Google (GOOGL:Nasdaq) this evening reported fourth-quarter
results that were below the consensus on the top and bottom
lines. There were hits from currency and several one-time
items on the cost line that affected the headline figures.
Digging deeper into the results, the numbers are pretty good
and while the expenses are still too elevated to our liking,
the continued double-digit revenue growth is impressive.
Management spent time on the call discussing its expenses
and investments, and noted that they are looking at all of
these prudently. Should they not find compelling
opportunities, they would review its capital-return program
(though management didn't discuss what that would be, a cash
distribution or just less investment spending). But
management clearly sounded like they are aware of investor
frustration over the lack of positive operation leverage.
Plus, they said they are aware of their stock price -- the
first such admission by this management team. Overall, we
believe expectations are low enough, which explains why the
shares initially reacted to the downside in after-hours
trading but then reversed.
One note: Currency hit results by $600 million on a gross
basis and by $468 million including hedges. This has been a
common fourth-quarter theme for a variety of multinational
companies and underlying results were better than the headline.
Google's fourth-quarter earnings were $6.88 per share vs. a
$7.13 consensus on revenue of $18.1 billion vs. $18.4
billion consensus. Gross revenue rose 15% year over year and
10% quarter over quarter to $18.1 billion; on a constant
currency basis, revenue was up 18% from last year. Google
Sites revenue rose 18% y/y to $12.4 billion and 10% over the
previous quarter driven by strength in mobile search.
Network revenue rose 6% y/y at $3.7 billion and up 8% q/q.
Other revenue grew 19% y/y to $2 billion and 6% q/q, driven
by annual growth in the Google Play store but offset by FX
and limited inventory in phone hardware.
Paid clicks were strong and in line, and cost per click
(CPC) was slightly lower than expected. Aggregate paid
clicks (APC) rose 14%, in line with consensus and up 11%
q/q. Last quarter, paid clicks on an aggregate basis rose 2%
q/q, so nice momentum here. Digging a little deeper, Google
Sites paid clicks rose 25% y/y and up from the 24% y/y
growth seen last quarter. On a sequential basis, Google
Sites paid clicks rose 18%, up from the 4% growth seen last
quarter. Both metrics are positive. Aggregate CPC fell 3%
y/y and q/q and were a little lower than the flat
expectations largely due to the Google sites CPCs, which
fell 8% y/y on the currency impact as well as geographic
mix. Network paid clicks fell 11% y/y and 7% q/q but network
CPCs were up 6% y/y and 10% q/q; both figures were a nice
improvement from last quarter when CPCs fell 4% y/y and rose
just 2% q/q.
U.S. revenue rose 14% from a year ago to $7.9 billion, while
the U.K. rose 10% to $1.7 billion. On a constant currency
basis the U.K. actually grew 11%. Non-U.S. revenue excluding
the U.K. rose 18% and now accounts for 47% of total revenue.
Non-U.S. on a constant currency basis rose 24%, which is
impressive, in our view.
A few callouts on expenses: Both operational and capex were
hit by one-time decisions in the quarter related to
compensation changes and real estate purchases ($900
million) for the build-out of work space. Traffic
acquisition costs (TAC) were $3.6 billion, or 22% of total
advertising revenue. Operating expenses came in below
expectations. Head count was up by 2,000 and the company
ended the quarter with 53,600 employees. Operating cash flow
was $6.4 billion. Capex of $3.6 billion was spent on
facilities, production equipment and data center; it was
higher than the $2.3 billion expectation. Even after
adjusting for the $300 million in one-time items, capex was
still high. Free cash flow was a solid $2.8 billion.
All in all it was a mixed quarter, but a little better on
total revenue growth. Expenses had a few one-timers and
remain elevated but the real news was the fact that the
company is watching its stock and is apparently listening to
the frustrations of shareholders, so a capital return could
be in the works.
Jim Cramer, Stephanie Link, and TheStreet Research Team
DISCLOSURE: At the time of publication, Action Alerts PLUS
was long GOOGL.
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