Google reported solid quarterly earnings this afternoon, but EPS was slightly below expectations and expenses were high. The expenses were apparently cause for investor concern, and shares have dropped more than 5% after hours.
In particular, cap ex spend was $890 million. Google explained most of that was related to the purchase of new buildings in Dublin and Paris.
Operating expenses were also up thanks in large part to the 10% one-time salary raise, which kicked in this quarter.
In a Q&A with investors during the earnings call, several analysts wondered if this level of expenditure is the only way Google can continue to grow revenue more than 20%. Execs tried to reassure them that Google is measuring and paying very close attention to the expense side of the equation.
Gross Revenue of $8.58 billion was slightly better than expected and rose a strong 27% year over year.
Net Revenue of $6.54 billion slightly better than expected.
Adjusted EPS of $8.08 is slightly–slightly–below expectations of $8.13. Revenue was strong, so the key will be whether the earnings miss is the result of lower margins (bad) or, say, a higher tax rate (irrelevant).
Paid clicks growth was better than expected at 18% year over year (vs 15%-17% expectation). This is Google’s key revenue unit, and better-than-expected unit growth is positive.
Revenue per click increased 8% year over year, at the high end of expectations.
Free cash flow was a solid $2.2 billion. Cash flow from operations was spectacular–$3.2 billion–but the company spent an astronomical $890 million on capital expenditures, much more than expected. (What on earth are they spending all this money on?)
Product highlights: Android is getting 350,000 activations per day. Chrome now has 120 million users — that means 120 million people who are more likely to be “locked in” to Google services. YouTube revenue is doubling every year, but still no concrete numbers to share.
Bottom line, Google remains robustly healthy. 27% year over year revenue growth in a company this size is extremely impressive, and the core search business is humming along. The high capital expenditures are a question and concern–it will be interesting to hear what the company says about them on the call.
Here are some slides from the deck Google used on its earnings call. Scroll past them for our live blog of the call itself.
You’ve got to love 27% growth from such an enormous base.
Traffic acquisition costs are looking good as well:
But this is what investors are worried about — costs rising as a percentage of revenue, particularly R&D and sales and marketing. A lot of that is salary-related:
Here’s another way of looking at it: operating margins are getting lower:
Here are our notes from the call:
4:27 ET: We’re waiting for the call to start. We’ll see if Larry Page jumps on, since he just took over as CEO last week. He’s reportedly investor and press shy, so we’ll be curious to see how he performs.
One slightly curious note: the call isn’t being broadcast on YouTube as it has in the past.
4:31: Larry will join at the beginning of the call. It’s also Patrick Pichette, CFO. Two of the new senior VPs are on board as well — Susan Wojcikci (advertising), Jeff Huber (local and commerce). Plus Nikesh Arora, the chief business officer, who’s been on past calls.
4:33: Page notes 27% revenue growth. Tremendous improvements still ahead. Now he’s talking management changes.
“Everything we told you last quarter has happened.” He’s managing day to day operations as CEO. Eric Schmidt is on government and partner outreaches — last quarter he was in Germany, Brazil, Argentina, and Spain. Sergey working “very intensively” on a few projects.
4:34: Also made changes to simplify their org structure. He’s thanking Jonathan Rosenberg, who’s been on most of these past calls.
That’s about it. Now it’s on to Pichette.
4:35: Expenses show the 10% across the board raise for the first time.
Gross revenue up 27%, $8.6B. It actually rose 2% quarter to quarter — and last year Google had the Nexus One goosing revenue. Plus this year the disaster in Japan.
Google Network revenue up 19%. Negatively impacted by loss of search distribution deal, plus search quality improvement — spam control. It always serves us well.
Other revenue was down 10% year over year to $269 million. That’s mostly Google Apps and Enterprise Search, a very small business.
Aggregate click growth up 18% year to year, and 4% from last quarter. The shift from offline to online is driving that.
4:40: International revenue was 53% of total.
TAC was 25% of total revenue, $2.2B.
Overall opex totaled $2.8m, including stock-based compensation.
Opex increase is primarily payroll, some advertising.
Op margin 37.6%
Headcount up 1,900 during the quarter. total 26,316 employees.
Capex is facilities, data centres. Facilities driven by purchases of buildings in Dublin and Paris. Capex is “lumpy from quarter to quarter” depending on when it wants to make capex investments.
4:43. Boasting about Android, fastest growing mobile OS, and Chrome, fastest growing browser. Pushed frontier of mobile search which is adding to overall search volume. YouTube “win win” platform for content owners and users.
Second half of 2010, grew 25% year to year. This quarter 27%. Compared to comp of 23% a year ago. “We are building multibillion dollar businesses” and confident now is the time to invest. Discipline.
