18 October, 2007

Major Tech Earnings Start Q3 with a Bang Part 3: Google Growth Continues

All eyes were on Google (GOOG) Thursday as Investors had digested a couple days of very positive Technology earnings and some not so positive Financial earnings. Momentum Traders hoping to continue the Tech ride further into the Fall pinned their hopes on favourable numbers from everyone's favourite Internet Giant, Google.

In terms of raw numbers it was an all around exceptional quarter from the Internet Advertising behemoth. Revenue climbed 57% year over year to $4.2Billion, which also represented a 9% quarter over quarter increase. Profit numbers, without stock option expenses, were $3.91/share, beating analyst expectations of $3.78. Google continues to dumbfound analysts when it comes to growth prospects and projections.

All the rage last quarter surrounded a drop in margins from 35% to 29% due to over hiring. Management was adament that hiring would be more disciplined and they re-iterated that same fact during this conference call. Google infact added even more employees this quarter than last. However, these additions were due to pre-signed contracts with University Graduates and 300 employees from the acquisition of Postini. Management seemed to relieve analysts during the call with specifics about hiring and their diligence about keeping an extra eye on hiring practices. Margins improved to 31%, becoming more normalized, however this number is still below year ago levels. This I believe, can be attributed to a tax rate rise from 25% to over 27% this quarter. Google typically projects a tax rate of near 30% and the assumption is that the company wil be paying more with an increased rate in the following quarter. A cause for concern perhaps, but at these growth levels, expected tax levels shouldn't be a real problem.

Google's cash horde is ever increasing and analysts began to question the company on potential uses of that cash. In response management seemed very disciplined in their approach to spending the money on only causes that make seemingly perfect sense strategically. This is clearly a company with a vision of the future, not ready to throw money around to get into businesses that don't fit. I believe this is one of Google's greatest core competencies! The minds at Google have a plan, a broad plan, and things that fit this plan get bought or invested in. They don't go after fliers, buy on whims, or buy things on hype.

Cases in point:
YouTube -> a clear direction in online video and its expansive possibilities into video and TV advertising
DoubleClick -> a clear direction for display advertising and advertising campaign management
Writely -> Online word processing technology to create an online Office suite
Postini -> Strengtening security in Email for Google Apps to break into Enterprise markets heavily
GrandCentral -> Telephone consolidation with online management, another pool for Apps or AdWords campaigns

Capital Expenditures at Google are always a concern for Investors as Google seems to wave its nose at the concept of Cost Cutting/Slowing. It's building a vast network of computing architecture and no one will tell the company differently. Where this comes into effect in the Finances is when the depreciation and replacement of all that computing equipment starts to kick in. The upside though, is that Google's technology is far and wide beyond its competitors and they can't catch up if Google keeps spending more, and more effectively, on development and technology.

Google's AdSense partners are getting less and less of a percentage of revenues. Last year at this time, the amount Google paid out to its partners was 31% of revenues, this year 29%. This percentage has been dropping steadily since Google became a public company. This means that an increasing percentage of revenue is coming from Google's own properties, meaning that all of the advertising dollars are going to Google's bottom line and not its partner sites (Of which this blog is one).

Google is growing still, has its mind set on strategic advancements and search improvements, is leaving its competitors in its Search dust (60% of searches at last count), and is continuing to make money hand over fist. What's next for the company? TV ads?, The Mobile Space?, GPhone? Only management knows and only future quarters will tell. So this isn't a boat to jump off of just yet.

Disclosure: Author is long GOOG

No comments: