Google posted very strong Q2 earnings numbers, blowing past expectations and sending the stock up 12% after hours.The main strength was Google Sites (search) revenue, which was way ahead of what everybody expected. Revenue from the ad network came in about where expected.
But operating expenses were up almost $1 billion from last year. That’s probably from Google’s hiring spree, plus the cost of rolling out Google+.
Larry Page also took a major role on the company’s earnings call, giving a fairly long introductory speech about the company’s current position — which he then posted, verbatim, on his Google+ account — and sticking around for the Q&A session afterward, even occasionally interjecting when he wasn’t asked to comment.
Here are the basic numbers:
- Gross revenue: $9.03 billion (up 32%) vs consensus of $8.59 billion.
- Net revenue (minus traffic acquisition costs): $6.92 billion –higher than the high-end estimate of $6.75 billion.
- Non-gaap EPS: $8.64 vs consensus of $7.68.
- GAAP EPS: $7.68
- Google Sites revenue: $6.23 billion vs consensus of $5.83 billion
- Google Network revenue: $2.48 billion vs. consensus of $2.47.
- Traffic acquisition costs: $2.11 billion vs. consensus of $2.07 — that’s not a huge deal, but might give investors some concern.
- Operating expense: $2.97 billion — almost $1B more than last year’s $1.99 billion figure. But that’s down from last quarter’s adjusted figure of $3.34 billion (which included a $500 million legal charge that Google took after it reported earnings).
- Capital expenditures: $917 million. That’s even higher than last quarter’s $890 million, which seemed shocking at the time, but apparently everybody was expecting this. Probably real estate and data centres, mostly.
Here’s the slide deck that will be used in the earnings call. Scroll down to see our coverage of the earnings call.
1:30pm | Welcome! We’re listening to some lovely flamenco guitar music. If you want to follow along live, the link is here.
1:32pm| We’re on. Jane Penner from investor relations is giving the usual caveats. Larry Page will be on the call, along with CFO Larry PIchettte, Ad SVP Susan Wojcikci, and chief business officer Nikesh Arora.
1:35pm | Larry Page: new record for revenue at over $9B. We’ve accelerated product release, big goal of mine. New management team is working together fabulously. “Our goal with Google+ is to make sharing on the Web like sharing in real life.” Circles has been very well received because in real life, we share different things with different people. Hangouts allows “serendipitous interactions” like in real life when you run into real friends.
1:36pm| Last month we released +1 to Google search, this month it’s all over. Google+ is still in limited field trial, users must be invited. But the growth has been great, and I’m excited to release new metrics. Over 10 million people.
1:37pm | “more wood behind fewer arrows” — closed Google Health and Power Meter. Doing other work behind the scenes to get products out faster. “Believe it or not we’re still in the very early stages of what we want to do. Even in search, which we’ve been working on for more than 12 years.”Pilot program this quarter — put author’s picture in search results. “When we started doing search, people thought we were crazy — there was no money to be made in search advertising other than a few banner ads….fast forward today, it feels like we’re watching the same thing in slow motion.
1:39pm| Android — 550,000 activations per day. Chrome has 160m users. How will we monetise these businesses? “I understand the need to balance short-term with long-term.” But he’s convinced these new businesses will create huge new opportunities in the long run, and they have lots of experience monetizing search.
1:40pm| He thinks of Google as three businesses. 1. Search and ads. 2. Products enjoying high consumer success — YouTube, Android, Chrome. Investing in those. 3. New products like Google+ and local, investing there as well. Focused on long-term investment and growth. Tight financial management as we’ve been doing last two years.
1:40pm | Great people are required. Hiring the best, keeping them happy and well-rewarded. We will optimise headcount for the long-term. We’re probably ahead of where we need to be at headcount growth. It’s easy to focus on the speculative things we do like driverless cars, but we’re very careful stewards of shareholder money. “We’re not betting the farm on this stuff.” We want to create products that people use twice a day, “just like your toothbrush.”
1:42pm| That’s why I’m here. Thank you, and we had a great quarter.
1:42pm| Page is signing off for now, but he’ll stick around for the Q&A. Looks like he’s acting more like a traditional CEO after all. Now Patrick Pichette is taking over.
1:44pm | US and rest of world growing very well. UK shows signs of acceleration as well. Revenue from US up 26% to $4.2B. Non-US revenue was 54% of total revenue. Up 38% year over year. That’s only including a small benefit ($4m) from hedging.
1:46pm | Headcount growth similar to Q1.
1:47pm |Great opportunity to purchase buildings in Dublin and Mountain View, and we took those opportunities. That’s why capex was so high. It’s going to be “lumpy” as we take advantage of opportunities.
1:49pm | Nikesh Arora now talking about business processes. Large advertisers spending more. Continued healthy growth in display. 98% of top 100 advertisers bought display.
1:52pm | Enterprise business growing. He’s naming some wins, but no revenue details. Hmm.
1:53pm | Marketing — drives customer acquisition and use of consumer products. Successfully launched campaigns in Brazil, Thailand, other areas. Bringing small businesses online. Strong results from our own campaigns, including Justin Bieber and Lady Gaga promoting Chrome.
1:55pm | Susan Wojcicki will cover some more product highlights. Search — always looking for new ways to help users find answers to their questions. This quarter brought voice search and search by image to desktop. Voice search for mobile is up. Useful for things like bolognese sauce which are hard to spell. (Did I spell that right?)
1:57pm | Music, books, videos, and apps, all available on Android devices. As of this week, Google Offers available in SF, Oakland, NY, Portland.
1:58pm | Big upgrade to ad relevancy, ad formats. Also more than 20 launches across display network.
