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Net revenue was better than expected at $5.5 billion (vs. $5.25 billion consensus), up 23% year over year. EPS much better than expected at $7.64 (vs. $6.67 estimate).
Stock up sharply after hours.
The earnings strength came from both revenue and operating leverage (both good). Adjusted operating income was much better than expected at $2.93 billion (vs $2.55 billion consensus).
Paid clicks were up a strong 16% year over year, and revenue per click rose 3% — both fine.
Free cash flow was $2.13 billion, which is actually down considerably from last year. FCF would have been considerably higher if the company hadn’t spent a mind-boggling $757 million on capital expenditures (buildings, servers).
Google now officially has cash coming out of its ears: There’s $33 billion sitting on the balance sheet.
Bottom line: A strong quarter, better than expected. Not barn-burning growth, but plenty healthy. Cash flow was impressive. The company could not be in a strong position financially.
Join us here for live coverage of the conference call at 4:30/1:30. Here’s the link to listen.
Live notes from earnings call. Apologies for typos, all direct quotes will have quotation marks:
4:31: Here we go…
4:32: Here’s Patrick Pichette Says Eric Schmidt will be there for Q&A. “Digital economy continues to grow.”
4:34: When I say our newer businesses seeing great momentum, “I mean it.” Jonathan will back it up with hard numbers shortly.
4:35: Other revenue up 35%, down sequentially because of end of Nexus One.
4:36: Turning to geo – UK lags a little bit in the economic recovery. Revenue in US up 26% y/y. In slides you can see how hedging is working. International is 52% of revenue. Up 20% y/y. The UK up 10% y/y. Using a fixed exchange rate it would have been higher.
4:37: The increase in Op EX is payroll, pro services, promotional expenses. Non-gaap op margin essentially the same as last year.
4:38: Headcount increase came from acquisitions.
4:39: Op cash flow very strong for the quarter. We continue to make investment in cap ex, they are lumpy from quarter to quarter.
How we’re going business for the long term — next 5 to 10 years. We continue to see oppotunity in core and emerging business. Growth agenda full throttle. Invest in people and product. Explosive growth in the digital economy creating a war for talent, which is out of sync with rest of the economy. We’ve stepped up hiring machine. Exploring how to attract and keep people in exceptionally competitive environment. Proud to attract over 1000 people in Q3.
4:41: On product, proud of truly innovative products. We plan to continue to attract top level talent.
Jonathan numbers on a one time basis.
4:42: Wont be updating going forward. Jonathan — from financials tremendous. But from emerging you have to guess, today with Patricks permission here’s new numbers.
Search more important than ever. More people online than ever, first thing is search. Doing search well harder than ever. Still one of the most cjhallenging problems. Why we’re proud of Instant. We made it not for more money, we did it because its better. Not much revenue, and its more expensive to maintain.
Why do it? Better experience. It saves 2-5 seconds per search people love it. More they use, the more they like it. Be clear — not launhced for revenue
But we do care about money.
A lot of great momentum with AdWords.
4:45: Ads on more than 10% of queries. Click rates up 10% and 30% on different ads.
Big numbers: Letter B — SO 1st big number is 2.5 billion as in display on annualized run rate of $2.5 billion. Doesn’t count text ads. Counts YouTube ads, display ads. You guys ask, where is multi-billion business? It’s here, it’s display.
Second: YouTube monetizing 2 billion videos per week thats up 40%. Just launched new ad formats. TrueView, so viewers can choose. When advertisers only pay for people that choose its more valuabel/
Third number: 1 billion — mobile annualize run rate of $1 billion revenue. People getting our services through mobile adding $1 billion in revenue. Mobile search has grown 5X.
All these businesses are growing.
AdMob counted in mobile and display.
4:49: Now it’s Q&A with Eric in the house.
Highest correlation between ad clicks and anything is query growth. That will dwarf any other factor. New formats also drive click growth. try them with Halloween cosutmes. Improving ad formats, clicks go up.
Ads done on a gross basis for display.
4:51: Of 2 billion views monetized what is that of total views? And is YouTube profitable?
Patrick — no comment on profitability. Have not and will not comment.
Jonathan — two points to connect on your own for second question. On traffic, we have 24 hrs of video uploaded every minute. And 2 billion views per day.
4:53: Social? real time? How does Apple’s app store affect you?
Eric — We will add social ranking clues over time. We want to make search more personal. We think that makes a better search result. We want users to be more logged in. So we can give them more information. As for real time, we already have significant feeds from Real Time companies. For instance, we have Twitter as part of universal search.
4:55: Eric still…success of one thing impinge on something else, but a rising tide lifts all boats. All the companies driving the web are doing well. From offline to online they’re searching more, using apps more, etc. From our perspective, we have Android which will be a huge huge success. Open, plenty of partners 90,000 applications, many have search. Dont see as a net negative.
