RELEASE OUT! Here’s a link.
QUICK TAKE: Google’s Q2 was basically in line with expectations. Revenue was slightly stronger than expected, EPS slightly worse. Overall, it seems like an OK quarter, but nothing to get excited about.
Paid clicks, Google’s primary revenue unit, declined sequentially, which is not good news. On a year-over-year basis (from the depths of the depression), paid clicks rose a reasonable 15%, but this was an extremely easy comparison. Revenue per click rose modestly sequentially, offsetting some of the decline in clicks.
Free cash flow was not nearly as impressive as it has been in recent quarters, declining to $1.6 billion. This was primarily the result of a big increase in capital expenditures (which are lumpy) to $476 million.
BOTTOM LINE: Growth will remain a concern as Google’s maturing primary business–search–continues to decelerate. Other promising businesses–YouTube, mobile search, display, etc.–are still too small to make a real contribution. At $485, the stock is trading at about 12X trailing EBITDA. As long as growth continues to decelerate, we expect the multiple will generally continue to compress.
- Net revenue was slightly better than expected at $5.1 billion (vs consensus of $5 billion).
- Adjusted operating income was just shy of consensus at $2.67 billion (vs consensus of $2.71 billion).
- Adjusted EPS was slightly light at $6.45 (vs $6.48 consensus).
Here’s a link to the conference call, which starts at 4:30 ET: http://investor.google.com/webcast.html. Please join Jay Yarow here for live conference call notes:
CONFERENCE CALL (starts at 4:30 ET)
Here we go. Assume we’re paraphrasing unless you see quotes.
We’ve got Patrick Pichette talking now. Overall “very pleased” with Q2 results. More traditional brands are embracing digital. For example P&G now one of the biggest advertisers.
We’re seeing a lot of integration across display, search and mobile.
Display network “growing very rapidly.”
YouTube, “very impressive growth,” as brand advertisers consider it a must buy…Coke, Nike, Visa, etc. all bought for World Cup. We’re pleased court ruled with us against Viacom in the YouTube case. Invested $100 million this case.
Underpinning out growth in mobile is Android, with 160,000 phones activated daily.
In Q2 added over 1,000 employees in search monetization, display, mobile, apps.
Gross revenue grew over 24%. Our ad sense revenue up 23%. Other revenue up 39%, includes last quarter of Nexus One sales. Stop selling Nexus One directly. Still sold through various carrier partners.
On relative basis, UK lagged the rest of the world. Revenue from US up 26%.
TAC was $1.7 billion. Cost of revenue $735 million. Finally op expenses were $2 billion, with approx. $300 million from stock compensation.
Headcount up 1,200 heads v. Q1. Reflects acquisitions.
Announced a $3 billion commercial paper, important for more capital efficient structure.
Op cash flow at $2.1 billion.
Free cash flow at $1.6 billion.
Now it’s Jonathan Rosenberg…let me start with search. Used to be simple, now web is much more complicated. So, scale of web is grand and not slowing down. We migrated index to new structure called caffeine. Now the results are a lot freshers, in fact 50% fresher.
Launched a new UI. “I especially like the timeline feature.”
We’re getting better at quickly answering queries. Try entering Barack Obama’s birthday.
We’re putting more wood behind fewer arrows. Search is definitely one of those arrows. We’re putting out weekly blog post to update all the search updates.
You have to make ads people actually want to watch now that users don’t have to watch ads. Lots of upside in improving ads. We added new ad formats. Focused on quality with new ads this quarter.
if you search from phone, more likely to click on ad if there’s a phone number. Carnival Cruises increased mobile clicks by 160% by including phone number.
Display, by the way, is going well.
We want to be open in everything we do. We think it makes everything better, which means people use the internet more, which helps us.
Android up to 160,000 daily from 65,000 the quarter before. JOnathan likes the EVO phone. There’s 4G in Mountain View. He says Android has 70,000 apps.
We just launched feature if you have a PDF, upload it and we convert it to text.
4.8 million hours for people playing Google doodle of Pac-Man says Jonathan, then he went “bloop bloop bloop”
PAid click growth of 15% how much is coming from mobile? On TAC, down a little, where you think on % basis that’s trending?
On mobile, certainly growing faster. In case of TAC, most of TAC we have today, there’s no big jump going forward. It’s been pretty stable.
Where is headcount allocated? In terms of CPC, difference on mobile versus desktop?
1,200 new employees, around 300 come from M&A. Organically is more like 900. As I mentioned, most of headcount is in engineering and sales, vast majority to core areas, search and seach monetization, mobile, apps and display. So much momentum in them that;s where they’re going.
On CPC, I don’t think enough data to disclose. Mobile advertiser sees it as differnt than desktop. Some disparities.
Can you talk about investment into Android platform? How do you think about it? Is this a real installed base revenue opportunity?
HIgh level — Android is not in terms of cost, not material to company. Some of the key products have not been developed by Google at all. The Droid X developed by Motorola, not involving Google. Not a huge suck on resources.
Most important app on these devices? It’s the browser and they search on a magnittude more than they ever did before. And that’s the formula around how Google succeeds.
Do you see losing search to application?
Android search grew 300% in the first half…Mobile has grown 500% in the last 2 years. And Android is an accelerator. That’s how to think about hte problem and solution we bring.
About the $3 billion commercial paper?
Gives us flexibility. If we need it. On share buybacks, it’s debated around board, but we have no announcement.
Macro, it’s been a great quarter for us at Google. That’s why we said for last few quarters, pleased with how we’re performing.
Can you comment on cash breakdownb International v. US?
It’s about 50-50.
How is display sold/what’s popular?
CLick to call ads on mobile doing very well. Thousands of active campaigns on click to call. We change the way we do site links, allows more to show up.