4:45: Local and commerce SVP Jeff Huber.
Ambitious hiring this quarter by design. 2011 will be biggest hiring in history, hired 1,900 this quarter. Core and growing businesses are doing well, so “who wouldn’t want to invest in this business.” Over half the “Nooglers” who joined will be in new areas like YouTube, Chrome, Enterprise.
Search: improving quality. Launched over 90 quality improvements, including changes to ranking algorithms. Impacted about 12% of queries, and addressed over 80% of sites that users reported.
Had adverse affect on revenues on SOME SITES in Display network. But improving search is always the best thing to do in the long run.
Personal, as in building around people. Launched the +1 button, easier to share results. “This is just the beginning” more personal search coming soon.
Mobile traffic up 500%+ over last two years.
350,000 Android devices activated per day. Recently launched in-app billing.
Chrome: users “very valuable”. Investing in Chrome marketing. Now more than 120m daily users, more than 40% added in last year.
Chrome OS “also going well” and look forward to launching devices later this year.
Enterprise: growing across businesses and schools. New deals, reseller agreements. University of Texas, Boston U.
Pleased our ITA deal closed, travel search lots of room for innovation there.
Huber is now thanking Jonathan Rosenberg as well. “Friends and colleagues for over 15 years. He will be missed”
4:49: Now it’s Susan Wojcicki.
Lots to be excited about in ads. Search is still core, but big oppty for growth.
“How can we search the perfect ad for every query?” New creative types, new ways for advertisers to set up campaigns. Product Listing Ads, introduced Q4 last year.
Display advertising: bought DoubleClick 3 years ago, lot of integration, lot of progress. Display Network up 5x since acquisition, doubling annually in Brazil, UK, and Japan.
Display advertisers either performance oriented (conversions) and brand oriented (awareness). Launched new stuff for brand advertisers, like Display Ad Network Reserve — buy premium inventory on a guaranteed basis. Also tools to measure effectiveness of campaigns — not just clicks.
Ad Exchange — transaction volume has tripled in past year, 2/3ds of that inventory bought via real-time bidding.
YouTube: revenue doubling year over year, shared with more than 20k content partners. The more money we make for them, the more engaging stuff they upload.
AdMob: over 150 million iOS and Android devices, up 50% in last four months.
Advertisers starting to run mobile-only campaigns. Incorporating local — how far are you standing away from the advertiser’s location right now?
4:55: Pichette taking over again for Q&A.
Q: Opex up 45% year over year excluding traffic acquisition cost. Is this kind of spending required to retain 20%+ revenue growth? Or one-off?
A. Clearly the effect of the one-time salary change. Salary increase flows through to other stuff like 401(k) and vacation, so disproportionately felt in first quarter. “Nooglers” as well. One-time step change in labour, but after that regular.
Marketing has increased since last year because it’s providing great returns. Both customer acquisition and key products like Chrome.
Still disciplined: quarterly reviews to get your next funding.
Q. What about marketing costs? What’s going on?
A. Professional services. Chrome — really pushing the web. When they get Chrome, instead of having to look for Google, they get it. It’s there already. “Everybody who uses Chrome is a guaranteed locked-in user of Google.”
Q. How does Larry view the company differently than it was?
A. Position hasn’t changed. We’re a tech company, focused on users, looking for products that can affect billions of people. Computer science helping find problems for billions of people.
If you think that way, Chrome, Android, search all make sense. The 70/20/10 is very alive. “Search is the next billion dollar business.” 90 improvements on one side, 40 on the other — search still in our infancy. Mobile, display, enterprise.
10% is commerce, social, stuff that’s nascent. Strategy same core lenses, same products that serve billions of people.
Q. But financially? Any meaningful difference?
A. No. Build great products, same financial discipline.
Q. More about opex. Customer acquisition in Chrome, salespeople. Do you think your 20%+ growth rate would be achievable without these costs? Will you still get the growth without the costs?
A. Strategy in context of last 4 to 5 quarters. Trajectory of revenue growth, 23%, 25%, 27%. We’re funding revenue growth with discipline. “Carpe diem, it’s there to take.”
Q. Imagine display is $20B based on various figures. Right now you’re at 10% or so. How big can that be? And as display gets bigger, how does that affect margins?
A. Search unique with very very high margins. Display more paperwork. But still very good margin product. “All of those dollars I want.” Plus great “symbiotic” relationship — display ads now showing up in search.
Could say that display was stalled at $50 to $60B because video wasn’t there. YouTube helps reach 23 to 24% more consumers. Efficiency of Web applied to video. All efforts trying to build that display, rich media and video. Every profitable dollar of revenue is good.
