Google Q2 2014 Earnings Review

  • Google registered strong revenue growth in core and non-core businesses.
  • Google’s profitability declined marginally while other key metrics improved.
  • Google is an attractive long term investment option at its current stock valuations.



Google (NASDAQ:GOOG) reported its numbers for Q2 2014 on 17 July 2014 after market hours. The internet search giant reported a better than expected revenue growth, but Google’s EPS missed estimates. Google’s stock price was up about 1.5% after market hours, reacting to the earnings release. Among other things, Google announced a change at the top with the departure of Chief Business Officer Nikesh Arora. To sum up, Google’s Q2 results were largely along expected lines with no major disappointments with more positives than negatives.

Our Google stock analysis continues to find the stock attractive at its current valuations.

Google Q2 2014 Revenue & EPS vs Estimates

Google’s revenue grew at 21.8% Year on Year (YoY). The company registered operating margin and net profit margins of 26.7% and 21.4% respectively.

Estimates

Actuals

Beat/(Miss)

%

Revenue ($ Billion)

15.62

15.96

340 Mn

2.2%

EPS - $

6.25

6.08

17 cents

-2.7%

In terms of revenue and EPS results, Google’s Q2 earnings release was a mixed bag. The company beat revenue estimates and missed EPS estimates for the quarter. Though Google’s revenue received a mild boost from a favorable forex impact, on a forex neutral basis too, revenue surpassed estimates by a comfortable $250 million or 1.6%.

Google Revenue Growth

Google’s revenue grew at 21.8% (YoY), beating estimated growth of 19%. As we had anticipated in our Google earnings preview, both core and non-core business growth accelerated in Q2, driving Google’s overall growth.

  • Google Ad-revenue growth - 19% YoY
  • ‘Other Revenue’ growth - 53% YoY

Google’s core business or advertising revenue continued to account for lion’s share of the revenue, generating 90% of total revenue. Ad-revenue from Google Owned & Operated (O&O) sites continued to grow faster than revenue from Google’s network partners. However, Google’s traffic Acquisition Costs (TAC) remained sticky at 23% of total ad-revenue.

An interesting trend in Google’s core business has been that on the whole, Cost-Per-Click or CPC has been declining consistently for several quarters. Those who follow other search engines like Baidu and Yandex will observe that the same is the case with those search engines. However, in the last two quarters, the decline in CPC for ads served on Google’s network partners has declined at a much slower rate than the CPC on Google O&O sites.

Positive on the whole, Google’s CPC declined by 6% YoY in Q2 as against an average YoY decline of 10% in the last two quarters. Paid Clicks continued its upward trend growing at 25% YoY as against the 23% YoY growth a year ago. In case of Paid Clicks, Google sites drove the growth while growth on network partners was much slower.

To sum up, Google’s revenue growth showed mild positives with improvements in both core and non-core businesses and improvements in CPC and Paid clicks. Here’s a quick summary of the key metrics.

  • TAC - 23% of ad-revenue
  • CPC - down 6% Y/Y
  • Paid Clicks - Up 25% Y/Y

The key takeaway is that Google’s growth rate of 21.8% in Q2 surpasses its 5 year CAGR of 20.6% (excluding Motorola) and is in touching distance of its unadjusted (including Motorola) 5 year CAGR of 22.4%. This is both encouraging and impressive given the large revenue base on which Google is growing.

Google Profit Margins

Google registered operating and net profit margins of 26.7% and 21.4% in Q2. In this quarter again, Motorola employees were part of Google’s headcount implying that profit margins weren’t as healthy as they should be. Motorola’s employees accounted for about 7% of Google’s total manpower at the end of Q2.

Google Cash Flows

Google generated an operating cash flow of $5.6 billion and free cash flows of about $3 billion to close the quarter with cash and marketable securities worth about $61.2 billion. Google’s capital expenditure totalled $2.6 billion for the quarter with spends on building data centres and real estate. Going by the management commentary, Google is likely to continue cap-ex on similar lines in the coming quarters.

Google Future Outlook

As Motorola gets eliminated from Google’s numbers, improvement in margins is likely. However, that might get offset by the company’s spends on other businesses, like its shopping express which is on an aggressive expansion spree.

We expect non-core businesses to accelerate further as we progress into FY 2014 with hardware sales forming an interesting part of the segment. Google has lined up its smartwatch and Google Glass among other intelligent wearable devices even as other hardware like Chromebooks, which just registered record growth in Q2, are likely to drive non-core businesss growth.

Google’s focus on mobile could impact profit margins in the short term given that monetization rates are much lower on mobile devices when compared to those on desktops. However, mobile is the future and the company’s focus is likely to be a positive in the long term. In Q2, Google reported that the mobile traffic it sent to online retailers tripled YoY. This shows that volumes are improving and that the results will show in numbers when Google's mobile monetization rates gain traction.

Google Valuation

At its current stock price of $580 a share, Google’s PE ratio stands at 30 and Google’s price to sales ratio currently stands at 6.3. We expect the company’s profit margins to hover around its current levels. Google’s operating profit margin of 26.6% is incidentally exactly what it was last quarter.

A sustained acceleration in revenue growth will drive Google’s valuations. Given Google’s grip on the internet search industry, itsstable growth and profitability make it attractive at its current valuations. Google has been one of our top stock picks since May 2013 and has returned over 30% since. Our Google stock analysis assigns it with a ‘buy’ rating, in line with our long term view of the stock.

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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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