Print 12 comment(s) - last by sviola.. on Oct 19 at 10:54 AM

Strong sales revenue helps offset ballooning costs from Motorola, advertising

Today was a wild day for Google. Things started off on the wrong foot, as its earnings report was inadvertently leaked ahead of schedule. This little nugget of information provided within the earnings report sent Google's stock plunging during the trading day:
Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 15% over the third quarter of 2011 and decreased approximately 3% over the second quarter of 2012.
This shows that Google is starting to lose money on its key moneymaker -- clickthroughs using AdWords. When investors caught word of this, the stock took a serious beating. At around the time the results were published early (around noon EST), the stock plummeted roughly $70, but slightly recovered throughout the trading day. By the closing bell, Google was down $60.49 or 8.01 percent.
Google's overall report paints a picture of rising costs and rising income -- which together have led to a slight slide in profitability.

Google is still working to stabilize its troubled acquisition, Android handset maker Motorola Mobility.  The company poured $349M USD into restructuring the troubled asset, shuttering certain struggling regional units and committing to layoffs.  

Motorola did pull in a decent chunk of cash, earning $2.58B USD for the quarter -- or roughly one-fifth of the $14.10B USD in total consolidated revenues for Google in its fiscal third quarter.  But the bad news is that Motorola's revenue is back on a downward slide after a brief recovery to $3.3B USD in Q3 2011.

Traffic acquisition costs (TAC) -- the amount of revenue Google shares with advertising partners -- totaled $2.77B USD (26 percent of Google's revenue), up noticeably from the $2.21B USD (24 percent of total revenue) that Google shared in Q3 2011.

Across the board, other costs were on the rise as well -- advertising, administrative, sales/marketing, and research and development (R&D). R&D, for example rose from $1.4B USD last year to $2.0B USD this year.  Google now employs 53,546 full-time employees (36,118 at Google and 17,428 at Motorola); that's up substantially from the just-slightly-over 33,000 Google employed in Q1 2012.

Google money bags
Google's cash pile has shrunk as spending has risen. [Image Source: OMG Droid]

Among the 38 analyst surveyed the expectation was a profit of $2.99B USD by Google.  That means that the actual result -- $2.176B USD -- was a big miss.  The analysts expected $11.867B USD in revenue after TAC, versus the delivered result of $11.33B USD -- another miss.

But Google isn't exactly crying over that profit and reveue misses.  Its war chest is down slightly from the $49.3B USD in cash it had at the end of Q1 2012.  Google's current cash/cash equivalents pile is at $45.7B USD.

Google's heavy research and development spending has fueled Android to a population of 500 million handsets in the wild, with activations recently reaching 1.3 million smartphones per day.  Even as it rides the wave of an industry transition towards greater mobile usage, Google is greedily eyeing even more ambitious efforts, like wearable electronics (Glass Explorer) and automation of mundane tasks (like self-driving cars).

Sources: Google, Buzzfeed

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Frickin Speculators
By inperfectdarkness on 10/19/2012 4:37:01 AM , Rating: 2
45 billion in reserves still? Billion with a B. Why should anyone be uneasy about this? Minor fluctuations from an otherwise stellar stock performer. It's not like we're talking about RIM here.

RE: Frickin Speculators
By Tony Swash on 10/19/2012 6:50:36 AM , Rating: 1
I agree that Google are not in danger, they are profitable and big and their revenues are strong. But what does appear to be happening is that their margins are being squeezed and that squeeze has gone on for a while now so it looks like a rend.

The article points out that the average cost-per-click has decreased approximately 15% over the third quarter of 2011. Last quarter it was down 16% year on year. The previous quarter it was down 12% year on year. The one before that down 8%. That's a trend down for a year now.

None of the above relates to the big losses stacking up from it's Motorola acquisition which is a separate drain on Google's finances.

What this deterioration of Google's core business margins means is that the dynamics of Google's business are changing and that money will be tighter in future. And this will probably have some big impacts on the culture of the company.

RE: Frickin Speculators
By Tony Swash on 10/19/12, Rating: -1
RE: Frickin Speculators
By Crazyeyeskillah on 10/19/2012 10:44:05 AM , Rating: 2
Tony S is a PAID apple blogger that has no right to be on a site like this. Down vote his political, corporate slander off of this site.