Q. What about social data? You don’t run social network. Do you need it for search?
A. Jeff Huber — it’s important, we use 200+ signals for ranking search today. It’s one of many inputs. Assets that apply to that, we do have large number of users coming to our door every day. Considerable percentage logged in, using multiple products.
Pichette: launch of +1 is commitment to get every signal. Continued focus on social as one of 200 signals.
Q. Does Chrome give you any signals you can integrate into search results?
A. Huber — will be part of story over time, personalised today. Chrome experience, can sign into Chrome, will sync info across computers.
Q. Where are those bold steps to control expenses? We don’t see it. And is social really just one of 200 variables?
A. On expenses, you see ramp-up on one side. Guarantee you everybody who has cost centre has to demonstrate productivity. Data centre, incredibly steep. Sales force. We always think of cost per x. Cost per bit for data centres. Even food, everybody has productivity curve.
Google is growing 25% year over year from a $25B base. Tide coming with it, but every element of the company is “scrubbed and scrutinized.” The unit costs haunt many of my managers.
Huber now on social: one of many signals. We regularly measure and tune.
Pichette again: expenses, we really want to lay the ground clear on these issues.
Q. Search algo changes — how does that affect search ads and cost per click? And what’s driving display ad revenue growth — ad units or more targeting?
A. Huber: 12% of queries affected. Was Web search only, not ads. NO effect on CPC. Did affect display network, but focus is on user experience.
Wojcicki: Can buy audiences, target more effectively. It’s both. End to end platform to enable buying across the Internet for all advertisers and all publishers.
Pichette: Some properties tuned to display like YouTube, but entire Web is more powerful than any single prop.
Q. What about tablet share — is it as important as smartphone share?
A. Jeff Huber: tablets doing well, lot of growth in that segment. Dynamics — hybrid between mobile and desktop when you look at user behaviour. Optimistic about Honeycomb. Xoom was product of the show at CES in January. More products, more innovation.
Enable advertisers to target tablets, which will help that segment.
Q. Employee bonuses and social — define success?
A. This is an internal matter. We focus a strategy across many platforms, we wanted to signal to employees that social is an important signal and worth investing. No further comment.
Q. Search important, but engagement might be more important. Have you looked at 70/20/10 and think about shifting to build greater engagement? Look at how other products and services can be integrated in?
A. Web in general, how platforms are growing, we’re focusing in areas where engagement matters. Local, mobile, YouTube, all about engagement. Mobile, Chrome. Technology fuels engagement. At highest level, search itself is more engaged today than it was 3 years ago. It’s part of our strategy.
Q. Engagement through frequency rather than share of time.
A. When you are in YouTube, you’re spending more time in YouTube. Android phone, now visiting and in town, additional signals sharing with friends etc.
Q. Does Chrome give you potential to create unique products, apps, content services?
A. Huber: great opportunities in that. Chrome Web Store — same model as Android Market, bringing it to that platform.
Q. How much is a mobile user worth today, and how do you think about larger acquisitions?
A. Can’t answer about mobile user. Look at our focus, we’re very excited about mobile. Great potential there. Monetization side — click to call ads. Locally targeted ads, ability to engage users where they are. Smartphone will be way people do everything — inform, entertain. It will merge.
Q. Do you think value can go up order of magnitude in 3 years?
A. Wojcicki: very early in what mobile can do. Will grow overall opportunity, overall pie.
Nobody is going to say a substantive thing about acquisitions.
We haven’t found big one that will significantly accelerate our growth. We have a really focused agenda, don’t want massive distraction. Google is a specific culture — big acquisition must be both financially sensible and cultural fit. “That’s a pretty high bar to pass.”
Q. Non cost-per-click ads — what kind of growth are you seeing? And does Google have a video strategy outside of user-generated content?
A. We have new people on board with YouTube to expand beyond user-generated.
Huber: user-generated is huge. But we’re interested in “long-form premium content,” another area is developing content of, by, and for new medium being created. Next New Networks acquisition was there.
Wojcicki: we’re allowing advertiser to bid with CPA (cost per action) then Google figures out CPC (per click) in background. Also CPM (per impression). Depends on whether advertisers are more performance or ad-driven. As we introduce new kinds of ads for brand advertising, CPM will become a bigger deal.
Q. How bad was Japan? You also said 350k Android activations per day — can you give breakdown smartphone v tablet and US v international?
A. Our first response to the events was to help the Japanese community. People finding people and disaster recovery. Focus on community, not optimising revenue.
Tons of searches, by the way, but not monetizable searches. Japan is great market for us. Historically they bounce back fast. We can’t predict how will rebound on advertising, but it’s a 1st world economy that will recover.
Huber: Android. Not going to answer the question. But we have strong partnerships in Europe, Japan, Korea, and international is growing. Android is relatively early on in tablets, Honeycomb just came out. Big innovations coming.