Google Q4 2013 Earnings Review

Google Q4 2013 earnings review

Google (NASDAQ:GOOG) announced their Q4 2013 results yesterday (Jan 30) after market close. The company beat the top end of revenue estimates but missed the earnings by a huge gap. The stock was trading at $33.61 (at the time of writing), up nearly 3% over the last closing price inspite of the earnings miss. Investor sentiment was bolstered by the announcement of the sale of Motorola hardware segment, and the performance of Google search segment. Let’s take a look at the company’s Q4 numbers and later look into the Motorola sale to show that the net loss to Google from Motorola sale was not as high as it seems. We covered the controversial and unique stock split announced by Google in our article entitled ‘Google: The complicated stock split

Q4 2013: Positives from Google search and advertising business

The company reported an overall revenue growth of 16.9% with the Google segment reporting a 21.7% Y/Y growth while the discontinued Motorola segment continued to play its role in dragging the topline with a 24% Y/Y decline.

Q4 2012 Q4 2013 YoY Change
Google 12,905 15,707 21.7%
Motorola 1,514 1,151 -24.0%
Revenue 14,419 16,858 16.9%

The revenue growth was a direct function of increase in the number of paid clicks, which made up for the decline in the average cost per click (revenue for Google). The paid clicks registered Y/Y growth over Q4 2012 as well as a Q/Q growth over Q3 2013 while the cost per click continued to decline with a 2% Q/Q fall and a 11% decline on a Y/Y basis.

QoQ Change YoY Change
Paid Clicks 13% 31%
Average CPC -2% -11%

The operating cost as a percentage of revenue stayed closely similar to Q4 2012, with a negative 30 basis point impact on the operating margin. Google reported a 23% operating margin for the quarter. The table below summarizes Google’s Q4 2013 performance.

Google Revenue and Earnings Growth

Q4 2012 Q4 2013 YoY Change
Revenue (in millions of USD) 14,419 16,858 16.9%
Net Income (in millions of USD) 2,886 3,376 17.0%
GAAP Earnings (in USD) 8.62 9.90 14.9%
Non-GAAP Earnings (in USD) 10.65 12.01 12.8%

Google Profit Margin & Cost Analysis

Q4 2012 Q4 2013 YoY Change
Operating Margin 23.5% 23.3% -0.3%
Net Income Margin 20.0% 20.0% 0.0%
Cost of Revenue 43.1% 44.1% 1.0%
Research & Development 13.4% 12.5% -0.9%
Selling & Marketing 12.1% 12.6% 0.5%
General & Administrative 7.8% 7.5% -0.3%
Operating Costs 76.5% 76.7% 0.3%

The performance of the core business was encouraging with Y/Y growth in excess of 20%. Google maintained a healthy cash flow during the quarter, with a healthy free cash flow margin of 17% during the quarter.

Analyst estimates v/s actual performance

The company came out on top of analyst consensus revenue estimates while missing the earnings estimates. According to Streetinsider.com, Google beat revenue consensus by 1%, and missed the earnings per share consensus by 2%. However, Investors seemed upbeat in after-hours trade following the conference call, buoyed by the fact that Google has finally decide to sell of the dragging hardware/Motorola mobility division.

The Motorola Mobility sale

Let’s now take a look into the details of the sale and how much did Google gain or lose on the sale to Lenovo. The terms of the deal: Google will sell Motorola Mobility to Lenovo for $2.91 billion, while keeping a vast majority of the patent portfolio it had acquired from Motorola in 2012. Motorola reportedly has a current Cash Balance of $1.7 billion.

in billions of USD
Google price for Motorola 12.5
Motorola cash balance in 2012 3
Value of acquired patent portfolio (as claimed by Google at the time of acquisition) 5.5
Effective cost of other assets 4
Sale of Arris in April 2013 4
Cash 2.05
Stock 0.3
Total Value of Motorola home division sale 2.35
Net cost to Google 1.65
Value of Lenovo Sale 2.91
Cash Balance 1.5
Net value of sale to Lenovo 1.41
Loss of sale on Motorola mobility 0.24

According to our calculations, excluding the losses from the division over the two years, the net loss on the sale is 216 million, which is hugely different from the first glance loss of $9.5 billion. While at first glance it might seem Larry page and his managerial team have lost their minds, through a careful glance it appears to be the right move ahead. The hardware division has been a drag on Google for quite some time without any signs of a turnaround. We think it is a wise decision to let go of the division, which will result in two immediate benefits. Firstly, Google will not bear any further losses from the division, and secondly the sale could result in better future cash flows for Google as hardware division was burning cash and marginally depressing the overall cash flows of Google.

Conclusion

The sale of the Motorola division seems to be the right move ahead for Google. The sale appears to be a win-win situation as it will enable Google to focus on developing android and Lenovo could be in a better position to turnaround Motorola than Google, given its experience in hardware and the successful turnaround of IBM’s computer division it bought earlier. The sale will boost Google profit margins as search and advertising business seems to be chugging along at a healthy rate, not to forget it generates tons of Cash. $200 million is a loss Google could easily swallow. Finally Google needs to find a way to boost its mobile cost per click, where the company seems to be currently struggling for the last many quarters.

Going forward, we continue to remain bullish on Google, and expect an improved showing from the Mountain View giant over the coming quarters, having got Motorola off its books (Finally!!).

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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Comments on this article and GOOGL stock

harish.brn43@gmail.com
Are fancy variables such as paid clicks and average cost per click, etc. sound multiples to be considered in the process of analysing firms?
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oracleofwallstreet009
I think these are variables which drive revenues at Google search. Hence these are sound multiples to track companies who make their revenue through online advertising.
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