Updated from 8:50 a.m. with earnings resultsGoogle
(GOOG)
reported pretty unspectacular results on Thursday, missing both top- and bottom-line estimates, posting earnings per share 2 cents light ($4.43) and revenue (ex-traffic acquisition costs) of $3.39 billion. Because the company does not give any guidance, it's easy to see why the shares were trading some 7% lower after hours.
Gross revenue grew 51% year over year, while EPS grew 39%. Those figures continue the trend of a slight slowing in growth rates, but that is normal when the law of large numbers begins to catch up.
Google-owned sites posted revenue growth of 58%, which isn't bad. Also, margins were a touch lighter, with operating margins of 35%. The tax rate was low ,at 25%, which makes the earnings miss even less palatable.
AdSense revenue increased 37%, and the company said it again experienced good monetization. The only area it highlighted that didn't see good monetization was in social networking. But management said it was pleased with overall traffic growth, and that despite the chatter of an economic slowdown, it still sees ad dollars moving online in a trend that will benefit Google.
International revenue again totaled 48% of the mix, but the company didn't specify how fast international revenue grew in relation to domestic revenue (I am getting a little tired of the cryptic, veiled reporting).The company said Europe, Middle East and Asia was strong, as was Latin America, while U.K. slowed a bit.
Operating expenses were flat at 30% of revenue, while traffic acquisitions costs were slightly higher at 30%. Headcount finally looks like it slowed, as the company added 889 employees vs. 2,130 last quarter. Google now has 16,805 full-time employees. Wow. Paid clicks grew 30%, which is solid, but slower than in prior periods. Free cash flow grew a solid 87% from a year ago, and the company ended the quarter with $14.2 billion in cash on its balance sheet. I think they should buy back some stock.
Overall, I came away with a sense that the company is still experiencing very solid growth, but that they didn't raise the bar in any area this quarter. Nothing really stood out to me as exceptionally strong. They talked about a lot of areas within the company where people are working on cool things, and improvements to existing apps, but the revenue base is getting so big that it will take even longer for one of these areas to start to move the needle. For now, it's still ads, and mobile ads probably have the most near-term promise.
As for the stock, I still don't think it is expensive for the leading Internet company (do people still use that term?), and so I am not worried about too much downside. But the stock just isn't in favor right now, like a lot of large-cap tech stocks. I think once the market gets past this period of uncertainty, and growth stocks begin to lead again, then it will be time to add to GOOG again.
Preview
Google
(GOOG)
reports earnings after the close on Thursday. This will probably be one of the most widely anticipated calls of this earnings season. Since the company doesn't provide guidance, it is also a difficult one to handicap.
For what its worth, Google has beaten consensus estimates in three of the last four quarters, as it usually does. Consensus estimates are for EPS of $4.45 on revenue of $3.45 billion (excluding traffic acquisition costs). Earnings before interest, taxes, depreciation and amortization margins should be in the 59% to 60% range.
There has been a lot of chatter in recent weeks that data from the likes of comScore hint at a drop in things like the "click-through rate." Also, comments from eBay
(EBAY)
that the company had pulled back in its own online ad spend have raised concerns about an overall slowdown in e-commerce. Expectations are always high for Google, so if the company acknowledges that it is feeling some of this slowdown, it won't be good for the stock.
But I have to admit that I often hear these concerns going into Google's earnings calls, and, more often than not, the company has shown its ability to offset these concerns with monetization improvements that boost the bottom line. Also, the comScore data doesn't take into account international results, which could provide another big boost. Fourth quarter is often a strong one for Google, so I wouldn't be surprised to see strong results.
There are also other ongoing developments within the company that we should hear about on the call. This should be the first quarter that we see a revenue contribution from Postini and YouTube. Granted, right now, they only contribute around 1% of gross revenue, but it will be nice to hear Google talk about other areas that offer promising growth.
The company also acquired Jaiku (instant messaging) during the quarter, and I would like to hear its plans to monetize this acquisition. Google continues to rollout Android, its mobile operating system, which, hopefully, the company plans to monetize at some point as well. And the applications for the iPhone sound interesting. I think the company will mention that it saw a lot of traffic from all of the iPhones that were activated that have Google incorporated into them.
Google has also been on a long hiring spree. I personally would like to see hiring slow a bit, just to put a lid on operating expenses in the short term. As for the stock, it has not done much of late, to put it mildly. At 26x 2008 earnings estimates, the stock is not particularly expensive for one of the leading growth companies around today. But tech stocks are not in favor at the moment, and it seems that most big-cap tech stocks have declined after reporting earnings, even if their quarters were solid.
Google has been hovering below its 200-day moving average for the last week, which is a vulnerable technical position. I trimmed half of my position ahead of earnings because the odds right now do not favor a big bounce on earnings. I hope I am wrong, but I want to be a bit defensive here. That said, if the stock drops a lot, I will be inclined to buy back my positions as I still see significant upside over the longer term.
At the time of publication, Kahn was long Google.Jordan Kahn, CFA, is a portfolio manager with Bevery Investment Advisors, a Beverly Hills, Calif., money manager. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. Kahn appreciates your feedback; click here to send him an email.