2:02pm | Now we’re on to Q&A. First question: How much of international advertising is core search vs others. And what about patent strategy given Oracle situation?
2:03pm | Nikesh Arora: different in different markets. Japan more display and mobile. Asia just getting up the curve in display. Russia very strong, Brazil very strong.
2:04pm | Page: we have a lot of IP in process. Android is on a tear. 550k activations, 231 carriers in 123 countries, 400+ devices, 78 Open Handset Alliance. Despite efforts of competitors, haven’t been any slowdown in any of those things. We’re really committed to Android and supporting that ecosystem in a cost-effective way.
2:05pm | How much more efficiently could Google be run than it’s been run? And how important are social signals to core search results?
2:06pm | Page: super-excited about changes we’ve made. As companies scale we always change how we’re running the company over time. More product-focused structure. Maintaining and improving our velocity and execution is a noble goal for us.
2:07pm | Wojcicki: We have +es on all the ads, if users click on them, friends can see them. Social is just one of many inputs, though.
2:07pm | How are you managing finances compared with Eric Schmidt? Margins, etc. And on mobile search, how much share, what about lower cost-per-click? How think about the overall impact of mobile?
2:08pm | Arora: for mobile search, focus on what we focus on. Businesses that will be billion-dollar businesses with significant operating margins, that’s focus. On specifics of mobile, we see it like search was in 2001. So new, you know there’s room for optimization on top. Can’t predict future by what it looks like today.
2:09pm | Page: Eric great partner and leader, plays big part in the company. No major changes in what we’re doing. He’s talking about the three categories again. Search and ads are core revenue driver. Businesses enjoying high consumer success, YouTube, Android, Chrome. optimise long-term success. New businesses, Google+, commerce, local, excited about them and early stage. We optimise for long-term economic success. Very different buckets.
2:10pm | On Google+, no real integration with search and other things you’ve been successful with. Plans there? On Offers, how many more cities, and when, and what about international?
2:11pm | Page: that black Google bar you see is entry point for Google+ on all our properties. That’s a big deal. We’re looking at sharing and identity across Google.
2:12pm | Arora: we’re not going into details about rollout for Offers. But it’s just the beginning, we’ll look at model, see what’s working. We want to build next version of Offers product.
2:15: How focused is senior management on the stock? And what about Local opportunity, different ad market than search?
Page: We have a lot of things to do at Google, and we don’t control our stock price. We’re focused on overall profitability on long-term, and revenue growth. We focus on that long-term.
Wojcicki: Local can be thought about two different ways. Large retailers with many points of presence like Starbucks or Pizza Hut. And local businesses with one branch. Working on both branches. Large ones need functionality of how to run a campaign in many different locations, keywords, pricing. Location in AdWords campaign. Small ones, enabling signing up for AdWords to be a much easier experience. Product called Google Boost, a one-page five-minute signup for advertisers.
Mobile is also completely integrated.
2:20: How do you think about integrating assets? And with Google+, what’s overall trend compare vs early days of Android or Chrome or Search or Mail? Is that really good?
Page: On the integration point, visual redesign. Doing other things to tie products together.
On Google+, lots of barriers — have to be invited, still in field trial. We’re extremely excited. Very early days — less than two weeks. (No answer.)
2:22: On Local, lots of capabilities but still disparate and overlapping. From end user perspective, how do you bring them all together. Then followup on Google+, what are longer term goals — like users or number of items shared over 2 year.
Page: On Google+, we want to make products like toothbrush everybody uses twice a day. We think of + that way, and having a really great sharing experience.
2:24: What about headcount? R&D was flat sequentially, but added 2,000 people during the quarter. And second, how do you think about display and whether you need more owned and operated inventory.
Pichette: on headcount, roughly 2,000 for the quarter. Still a huge amount of engineers. But R&D is in every line item. It’s in many areas of our P&L. We have a complete focus that the m majority of our hiring is engineering. Then you have mix of sales and overhead.
Page: (He interrupts, unasked!) Our focus hasn’t changed from the past.
Wojcicki: Our biggest owned and operated product is YouTube. Display strategy dependent not just on owned and operated. Also platform for advertisers and publishers to much more easily buy and sell display ads. And second, to enable all the sites in the world to be able to monetise. Via our network, lot of targeting techniques.
2:27: 6% cost per click acceleration since last quarter — why? And will it continue or fall back with more. And second question — switching costs on social platforms are high, look at all the photos people already have, and what does Google+ do to get people off other platforms. (Facebook.)
Wojcicki: One driver was foreign exchange. Ad quality improvements. Ads appearing above search results, tend to be higher cost per click and we’re really optimising those ads.
Page: We’ve been really excited about Google+ improving overall social experience, more like how you would share in real life. That’s a different product than what’s out there now. People like to be sharing with more discrete groups in easy and intuitive way, lot of magic built into the product. We have really great photo experience on Android — take pic on Android, have Google+ client, uploads photos automatically, share, post to friends. (So basically, better features.)
2:30: Is hiring coming in waves? Also, other costs and revenues as %age of traffic is high. Is that increased data centre depreciation, or YouTube?
Pichette: On the costs, headcount is included. Power has increased because it’s summer. Catch-up in expenses on equipment. There’s been a cleanup that have slightly deflated Q1 and inflated Q2. Don’t look at datapoint between the quarters as a constant — don’t build a graph on it.
Page: Great question. We implemented compensation changes in Q1. That has had even more positive effect on hiring and retention than we expected. There are more excited people who want to work at Google and stay at Google than we expected. There’s a limit on how many and how fast we can hire. My judgments are that we’re at the edge of that pace being reasonable. We’re always looking for good people. We have a great management team, can absorb, but we’re surprised at the success of our comp changes.
That’s a wrap, folks.
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