The release is out and looks solid. The stock up 4% 2% after hours. Release is here.
–Net revenue: $4.2 billion vs. estimates of $4.18 billion.
–Non-GAAP EPS $5.10 vs. $4.96 per share.
–Google sites revenue up 22%
–Headcount: Company added only 99 employees in the quarter vs. estimates of 500 new employees. Serious cost control going on here
–Paid Click Growth 18% vs. 17% estimates
— Total cash pile now $15.85 billion.
On AOL, the company wrote down $726 million from its holdings, basically a 70% haircut. Analyst Doug Anmuth had expected a 50% writedown back in November.
On the economy, nothing but vague generalities from Schmidt: “It’s unclear how long the global downturn will last, but our focus remains on the long term, and we’ll continue to invest in Google’s core search and ads business as well as in strategic growth areas such as display, mobile, and enterprise.”
Call start at 4:30.
Live notes from the call:
5:20, Patrick: strong quarter, strong year.
5:18, Omid says, we are doing very well with DoubleClick. We’re starting to see more inventory because we’re monetizing it well. We’re selling some inventory only if the DoubleClick advertisers can’t find a higher price. YouTube is fully integrated into our display. We still believe this is a great market for us, still very fragmented.
5:18, Analyst, what’s the strategy for the display side of the business?
5:17, Jonathan, Small and medium advertisers tend to cut their ad budgets back less. We think large advertisers are more prone to do across the board ad cuts. For smaller advertisers since every click is ROI positive, they’re basically willing to take every click we can give them.
5:16, Omid: Larger customers are in the mode where they’re evaluating their marketing budgets. Among those that have been online and familiar with it and are using analytical tools, they are continuing to take advantage of it, just lowering the CPCs. We’re seeing robustness in the smaller segments of our customers. It’s hard to predict.
5:15, Omid: Advertisers acted very rationally in Q4. The majority of our revenue comes from marketers who do not max out their budgets.
5:14, How did SMBs and mid-sized companies act in Q4?
5:14, Jonathan says we don’t know what the optimal ad coverage number is.
5:13, Omid says we have other deals coming in and we do the ones we want to do. “We have a certain amount we’re willing to pay for distribution.” (It is hard to believe Google got outbid)
5:12, Why didn’t you win the Dell and Verizon deals? What kind of ad-coverage should we have going forward.
5:11, Hedging program resulted in more benefits in US, more loss in Europe. More taxes in the US result in more taxes for Google.
5:11, Tax rate is up from 24% to 27%, why?
5:10, Patrick says TAC is down for “mixed reasons.” How helpful.
5:10, Why is TAC down?
5:09, Some modest number of businesses going out of business won’t CPC. It’s a function of whether overall commerce is reduced. CPC is really driven by users, not quite as much the number of advertisers coming in and out at any given time.
5:08, Patrick says the mindset of the company is to be a growth company. “I’d love to have more costs because they’ll be more revenues. Is there more cost-cutting available? I’d just say we’re managing responsibly.”
5:08, Is Google just starting to cut costs or is there more to go? Also will CPC go down as the economy sucks?
5:07, On cost structure, Patrick says, “you really have a cost structure that is labour intensive and we have a lot of flexibility in our model and we’re going to manage our company responsibility in that sense.” Translation: We can always lay off more people if we need to.
5:05, Patrick says Cap-Ex was down, but “we are investing.” We are benefitting from economies of scale and the Moore’s law at work as well as better utilization. The second factor: Cap-Ex is lumpy. Big data centres are “lumpy,” so be careful making modelling assumptions.
5:05, Spencer Wang from Credit Suisse asks about Cap-Ex, it’s been down a lot. Is that normal now? He also wants to know how much of Google’s costs are fixed.
5:04, Patrick says: We are really looking for bottom-line revenue. We’re not hedging for revenue. This quarter was crazy.
5:02, This analyst wants to know if the currency hedging benefits will continue.
5:01, He says advertisers are looking at ROI and so while consumers doing comparison shopping are clicking more, they buying less. This is driving revenue per click down.
4:59, Jonathan answers: The AdSense revenue was weaker, though AdSense for content was strong. When it comes to AdSense for Search, we did a lot of arbitrage cleanup in Q3 and Q4.
4:58, Imran Khan from JP Morgan wants to know about paid click growth and partner revenue growth rate: wants to know if its Google’s fault or volume’s fault.
4:57, Jonathan says hey we’ve done experiments. It’s hard to match the right ad with the right content. He says InVideo click throughs are higher than other ad formats. The hard part is that you’ve got to come up with a standard format. (Then why wasn’t Google participating in Starvest Mediacom’s standard-setting conference?)
