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
Jonathan Rosenberg:
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
call.
Larry Page:
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.
Eric Schmidt
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.
Conclusion:
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)