Google Mobile Revenue Blazing Despite Earnings

 |  Includes: GOOG, VELTF, VLTC
by: Mobile Guru

Last week Google (GOOG) reported first quarter earnings, which included $8.58B in gross revenues, 27% ahead of last year and a 15% net increase in income of $2.8B. Despite these solid numbers the stock was pummeled on Friday, dropping 47 points or roughly 8%. The main area of concern has been increased costs due to the large hiring spree that Google has been on. Roughly 1900 people were hired in the last quarter and they are unlikely to show any significant benefit to the bottom line for at least 2-4 quarters, depending on their experience level when hired. New graduates at hi-tech companies can take up to two years before they are really meaningful contributors, but I suspect with the job pool of talented workers still being fairly high, these new employees may start to show benefits as soon as Q3.

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I want to focus on Google’s mobile operations business. At the end of last year the company expected its mobile business to be at a $1B/year run rate this year. I suspect it was sandbagging big time and although it did not specifically break out this quarter’s mobile numbers, here are some of the quotes I have found on mobile from their management team.

CFO Patrick Pichette

“Without any radical effort, we already announced at end of Q3 this is a $1 Billion run-rate business,” says Pichette. Mobile is “growing at an amazing, blazingly pace,” he says. “We tripped into $1 billion.”

Senior VP of Local Jeff Huber noted on the call:

“In terms of where it trends over time, the smartphone is becoming an extension of the person, and how they do everything.”

Q. How much is a mobile user worth today, and how do you think about larger acquisitions?

A. Senior VP Local and Commerce Jeff Huber:

Can’t answer about mobile user. Look at our focus, we’re very excited about mobile. Great potential there. Monetization side — click to call ads. Locally targeted ads, ability to engage users where they are. Smartphone will be way people do everything — inform, entertain. It will merge.

Q. Do you think value can go up order of magnitude in 3 years?

A. Senior VP Advertising Susan Wojcicki:

Very early in what mobile can do. Will grow overall opportunity, overall pie.

Here is also a quote from an analyst who follows Google. Caris & Co’s Sandeep Aggarwal, who reiterated his “buy” rating, but lowered his price target to $680, noted that non-core businesses were causing an “unfavorable mix shift” as non-core businesses (display, mobile, local, i.e. anything except search) were growing 3 to 4 times faster than core (search) businesses while delivering substantially lower margins.

All the above indicates mobile is going to encompass a large part of Googles business going forward and in 3 years it would not surprise me to see it be in the range of 20-25% of its yearly revenues.

Another indicator of the growing understanding of the importance of mobile is the recent acquisition of Adenyo, a mobile advertising company, by Motricity (MOTR). Adenyo, which was ranked 25th in the Wikimobidex December top 40, was acquired for roughly $100M in cash and securities and may receive up to another $50M pursuant to an contingent earn-out. Adenyo had revenues of around $20M for the last year.

Of the Wikimobidex list, only Augme Technologies (AUGT.OB) and Velti (VELT) are publicly traded. Millenial Media recently announced plans to hire 50% more people prior to a possible IPO in 2011. Jumptap, rated 13th recently, raised another $20M - bringing its total to roughly $90M. It has also been on a hiring spree in 2011, so far adding 23 people, but has not indicated if it will do an IPO in 2011.

Disclosure: I am long AUGT.OB.