4:56, Eric answers: We’ve introduced three new ad video formats. Each has some traction.” I think it’s fair to say we haven’t found one solution that drives revenues.”
4:56, Ben Shachter from UBS wants to know about video. Wants to know why YouTube isn’t experimenting more.
4:55, Patrick is back.
4:54, Jonathan is talking about the review process Patrick helped implement. Patrick once said he’ll starve the losers and feed the winners. Jonathan says Chrome is an example of how innovation continues anyway.
4:54, Momentum is strong in the Google Apps area. 1,000,000 business on apps.
4:53, YouTube is emerging as a key compentent of our display business. Sponsored videos are great, he says without offering any numbers.
4:53, Remember most of our advertisers don’t max out their daily budgets, so there’s lots of opportunity to grow there.
4:52, This was one of our strongest quarters in ad-quality improvement. Our ads coverage dipped some earlier this year and some of our launches helped us incraese coverage. We’re now only back to where we were at the beginning of 2008. (We’ve covered this closely.)
4:51, More people are searching from mobile phones. (How many more? 2? Gimme numbahs!) “Mobile search traffic went up substantially this year.”
4:50, He’s talking about Books search, “we’ll be creating a whole new market for out of market books.”
4:49, Jonathan takes the phone. The search index grew this year a lot. Latency on all products is down. Universal search tripled this year.
4:49, Summary: Core business strong in challenging environment. We have and will continue to make investments.
4:48, More on the options exchange program: intended to motivate and retain employees. The number of shares will not change. “We do expect to take a modifcation charge of $460 million.” This will be recorded as additional stock-based compensation.
4:47, Free cash flow, $1.8 billion.
4:46, Currency continues to work against us, but our hedging programs continue to work well — $129 million benefit.
4:45, 20K full-time employees at the end of Q4.
4:45 Our non-Gaap operating margin was 36%.
4:44, TAC $1.5 billion were 27% of total advertising revenue. Operating expenses totaled $1.65 billion (ironically the amount YouTube cost to buy a couple years ago.)
4:44, Asia and Latin America were solid on Brazil and China.
4:42, Patrick takes the phone. Gross revenue up 18%. Google.com was up 22%, driven by traffic growth and ads quality launches this quarter. AdSense was up 4% y/y driven by AdSense for Content Network, offset by AdSense Search. Paid click growth was up 18% y/y, 10% q/q , healthy across all geographies. INTL rev: 50% of total revenue. UK showed softness due to currency. Down 1% y/y
4:41 800 apps in the Android Google market place. (Apple has 15,000, says Frommer)
4:41 We’re really trying to bring the science of search to the art of display.
4:39, Our core focus is the huge untapped mrkt of search and ads. “Wouldn’t it be nice if Google understood the meaning of your search, not just the words in your phrase.”
4:38, 85% of our employees have some stock options under water. We’re going to offer people to do a stock exchange.Total options are expected to represent 3% of total shares outstanding. As part of the bargain employees have to give up 12 months of vesting. We thin that’s a good deal for shareholders and employees as well.
4:37, He says Q4 was the easy part. “We don’t know how long this period we’re last. We’re certainly prepared to get through this no problem.”
4:37, Eric’s talking about Google’s ROI advantage and about how consumers are comparison shopping.
4:36, “We had tight control over costs, something that alluded us in the past,” Eric says.
4:36, Eric’s talking now. Larry and Sergey aren’t even on the call!
4:35, Legal disclaimers.
4:33, CEO Eric Schmidt, CFO Patrick Pitchette, products guy Jonathan Rosenberg and sales boss Omid Kordestani are on the call.
4:32, Standbye, we’re beginning.
4:30, Call starts soon. Right now we’re listening to some lovely hold music. Some trumpets, some strings.
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Henry Blodget’s Preview:
Google (GOOG) reports Q4 earnings after the close. Please join us for LIVE COVERAGE of the results and conference call starting at about 4:30PM ET.
Our Bottom Line: Q4 probably OK, but 2009 estimates are still too high (11% growth seems unlikely in this environment). This makes sustainable outperformance by the stock unlikely.
Background: At $300, Google’s stock is trading at about 15X trailing free cash flow of $5 billion (Enterprise Value/FCF). That is a reasonable multiple, and it reflects a consensus that Google will see only modest growth in 2009. The stock’s valuation does not, however, reflect the real possibility that Google’s revenue might end up FLAT in 2009 (or worse). If Google’s trajectory in Q4 makes it clear that 2009 estimates are still too high, which we expect they are, the stock will likely go lower from here.
- Net Revenue (Gross – TAC): $4.12 billion
- Pro-forma Operating Income: $2.04 Billion
- Adjusted EPS: $4.96
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