RE: Frickin Speculators
By sviola on 10/19/2012 10:54:52 AM , Rating: 2
That usually happens in the quarter before the release of a new Windows OS.

RE: Frickin Speculators
By nafhan on 10/19/2012 10:38:07 AM , Rating: 2
They could have come very close to the numbers analysts expected by simply leaving R&D spending alone. Instead they're actually using the money to increase Google's future value. Same story with the Moto acquisition.
What this deterioration of Google's core business margins means
It means that you are wrong. Their cores business margins are not deteriorating (from the press release):
Paid Clicks...increased approximately 33% over the third quarter of 2011 and increased approximately 6% over the second quarter of 2012.
Also: ad revenue was up 19%. The value of a single click is deteriorating, but that may be a problem or it may be something as simple as a consequence of a lot more "clicks" causing the money to get spread around more. We don't know.

RE: Frickin Speculators
By BrgMx5 on 10/19/2012 7:14:37 AM , Rating: 2
Markets are about the future. If you're not growing as predicted (revenue, market penetration, etc.), the stock price will adjust.

Android is growing, but it all comes down to (market wise) how much money they will reel in from that growth.

RE: Frickin Speculators
By Tony Swash on 10/19/2012 8:59:34 AM , Rating: 1
Android is growing, but it all comes down to (market wise) how much money they will reel in from that growth.

The problem for Google is that Android is a cost center and not a profit center.

RE: Frickin Speculators
By RufusM on 10/19/2012 9:55:14 AM , Rating: 2
Many companies take years of losses before gaining sustaining profitability for a product. It's part of taking a gamble on a product a company believes in.

To the article you referenced, they believe Android has profits; therefore not a cost center. They just want to see the numbers.

I have no doubt that Android is making money. What I SERIOUSLY doubt is just how much money Android is making.

RE: Frickin Speculators
By Dr of crap on 10/19/2012 8:23:36 AM , Rating: 3
I agree. It's the herd mentality when dealing with the stock market.
Stupid but true examples -
Have a bad cup of coffee, better go sell all my food stocks. Get a cold better go dump all the cleaning supply companies. DID the leader of that oil exporting country NOT shake the presidents hand long enough! I'd better buy more stock in any company that makes weapons and drive up the price of oil futures. So there was a freeze in Florida, buy more car companies stock?

I don't think that way and after all my years still don't understand it. How you make some of those wild conections and if everyone is selling then you have to sell as well. I went through the big dip of '87 and the crash of '08, and you don't have to sell every stock just because everyone else is. I know those that sold in '87 and lost cash. I stayed in and didn't loose any. It will bounce back. I've seen it happen.

These guys that react fast to news like this are the ones that make the market do wild swings. While the rest of us have to suffer from their stupid reactions. Looking ahead only for a day or two is the problem. No long term forward thinking. Only what can I make today.

RE: Frickin Speculators
By michael2k on 10/19/2012 9:47:27 AM , Rating: 2
Stupid analogy time.

You earn $50k a year. You've even managed to save a bit and have 200k in the bank.

Your pals, your girlfriend, etc, have a good time with you, you go out shooting, riding bikes, going to the bar, dancing, etc.

Then you find out that you got a 20% pay cut and now only earn $40k a year. You can no longer afford to go to the bar as much, go shooting, maybe sell a gun or some of your bike gear, and now you have to reach into your savings to make ends meet. Not the end of the world, for sure.

However your girl leaves you for another guy who is earning $55k, some of your buddies, who still earn $50k, now go shooting and riding without you, etc.

They now choose to [i]invest[/i] elsewhere because you are worth less now.

That's all investors do here; Google has suffered a 20% pay cut and is now worth less, and they now have to choose whether to stay or move their money elsewhere. This isn't speculation, this is basic math and good sense. Why would you put your eggs into a basket that won't give you any return?

RE: Frickin Speculators
By xti on 10/19/2012 10:22:13 AM , Rating: 2
umm...then banks would never lose stock value...

its not about how much $ in reserves, its about they picked a target they thought was attainable, and missed. its pretty much what quarterly announcements are all about....

"People Don't Respect Confidentiality in This Industry" -- Sony Computer Entertainment of America President and CEO Jack Tretton

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