Google's Q2 Results -- Key Facts & Analysis

Excerpt from our One Page Annotated Wall Street Journal Summary (receive it by email every morning by signing up here):

Google's Earnings and Revenue Surge

• Summary: Google's Q2 results: Net revenue (excludes traffic acquisition costs, or "TAC", paid to partners) up 77% year over year to $1.67 billion, beating the consensus estimate of $1.65 billion. Gross revenue was $2.46 billion. Net income more than doubled to $721 million. Adjusted EPS (which excludes stock based compensation) was $2.49, beating the consensus estimate of $2.22. The higher-than-expected profit came from revenue growth beating expectations but expenses being in-line with expectations. Total costs rose 86%. Capital expenditure was $699 million, including $319 million on real estate. Google's search market share in Q2 was 48% versus 31% for Yahoo and 14% for Microsoft, according to Majestic Research. CEO Eric Schmidt said that partnerships are important and that the partnership with Time Warner is on track.
• Comment on related stocks/ETFs: Google's stock (GOOG) rose just under 1% in late trading after the results were announced, in contrast to Yahoo's stock (YHOO) which fell over 20% after it announced earnings. But Google's stock also pulled back after the Yahoo results, so despite the headlines today ("Google's Profit Soars!") the market's reaction wasn't exactly a massive round of applause. Google's revenue wasn't far above analyst estimates; the big news was Google's increased profitability. But ultimately revenue growth drives 'Net stocks, because there's a limit to how much a company can continue to raise its profit margin. Yahoo engineer Amr Awadallah argues that Google's 9% sequential revenue growth rate shows that the entire search industry is slowing, and that Google's year over year revenues have been boosted by the addition of extra ads into its search results rather than organic growth in searches. His article is a must-read for fund managers. Google's traffic acquisition costs [TAC] are widely watched, because they show Google's revenue split with its partners. Phil Davis argues that much of Google's outperformance was due to a low tax rate and raises other concerns, while George Gutowski says that Google's international growth was flat. TAC was flat with last quarter, and that's good news because it shows that Google didn't goose its profits at the expense of its partners. Resources: press release, full conference call transcript, and Google's comments about its challenges in China.