4:57: Eric — one way to think about Android one of the biggest platform plays in the market. Market larger than the PC market. Think of mobile as phone + tablet. We hope to be the leader. People who use Android search twice as much as anyone else. Searches are shared with carriers no one else. On that basis, Android hugely profitable. Android likely to be financially successful. We can layer on value-added services.
Primary purpose now is the open platform.
4:59: On cost side, in which cost per employee declined, anything you put in place to continue that? Is mobile revenue strong enough to go with indirect revenue model.
Patrick — on cost per employee, it just example of us as generous but frugal. We’re just not a wasteful company.
Nikesh — on Mobile, we want to build an ecosystem. $1 billion run rate shows we have a revenue model. Search, display and app market. More people use these devices, moer they search. So we see no need to change.
Eric — Nikesh has argued display will become very large.
5:02: Eric — On Android stores. Goal is to make money for people making apps. Not revenue for Google. We think rival stores is a net win for everybody. Not revenue for Google, it’s for developers.
5:03: How are cpcs on mobile versus desktop? Can the gap be closed?
Jonathan — We started smart pricing on mobile. CPCs are lower because there isnt measurement isnt as much of a consumation. Don’t have credit card with them. As payment is built in, you can see it go up substantially. On devices like iPad, it’s more like the PC.
Nikesh — There are some formats on mobile like Click to call or hyper local which are making a difference. We are seeing monetization on mobile side. All advertisers want in on apps.
5:05: Can you see if tablet searches are incremental or cannibalization? Is tablet adwords similar to desktop/laptop? And colour on world growth?
Jonathan — no cannibalization from mobile. Complimentary to desktop. Mobile at lunch, weekends, evenings. Appear to be complimentary.
Nikesh — On international, trend positive. France Germany very very robust. Southern Europe, Asian markets good growth.
5:07: Apple makes more operating profit per handset? Whats your upper bound on monetization.
Eric — Our model is handset makers and carriers will make money. We will do value added services/ads. Tough to compare us to Apple. If you assume search monetization on mobile with equal PCs, then it will be highly lucrative. Ultimately, a very very strong revenue stream compared to the PC.
5:10: How do you get social w.o relationship w. Facebook?
Eric — someways without Facebook. Other ways in development.
5:14: TAC is lowest yet, is that sustainable? Growth volume not price, can pricing increase?
Patrick — on TAC, 1 is MySpace deal is over. There was a contract with minimum that is gone. As for Volume v. Price?
Jonathan — not sure how to answer…I dont think I see more SEO versus SEM. Pricing has been healthy coming from a recession. Bids are strong. Advertisers see value, optimise.
Eric — continue to make alogo improvements to ad targeting.
5:17: Do you think Google can do daily deals? And what about private/exclusive info?
Patrick — Web is growing, so all the exclusive data should be on the web.
Eric — always a concern large collection of data not accessible to search engines. Up to content owner to decided. We think the world is better off if info is searchable.
5:21: Another q…
On Instant — Jonathan says ready in late fall for mobile.
Patrick — 200,000 handsets activated a day.
5:22: Non-core search bigger part of business, how are you allocating resources?
At end of day, our job to divide between classic core businesses and emerging ones. We’re informed by hockey stick nature. Look at Android, small but growing. Going against large giants. They get what they need.
Nikesh — when you see a hockey stick pour gas on the fire (Mixing metaphors!)
5:25: How does Google think about data on people?
Eric — we take end user data privacy very seriously. With search history or anything else, people get very upset if we misuse it. We try to get explicit permission.
5:26: LAST QUESTION…display and evolution?
Nikesh — Glad to disclose $2.5 billion, puts us in top display cos in the world. Primarily display in banners, but video coming into it. We think that will change. We will see more and more monetization of video. We think network has more frequency and reach.
5:28: Patrick — reiterate we gave a few indications of success in businesses. Not about more information in the quarters to come, but about the future where we’re going. And thanks to the Googlers of the world.
Here are the earnings slides:
Google (GOOG) is reporting Q3 earnings after the market closes today.
We’ll be covering all the action live, so tune in here around 4PM ET. In the meanwhile, here’s a preview of what’s to come.
Mark Mahaney at Citi is calling for a “neutral-to-negative” quarter, which is the general consensus.
The most important thing he’s looking for is “U.S. Revenue growth greater than 24% Y/Y or 6% Q/Q.” This “would confirm Q2’s acceleration point and support the Bull thesis that Search format innovations, Mobile, YouTube & Display Ad Networks have become material enough to change GOOG’s revenue growth.”
Key consensus estimates:
- Q3 net revenue: $5.25 billion.
- Non-GAAP Operating Income: $2.77 billion.
- Non-GAAP EPS: $6.67
Here’s Mark Mahaney’s cheat sheet on Google’s earnings. Click here, or on the image for a bigger version.