GOOG: Q4 2013 Earnings Preview

Google Q3 2013 earnings preview

On October 18th 2013, Google (NASDAQ:GOOG) came out with Q3 2013 earnings beating the street’s estimates. The main driver of the stellar Q3 2013 performance was the increase in number of paid clicks, a result of Google’s multi-platform advertising strategy implemented in early 2013. On the other hand, the acquired division of Motorola Mobility (Hardware) continued to be a drag on Google’s overall performance. The strong quarter from the search segment made up for the dismal performance of the hardware segment. The strong Q3 performance has been reflected in the positive market sentiment as the stock has risen 29.5% since announcing Q3 results. The company is all set to report its Q4 2013 earnings next week and we provide a peek into what to expect in the Q4 2013 results.

Google: Historical Performance

Even before we move into our expectations for Q4, we take a look at the company’s performance over the last twelve months. Since acquiring Motorola mobility in 2012, Google reports results in two segments: Search (Google) and hardware (Motorola Mobility). We take a look at the segmental performance in order to arrive at more accurate Q4 expectations. Let’s take a look at the segment revenue over the last two years

Google revenue by segment

One look at the chart shows that hardware revenues have been shrinking and they contribute a small proportion to the overall revenues of the company. A closer look throws up some revealing facts. Hardware segment contributed close to 8% to Google’s overall revenues, but 8% of Google’s Q3 revenues translate to $1.14 billion, a slice not too small after all. A turnaround of the segment could propel revenue growth at the firm over the coming quarters.

Let’s now take a look at the revenue growth of the two segments over the last twelve months.

Q4 2012 Q1 2013 Q2 2013 Q3 2013
Search revenue growth 21.9% 21.7% 19.5% 19.3%
Hardware revenue growth 18.4% -35.9%

Revenue growth at the two segments for Q3 2013 was in stark contrast to each other. While the growth, profitability and cash flow ability is beyond question as far as the search segment is concerned, the hardware segment is yet to prove its value to and justify the $12.5 billion Google paid for acquisition of the segment. While the growth suggests that the hardware segment is well on a downward slope, it is too early to conclude anything meaningful yet. The august 2013 launch of MOTO X was the first launch from Motorola since its acquisition by Google. The performance of the phone has not been extraordinary, but the Q4 2013 results will provide a better view of the hardware segments revenues and, more importantly, profit margins. However it will be important to note that the hardware segment saw a sequential increase in Q3 revenues, following three quarters of sequential fall.

Coming to the search segment, we expect the segment to report a Y/Y growth close to 20%. The growth will be driven by the new multiplatform advertising strategy. However, the average cost per click could be lower, as the current revenue to Google from a tablet or smartphone user is significantly lower than a PC user. A growth in revenue per mobile user over the coming quarters could push the revenue growth higher over the coming quarters.

Analyst estimates

According to Zacks, Google has beaten earnings estimates in three out of the last 4 quarters with an average earnings surprise of 1.9% over the last four quarters.

Conclusion

We expect the company to come out on top of analyst estimates. We estimate a Q4 2013 Non-GAAP earnings of $10.9, a conservative estimate which will represent a 2% increase over the year ago quarter. The quarterly performance will be mainly driven by the continued growth of the search segment and we hope to get a clearer view of the hardware segment from the Q4 2013 results. Keep reading to view our coverage of Google’s Q4 2013 results.

To see Google’s latest stock price movement, click here (NASDAQ:GOOG)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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