind-up for his last fastball which was very high on the radar gun. He said, “The dynamics around paid clicks and CPC is very complicated. We internally track all factors, with statisticians, economists, and engineers…We believe that shift in CPC or paid clicks taken independently don't reflect business… If anything, lower CPCs give better return on ad spend. Lower cost, better ROI, more advertisers.” In other words, Google knows best, and analysts need to take a broader perspective rather than knit pick.

The CFO was followed by Nikesh Arora, senior vice president and chief business officer, aka the product guy. Not surprisingly he discussed in some detail how Google was helping advertisers get a better handle on metrics and how YouTube was becoming increasingly important to the mix, along obviously with Android. 

Finally, while Q&A sessions always hold out the possibility for surprises and for sparks to fly, it was by any measure a rather tame affair.  Questions about headcount not growing robustly were deflected as seasonal, and Page promised better integration of Google Wallet, Offers and Maps going forward. 

They also intend to put a big push on in the Android tablet area and have no intention of ceding the space entirely to Apple. The Google team in fact is stressing that the integration of its products means they are just getting started in terms of mining the real opportunity created in the mobile space and that despite CPC’s being lower on mobile right now compared to desktop, that could very well change due to the localized nature of transactions and things like Google Wallet as the platform.  

What was a bit disappointing was the lack of questions regarding the Motorola (News - Alert) acquisition, and all of the intellectual property lawsuits and government investigations Google has on its plate. They may be “material” when analysts write their full reports in a few days, or maybe are as they say, “already factored into the price.”

At the end of the day, Wall Street decided that all is well in Google land and no Google goggles were necessary. Whether this is augmented reality or not does not make a difference. The stock price is being augmented by the financials and that is the only reality that matters to most people.  It will be interesting to see if Google’s growth is reflected in the performance of other companies in the space as earnings seasons progresses.

Edited by Jamie Epstein
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