But after investors initially sent the stock down about 3%, it recovered and ended up almost 2%.
So what’s going on?
Basically, for investors the Google story is stable, but boring, and that’s OK.
Ad revenue from its core sites is growing slower than it used to, but it’s still growing, and from a huge base. Google spent a little more than usual this quarter, but a lot of that was real estate to house its growing workforce.
CFO Patrick Pichette reassured investors that Google will keep spending on wild new stuff like self-driving cars only as long as its core business is strong.
Notably, the “other” business segment — Google enterprise and cloud — booked almost $US2 billion last quarter, and grew almost 20% from last year, showing that perhaps Google is becoming less of a one-trick pony.
Interestingly, Facebook posted bang-up numbers Thursday, but the stock is basically flat. These big internet companies have become blue chips, basically. Everybody knows what they’re doing, and as long as they execute their plans successfully, things will be just fine.
Here’s a recap of the numbers.
- Revenue (minus traffic-acquisition costs) was $US14.48 billion versus $US14.61 billion estimates (according to Yahoo Finance).
- Gross revenue was $US18.1 billion, up 15% from last year.
- Adjusted EPS was $US6.88 vs. $US7.08 expected.
- Google Sites revenues were $US12.43 billion, up 18% from last year.
- Google Networks revenues were $US3.72 billion, up 6% from a year ago.
- Paid clicks were up 14% from last year, and 11% from last quarter. That means traffic has continued to grow, as expected.
- Cost per click was down 3% from last year, and 3% from last quarter. That means advertisers are paying less for each ad. The decrease in CPC is worse than Q3’s, which was down 2% from a year ago.
- The “other” segment, which includes Google’s enterprise business, booked $US1.95 billion, up 19% from last year.
And here are the highlights of the earnings call:
CFO Patrick Pichette is blaming a strong US dollar for cutting revenues by $US468 million this quarter. In addition, the company had trouble securing enough inventory to ship as many Nexus 7 phones to meet demand. (Actually, he meant Nexus 6, not the Nexus 7 tablet, he clarified later.) There were also more than $US300 million in additional operating expenses this quarter. There was also some real-estate expense this quarter.
He’s going to be talking quite a bit about paid clicks, and cost per click, so these two slides from the investor presentation will be relevant. This one shows paid click growth in each of the last eight quarters:
This is cost per click over the same period:
This is interesting because the number of paid clicks is going down on Google sites but up on partner sites. The trend for CPC is exactly the opposite.
Now Pichette is talking about unusual expenses. Google took a write-down on some real-estate assets and bought some long-term leases where it needs spaces. It reclassified some stock-compensation expenses.
A lot of talk about real estate. They invested “just over $US900 million” in real estate, about half of which was the new Redwood City campus.
Now he’s talking about Google Glass: “In those cases where projects don’t have the impact we hoped for,” we will cancel them.
Chief business officer, Omid Kordestani, is detailing the quarter. Not much information here apart from what has already been shared in the press release and related slides.
“Last week, we saw our one millionth tap of a Cast button” on Chromecast.
Now comes the Q&A section.
The first question: How’s the UK doing?
Pichette: 11% growth. Core business is doing fine, but mix is a little less favourable than other countries because our less-profitable network business is stronger there.
Question: Talk about hiring. It slowed down a bit. And what about capital expenditures versus margins?
Pichette: There are only so many leaders we can hire that will fit into the Google culture. As far as capex goes, we’ll invest in things like Google Fibre, which are capex intensive but have big growth potential. Google Play, they’d love to grow it 10x faster than it’s growing today, even if it affected margins.
Question: What about a capital return? (Apple, Microsoft, and many other companies return capital through stock buybacks or dividends.) And are you worried about partnerships given Mozilla and Yahoo?
Pichette: “Share price does matter. It matters to our board, it matters to all of us, we are all shareholders in the company.” But nothing to announce.
No comment on Mozilla, but we want to make sure users are happy. “When you make wonderful products that are magical people will find them.”
Question: What do you mean Google is willing to “throw a little back”?
Pichette: We invested a lot in 2014. Lots of areas of excitement. But investors should continue to understand “we will push for growth, in a disciplined matter.” They monitor new things very closely, and draw back on investments “in a prudent matter.”
He’s noting that 18% year-over-year growth in core business — Google Sites — is a “licence” to keep investing in new areas.
Question: There’s a bill to allow repatriation of cash at 6% tax rate. Would that impact how you spend?
Pichette: Absolutely. Mix of cash is 60% international and 40% US, but it would make a big difference.
Question from Mark Mahaney of RBC: Talk a bit about YouTube? What do you want to do differently there?
Kordestani: Customers have “tremendous excitement” about YouTube. YouTube Mobile revenue up more than 100% year to year. Over 1 billion people per month.
“The challenge, frankly, is to structure our sales org, hire the right people, go deeper with these customers, agencies.” They’re going after big branding dollars.
Question: What’s your digital payments strategy and how does it tie in with Android? And how important are search partnerships, like the Apple Safari deal?
Pichette: “Google has a lot of partnerships. It’s an anchor of our strategy. It gives us distribution, distribution is good.” But they have to be win-wins.
But the second half of the strategy is building amazing products. If you build amazing products, people will want to distribute them. That’s what Amit Singh and his search team are doing. “That’s the core of what we’re focused on.”
Kordestani: Two areas of focus. First, building full functional payment system that’s beyond tap and pay. Using Gmail and the Wallet app to send people to friends, loyalty and gift cards, Buy with Google buttons. NFC devices are available, we are getting closer to broad merchant adoption.
And that’s a wrap.
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