Google (GOOG) Earnings Highlights/Analysis
There were very few surprises in the Google report after the bell today, unlike last quarter when there was an unexpected spike in hiring as well as a one time bonus accruals cost that resulted in a miss for just the 2nd time since the company went public. It caused some concern and knee jerk selling, but as I mentioned in my analysis of the last earnings report, it appeared to be an aberration and the concern was overblown creating an outstanding opportunity to steal shares. With the share price up around 25% since that report what a steal it was!
This time around the company returned to tradition and handily beat consensus EPS of 3.77 by posting a 3.91. Revenue growth year over year continued to decelerate incrementally and came in at 57% over the year ago quarter. No, this was not a blow out quarter (they did not beat the whisper number of 3.95) but it was a very good quarter. When you consider the size of this company, that kind of growth is absolutely astounding. Throw in the fact that the company continued its hiring binge last quarter by adding an additional 1800 employees (subtracting the Postini headcount), not to mention its push into new advertising formats as well as putting together an online "office" type suite that will one day rival Microsoft and it’s no wonder the stock will be approaching $700/share soon.
Here are a few highlights from the conference call transcript (provided by Seeking Alpha)(my comments in bold):
CEO Eric Schmidt:
"Looking at it as search, ads, and apps, on the apps side, we are now seeing a massive transition to web-based cloud computing at a consumer and enterprise level. We talked about this for a while and we now see not only the progress but also the future products, both from Google and from the other folks in the industry to make this really happen.
In our case, of course, we launched the presentation product as well as closing Postini, which is central to our enterprise push.
We are really on the cusp of a world where everyone can create, share, collaborate and find their content in the cloud anytime and anywhere."
At what point do they begin monetizing these properties with advertising or do they?
CFO George Reyes:
"We are particularly pleased with our AdSense performance, which grew 8% over the second quarter and 40% over last year to $1.5 billion. Both the AdSense for content and AdSense for search businesses were strong as we experienced continued increases in traffic and improved our ability to monetize our newer partner relationships."
People are still clicking on those text ads so there doesn’t appear to be problems with text ad blindness yet.
During the quarter, we added 2,130 employees, the majority in engineering and sales and marketing. At the end of the quarter, we had a full-time employee base of 15,916.
Consistent with previous years, a large portion of our starts in the third quarter were related to university hires. Approximately 1,000 employees had accepted offers earlier in the year but started in Q3, after the end of the academic year.
Included also are approximately 300 employees from the Postini acquisition which closed in September. As we have previously discussed, we are continuing to take a careful look at how we can more efficiently allocate resources across functions and globally.
The spike in hiring last quarter was a concern but the company explanation about university hires and the acknowledgement that they need to watch it closely should satisfy analysts until the next report
I think TV ads could actually really be underappreciated for the reason that you mentioned, in terms of our offline efforts. This is really one of the few places where you can bring the same type of Internet level accountability to offline advertising, so with search advertising, obviously our customers see real-time how their ads performed.
The same thing is really true with the feedback mechanism that we get with set-top boxes. We are bringing the same level of granularity to the offline TV format. The trials that we have right now are with EchoStar and Astound Cable.
And what we are able to do there is we are able to show the advertisers when their spot is playing and look at the viewing levels of users actually during the course of the spot, so we are very excited about how that is playing out and we think it bodes very, very well for our progress in TV.
Google’s efforts in the offline world doesn’t get much attention but if they can make inroads into the TV market look out. What’s interesting is that no mention was made of the radio ad initiative anywhere in the conference
I think we have many, many different options available to us as a company, in terms of spectrum and connectivity for people in wireless and so forth, so I don’t think we feel like there’s any desperate need for us to have to bid to win or anything like that. And again, the money is not burning a hole in our pockets.
In my opinion, making and winning a large bid for this spectrum would be the one thing that could derail Google stock so as a shareholder good to see Larry saying this.
On the mobile side, we have talked at some length about our mobile application strategy. We are very happy with it. Mobile applications, there’s some evidence that we are becoming the leading mobile applications provider, at least in certain segments, and the mobile story is a very strong one for Google. It is also a great one for the world.
Mobile is perhaps the biggest source of potential revenue down the road.
What jumps out to me as I read through the Google conference call transcript is that this is a company that hasn’t come close to peaking. When you talk about adsense via text link ads perhaps this is a business that has matured and in a sense peaked but keep in mind that the company hasn’t yet monetized YouTube, hasn’t yet monetized its online applications, hasn’t yet capitalized on TV or radio and is just scratching the service in mobile. Of course there are questions in all these areas but if they hit a homerun in just one or two of them and have moderate success in the others, they should continue to grow earnings and sales in the 40 – 60% range for at least a few more years. Any hiccups along the way, just as we saw last quarter just provide buy opportunities. Do not miss them.
Disclosure: I’m long Google (GOOG)
Holding Google (GOOG) Through Earnings Again
All eyes will be on Google as it reports after the bell today and once again I’ll be holding onto my core position for the long haul. Following the sell off last quarter I said it was a buy opportunity and any selling after its report tonight will most likely offer the same kind of opportunity.
The earnings "whisper" call is for an EPS of 3.95/share, which would result in a 51% increase in earnings over the year ago quarter. That’s certainly not out of reach for Google but is well above consensus estimates of 3.26/share [edit: that includes an option expense so consensus was 3.77]. As I’ve said before it’s the whisper number that matters and most stocks sell off if they beat the consensus but miss on the whisper. Google has had a great run over the past several weeks but I think if they can match or beat that whisper it will run after the bell. There is also some concern about rising costs, so if Google shows this quarter that they eased up on the hiring frenzy and in fact the bonus accrual costs of last quarter were a one time event, then I expect some sort of relief rally.
