Monday, July 20, 2009

Earnings Summary: Google (GOOG)

Google (GOOG) reported a solid quarter, beating both top- and bottom-line estimates. EPS came in 26 cents ahead of consensus at $5.36, which represented 16% growth vs. the year-ago period. Revenue was only slightly above estimates, posting 3% year-over-year growth.

Normally, a big bottom-line beat like this would have the stock trading higher in the after-hours, but shares of GOOG are lower right now. One thing that made the quarter less "clean" was a low tax rate. The tax rate for the quarter was only 20%. Last quarter it was 25%. Management said the tax rate fluctuates depending on foreign mix of profits, but the company didn't address the issue any further.

The CEO said that business appears to have stabilized, but that it is too early to call the recession over. The company is focused on operating efficiencies and cost management; these efforts showed this quarter as operating expenses fell to 28% and head count decreased by 378.

He spent time talking about Google's new operating system for 2010 and said that the company needs to think big. He also said that even though business is soft, Google is continuing to invest in innovation, and he said he feels that the prudent strategy is for Google to emerge from the downturn stronger than its competitors.

The company also commented that their three big drivers outside of search (display, apps, and mobile) were gaining traction. The CEO said YouTube is now on a trajectory that Google is pleased with," with increasing monetization of videos. Mobile search is also continuing to gain traction, and the company expects there will be 18 to 20 mobile phones on the market using the Android system by year-end.

For Apps, 75 new schools signed up to use their platform, as well as an increasing number of corporations. The company did not go so far as to say when it expects this group to begin making up a significant portion of revenue.

Key metrics for the quarter included:
  • Paid-click growth slowed to 15%.
  • CPCs fell 13% year over year but grew 5% quarter over quarter.
  • AdSense revenue grew 2%.
  • International revenue totaled 53% (U.S. rose 2%, U.K. fell 8%).
  • Foreign-exchange hedging added $124 million.
  • Free cash flow totaled $1.47 billion (up 38% year over year).
  • Operating margins rose to 39.2%.
  • Cash on the balance sheet now exceeds $19.3 billion.

I get the sense that Google is executing as well as we can expect given the weak macro environment. I believe it is making the most out of the lower ad budget revenue, and that when the purse strings on these ad budgets begin to loosen again, the company will be in good shape to take advantage of it. Recent comScore data put their market share at 65%, and I don't see Bing putting a dent in that. (Note: I don't think I even heard Bing come up once on the conference call)

I am comfortable with my long position in the stock. Most of the analysts have become pretty conservative with their price targets, but I still think it's reasonable that we could see the stock hit $600 sometime next year.

long GOOG