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Jim Cramer's Action Alerts PLUS

Action Alerts PLUS

Google 4Q Takes a Currency Hit

BY Jim Cramer and Stephanie Link | 01/29/15 - 07:31 PM EST
Stocks in Focus: GOOGL

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.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUS was long GOOGL.

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