The ad innovation on display, tremendous. YouTube front, new ad formats, more richer ad, more an advertiser will to contribute. More appetites for them. More return for the advertiser.
Costs are immaterial for Android, what’s margin on display?
Display business has slightly lower margins. But overall, still quite healthy.
Mobile CPCs are lower.
On issue of Europe and FX, everyone has a model, but incredible roller coaster right now. Last Q versus this Q, it’s tough. Our hedging is a long term hedging. It’s a tough puzzlue but take a look at Y/Y.
Do you think Android is defensive?What is appetite to create other revenue outside advertising?
Highest level — yes it’s both. Did it for offensive. We think open platform is incredibly important. We know new formats create new opportunities, you search and you buy. We’re investing heavily because the ecosystem wants it. Second, we are doing innovation with cloud computing. yes defensive, yes offensive.
Analyst: Do you think other models outside ads need to be explored?
Analyst: Like apps?
Google doesn’t seem to be believing in this idea.
Mark Mahaney: Close to profitability on YouTube last year, you there yet? Display new customers or just the same?
We don’t comment on YouTube. But “incredibly pleased” with its trajectory 1 billion monetized videos per week, 2 billion videos served daily. In that sense, read in the tea leaves, it’s a great business for us.
Many advertisers coming from television, we see an integrated campaign. P&G one of our larger advertisers this quarter. We’re seeing agencies realising this is an integrated buy you need to do.
Android as OS?
Too early to tell if it will be a revenue opportunity as an OS for computers. Still too early to comment on Chrome OS as a business.
Regarding paid clicks being 15%, what keeps it so robust?
Biggest thing, secular shift from offline to ROI based model of search advertising. We did see a good bit during the recession. On our side, doing a lot on ad quality. And ad formats served to drive clicks.
People are searching, people are searching, people are clicking.
On surface level, seems you lost some marketshare?
Highest level — a lot of debate about methodolgy, even the press cautioned. Just be cautious. We are pleased with marketshare —
Are you losing marketshare?
…On hiring, for us as we said three quarters ago, recession is over. So we’re investing in the company. It’s the right thing to do. Looking at a trend of continuing to invest.
On the autoroll slideshows, it’s a spurious request, not really an incremental request. We want to consumate transactions. What we care about is the number of genuine searches. It wouldn’t help us in any respect other than counts in share data to cause artificial growth. Basic answer, no, we don’t care about slideshow bumping Bing and Yahoo.
What countries stand out on growth perspective?
Rather not say. Some countries like Russia, India, Brazil taht are growing. France performed well, Australia performed well.
…Quick observations on driving CPCs up: I don’t see anyting from user perspective that is impacting equation. On positive side conversion rates are improving. See Google.com improves. Obvious things that improving is mobile and emerging markets.
Other revenue is slowing down on q/q basis?
In essence it’s one word: It’s Nexus One.
China — we’re in the same place as last time we talked. Good news licence renewed. Revenue from China is not material to our revenue, but we had decent revenues, but I don’t want to talk about it.
Click thru on mobile v. PC?
We dont break out. For mobile system to move v. aggressively will require commercial transactions on mobile. Ad Sense on mobile doing well. Display on mobile does really well because it really gets in your face and typically you’re not doing much on the mobile — as far as multitasking is concerned.
…Display buying is shifting to audience buying. Don’t want NYT.com, I want 18-34 female. Advertisers want audience and want to buy across publishers. Makes it important to have ad network across different publishers.
On acquisitions, what are you thinking?
We have, there’s a real triangulation — think of it as talent, IP, and enterprise. We want sweetspot where there are teams of people with leadership. There’s a price when it’s not worth it to us. What we do is we ask does it fit in our company, in our core area where we want to accelerate. AdMob is a great example of that, great company, right price, integrate into what was already the roadmap.
There are ample deals we walk away from because of price.
How additive are mobile searches?
No data, but intuitively, think about it this way. If you at desktop and you have mobile, you’ll do it with desktop. But, other times, you’re out with your mobile and you search, so its incremental. Also think it’s slightly different. On weekends see more mobile.
More on YouTube?
We look at YouTube, and we monetise many ways. We’re in the early stages of video ads. Advertisers still just taking TV ads and splicing them in. Not taking advantage of personalised ads. Not interactive. We see more monetization opportunities.
On Viacom, obviously, with more clarity gives us room for experimentation. Now with clear bar more room for experimentation. Just look at Old Spice for interactivity.
Ad exchange allows buyer to buy across networks.We’re trying to prove we can create a network of advertisers. YouTube becomes owned and operated, and margins are higher, allows us to accumulate content to monetise.
And that’s that!
Analysts have been slashing their estimates in the last few weeks. The primary culprit is changes in the foreign exchange rate, though the Nexus One failure also played a part. Google’s China mess isn’t helping things either.
Even with analysts slashing estimates, Mark Mahaney at Citi writes, “Based on extensive intra-quarter channel checks and our model sensitivity work, we believe Street Q2 EPS estimates could be at risk, in part because some Street estimates haven’t been adjusted for FX and reduced Nexus One revenue.”
The good news there is that expectations are very low. So even if Google just meets consensus, the stock might go up.
Fundamentally, Google needs to find its next growth engine. The company says that’s display advertising, so we’ll be looking to hear about the growth in that business.
Key consensus numbers:
- Q2 net revenue: $4.99 billion.
- Non-GAAP Operating Income: $2.71 billion.
- Non-GAAP EPS: $6.48.
- Beyond these numbers, we’ll be curious if Google updates the Android sales. Most recently it said it was activating 160,000 phones daily.
Here’s a great snapshot of what to expect from Citi’s Mark Mahaney. (Click here or on image to enlarge.)
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