Google’s ‘Automagical’ Quarter

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By Sudarshana Banerjee

“When I look back over the last quarter, the word that springs to mind is ‘gangbusters”, said Larry Page, announcing the results for Google’s third fiscal quarter. “We had a great quarter,” Page reiterates in the official earnings statement. He was not exaggerating.

Number of Google+ users have shot up over 400 million, since it was opened to everyone. Google’s revenues are up 33 per cent YoY (year on year), and its quarterly revenue was just shy of $10 billion. Google’s net income for FYQ3 was $2.73 billion, a jump from $2.17 billion from the same period last year. Its earnings per share (EPS) of $8.33, an increase of $1.61 from the third quarter of 2010, beat analyst and investor expectations.

“The company’s ultimate ambition is to transform the overall Google experience – making it beautifully simple, almost automagical,” says Page. To that end, Google hired 2,585 employees worldwide in this quarter. The hiring was driven in part by a lot of university graduates. Hiring new college grads is a Valley tradition, and companies like Intel hire a significant percentage of recent grads, but it does have a seasonal effect.

Page said that the company expects to continue to make significant capital expenditures. Currently the company is sitting on a $42.6 billion pool of cash, cash equivalents, and short-term marketable securities, and Google can indeed afford a expensive bauble or two; though the company better wait for the Motorola integration to fully happen before it does.

The strong quarter proves Google is still the king of Search, the company’s core business. It also seems that the company has remained insulated from economic uncertainties, and tentative advertising budgets on the anticipation of the second coming of a recession that can be ill-afforded if it does indeed arrive. Chrome usage has “been going through the roof,” to quote the company’s CEO. However, going by Google’s sheer breadth, its business units and acquisitions, Google is on its way to becoming a conglomerate, and not necessarily a tech conglomerate at that too. Rules of engagement will change if that happens, and if Google wants to be the new GE, it will have to be the new GE.

Now, let us look at the what Larry Page had to say at the earnings call, and then we will take a quick look at the company’s financial snapshot.

 

What Larry Page said

I’m also incredibly excited about the progress we’ve made on the product side.

Ever since taking over as CEO I have focused much of my energy on increasing Google’s velocity and execution.

Look at Google+ : We had 100 features launched in 90 days – the team is really cranking. People are flocking into Google+ at an incredible rate and we are just getting started!The engagement we are seeing is phenomenal too – over 3.4 billion photos have already been uploaded in Google+.

Our ultimate ambition is to transform the overall Google experience–making it beautifully simple, almost automagical, because we understand what you want and can deliver it instantly.

To create products that really change people’s lives, that they use every day, two or three times a day, is really hard.

Since we last spoke we’ve begun the process of shutting over 20 different products, including SideWiki, Google Pack, Google Notebook, and Fast Flip.  And we’ll continue to simplify and streamline our products going forward.

Chrome – Usage is going through the roof. We have now hit over 200 million users.

I am super pleased with Google Maps – it’s a favorite with our users, especially on mobile devices. In August we launched in 40 new countries, taking our total to 130 countries.

The growth of Android is mindboggling – Over 190M devices have now been activated globally.

I’m super excited about the soon to be released new version of Android, called Ice Cream Sandwich. That’s right, Ice Cream Sandwich. You won’t believe what we managed to get done in this release.

We’re seeing hugely positive revenue impact from mobile, which has grown 2.5X in the last 12 months to a run rate of over $2.5 billion.

Generally I’ve found that high usage products will make a lot of money over time for well managed technology companies, and that’s why it’s so important to run these businesses for the long term. That said, we must never lose sight of the fact that today’s revenues and growth serve as the engine that funds all of our future innovation.

We are still at the very early stages of what technology can deliver … these tools we use online will look very different in 5 years time. We’re building those tools now as Google+ .

 

Financials Highlights

Google reported revenues of $9.72 billion for the quarter ended September 30, 2011. Traffic acquisition costs (TAC) totaled $2.21 billion, or 24 per cent of advertising revenues. GAAP operating income was $3.06 billion, or 31 per cent of revenues. Google’s operating income stood at $2.55 billion, or 35 per cent of revenues for the same time period last year.

Google Sites Revenues: Google-owned sites generated revenues of $6.74 billion, or 69 per cent of total revenues, in the third quarter of 2011. This represents a 39 per cent QoQ increase.

Google Network Revenues: Google’s partner sites generated revenues (through AdSense) $2.60 billion in revenues, or 27 per cent of total revenues. This represents a 18 per cent QoQ increase.

International Revenues : Revenues from outside of the United States totaled $5.3 billion, representing 55 per cent of total revenues, compared to 54 per cent in the second quarter of 2011 and 52 per cent in the third quarter of 2010. Revenues from the United Kingdom totaled $1.05 billion, representing 11 per cent of revenues in the third quarter of 2011, compared to 12 per cent in the third quarter of 2010.

Paid Clicks:  Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 28 per cent over the third quarter of 2010 and increased approximately 13 per cent over the second quarter of 2011.

Cost-Per-Click:  Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 5 per cent over the third quarter of 2010 and decreased approximately 5 per cent over the second quarter of 2011.

TAC: Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.21 billion in the third quarter of 2011, compared to TAC of $1.81 billion in the third quarter of 2010. TAC as a percentage of advertising revenues was 24 per cent in the third quarter of 2011, compared to 26% in the third quarter of 2010.

The majority of TAC is related to amounts paid to Google’s AdSense partners, which totaled $1.83 billion in the third quarter of 2011. TAC also includes amounts paid to distribution partners and the likes, which totaled $383 million in the third quarter of 2011.

Other Cost of Revenues:  Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs as well as credit card processing charges, increased to $1.17 billion, or 12 per cent of revenues, in the third quarter of 2011, compared to $747 million, or 10 per cent of revenues, in the third quarter of 2010.

Operating Expenses: Operating expenses, other than cost of revenues, were $3.28 billion in the third quarter of 2011, or 34 per cent of revenues, compared to $2.19 billion in the third quarter of 2010, or 30 per cent of revenues.

Stock-Based Compensation (SBC): In the third quarter of 2011, the total charge related to SBC was $571 million, compared to $380 million in the third quarter of 2010.

Operating Income:  GAAP operating income in the third quarter of 2011 was $3.06 billion, or 31 per cent of revenues. This compares to GAAP operating income of $2.55 billion, or 35 per cent of revenues, in the third quarter of 2010.

Interest and Other Income, Net: Interest and other income, net increased to $302 million in the third quarter of 2011, compared to $167 million in the third quarter of 2010.

Income Taxes:  Google’s effective tax rate was 19 per cent for Q3 FY11.

Cash Flow and Capital Expenditures:  Net cash provided by operating activities in the third quarter of 2011 totaled $3.95 billion, compared to $2.89 billion in the third quarter of 2010. In the third quarter of 2011, capital expenditures were $680 million, the majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment.

In the third quarter of 2011, free cash flow was $3.27 billion. (Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures).

Sudarshana Banerjee is consulting editor with techtaffy.com. She can be reached at [email protected].