I’ll be all over the earnings report like flies on a pile of doo again this quarter and will have a full report for you tonight or way too early in the morning so be sure to keep an eye on the blog.
Update: Google reports 3.91, so not a blow out quarter (and below the whisper number) but at first glance very strong results once again. Hiring still appears rampant but we’ll have to see what they say in the conference call. I would expect Google weakness to continue tomorrow but nothing to be concerned about. More details later.
Google surprised everyone last night when they missed earnings estimates for just the second time in the 12 quarters since going public by posting earnings of 3.56/share (when you take out costs for employee stock compensation). That was 3 cents shy of analyst estimates and well below the whisper number of 3.75. Call it a case of not meeting lofty expectations from perhaps the most admired company in the world as well as higher one time costs which I’ll go into below. So, just as traders did after the bell, time to head for the exits right? No!! Maybe I’m a glass half full kind of guy but after reading through the reports and the entire transcript (thank you Seeking Alpha) I still feel good about Google and see this sell off as opportunity, not as a reason to head for the exits. Let’s run through the highlights of the quarter:
First the good….
– Revenue came in at a 58% increase over the year ago period which beat analyst estimates. No problem here.
– Revenue generated from Google.com properties grew an impressive 74% year over year and 9% sequentially. It was driven by global traffic growth and higher quality advertising.
– Adsense revenue increased 36% year over year but was flat sequentially due in part to seasonal trends but also due to the company cancelling accounts of unfavorable publishers (ie. made for adsense spam sites).
– International growth fueled by Europe now makes up 48% of revenues
– Traffic acquisitions costs decreased to 30% of total revenue, down from 31% in the first quarter
.. and the not so good…
You can see on the revenue side it was a great quarter. The problem was in the earnings per share number which was driven down below expectations due in part to much higher than anticipated costs associated with rampant hiring and what appears to be a higher one time cost associated with a revision of the employee bonus accrual methodology which led to a higher bonus accrual for this quarter.
The number of new hires increased to 1548 this quarter compared to 1152 in the year ago quarter. That’s a whole lot of additional on site hair cuts, catered meals, oil changes, dry cleaning and whatever else it is that the company famously provides… not to mention stock options and bonuses. A few quotes:
"A second factor driving expenses was headcount growth, which led to higher payroll expenses. We added 1,548 employees in Q2, the majority in sales and marketing and engineering," said CFO George Reyes.
CEO Eric Schmidt acknowledged they will be more careful about hiring in the future:
"From a Google perspective, when we look at the quarter, one area we exceeded over our expense plan was headcount. We are very pleased with the talent that we’ve brought on board, but going forward we will watch this area very closely."
Higher Bonues Accrual
This is the one part of the transcript that in my opinion stood out the most and a big reason why I feel that the earnings miss this quarter was an aberration and not the beginning of a trend. If you read the transcript, you’ll see that analysts were keying on this as well. Some quotes…..
"One of the larger drivers of payroll expense was the company bonus plan. This was due in part to a revision of our bonus accrual methodology that will allow us to more proportionately recognize the related expenses each quarter. This all led to a higher bonus accrual in Q2, which includes a catch-up from Q1, and affected all expense line items…going forward it should be a more normalized bonus accrual process. This was just sort of a one-time inflection that we tried to do to true-up the bonus , " said CFO George Reyes.
CEO Eric Schmidt:
"In general, we don’t break out all the puts and takes on the changes in the accrual. What I would tell you is that we overspent against our own plan in the area of headcount, and some of it was related to this bonus accrual that I talked about; and some, because we hired a little faster than we had planned. In looking at it we thought, was this a mistake or not? We decided it was not a mistake, that in fact the kind of people we brought in are so good that we’re happy we did this. As I said earlier, we will continue to watch this very carefully in the future. "
Google is a company that has seen a deceleration of its growth every quarter for over 2 years now, so that trend continuing is no surpirse given the billions upon billions this company now generates every year. It’s just flat out difficult to maintain the kind of growth they were achieving. At some point, and I think that is beginning to happen, the company will settle into quarter over quarter growth of 30 – 40% which is outstanding for a company of this size. Yes, it’s time for Wall Street to lower expectations a bit and this quarter miss should go a long ways in achieving that. All in all, it was another great quarter tarnished a bit by what appear to be one time costs. This sell off in my opinion will offer opportunity.
What can we expect in trading today? After hours the stock flirted with key support around 500 and this will remain a key area of support as I highlight below.
Here’s a look at the weekly chart, which reveals strong support around 500 at the 2 year upward trend line. Despite the headlines that a 40 point drop in Google creates, realize that it’s just a 7 – 8% drop and key support levels remain in place for now.
The daily chart reveals support levels on a more granular level – first level of support around where the previous breakout point and the 50 day moving average converge (lets call it 510 – 513). The last level of support for this stock is in the area of 480 – 490 which is an area where the 200 day moving average and the upward trend line converge.
I personally held my long term position in Google through this earnings report and will look at this dip as a buy opportunity. However, I won’t jump into it right away. It’s going to take some time for traders to sort out this report and for analyst to issue their reports. Once trading volume subsides to more normal levels and we get a clear idea of where exactly this stock will find support, I will be looking to add shares in this outstanding company.