Google Pre-earnings Overview

Edited by Vani Rao

Expansion into activities beyond self-service paid search could dent revenues

Google Inc. (NASDAQ: GOOG), the best search engine that has been ranked first in Fortune’s annual list among the Best Companies to Work For, processes over one billion search requests each day. Google has become synonymous with the internet and has revolutionized the way people study, communicate, find places, or connect. In addition, Google is a pioneer in disruptive innovation like driverless cars and Google Glass as well as devices like the Nexus smartphones and tablets and the Chromebook. The company is set to announce its first-quarter results on April 16, 2014.

Revenue

At present, more than 85% of its revenue is generated through advertisements. Moreover, the company believes that most of its revenue growth is expected to come from its Mobile Search Ads division in FY2014.

Analysts estimate that Google’s market share in mobile ads spending was close to 50% in 2013, and is expected to be closer to 46% this year. Furthermore, analysts estimate that mobile ads, which contributed $8.85 billion to Google’s revenues in 2013, are expected to bring in roughly $14 billion in 2014.

On a consolidated basis, Google’s revenue surged 21.71% to $15,707 million in the year ended December 31, 2013, as compared to the year-ago period, as shown below.

goog pic 1

Google reported a revenue growth of 14.14% in Q4 as compared to the previous quarter, whereas its Motorola Mobility division witnessed a revenue decline of 4.98%. However, Motorola’s revenues during the next few quarters are expected to grow at a steady rate following the launch of new products.

Net Income

Google’s net income has been volatile in the past few quarters, although revenue was growing at constant rate. However, the Motorola Mobility division’s losses are growing at a steady rate. Net income increased by 16.97% to $3,376 million in Q4 as compared to the year-ago period.

goog pic 2

Over the past few quarters, Google has been steadily diversifying into non-paid services. Moreover, the acquisition of Motorola has dented its operating margins over the past few years. For the year ended December 2010, Google’s operating margin was at 35.4%. However, operating margin has been steadily declining to 23.3% for the year ended December 2013.

Outlook for first quarter 2014

For the first quarter ended March 31, 2014, revenue is expected to decline to $12.64 billion on earnings of $5.279 per share according to the Bloomberg consensus estimates. Operating margins are expected to decline owing to Google’s expansion into activities beyond self-service paid search. Moreover, the weakening of the dollar against a basket of global currencies will have a positive impact on the revenue, as shown in the exhibit below. Other revenue, especially from Google Play, is expected to increase during the quarter.

goog pic 3

In the recent past, Google was in talks with Lenovo for the sale of Motorola Mobility; however, the deal is yet to be finalized. In the meantime, Motorola’s new smartphones, Moto X and Moto G, could have a positive impact on sales during the next few quarters.

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