Google (GOOG) reports Q2 results on July 19th.
The Street expects the following:
- Revenue: $8.45 billion
- EPS: $10.14
- Q3 revenue guide: $9.10 billion
In Q1, Google reported an in-line quarter to start the year. Paid clicks, an indicator of user engagement, increased 39% year over year, compared with +34% year over year in Q4 2011. That offset the weakness in CPC, which declined 12% year over year due to a combination of mobile, international markets, and FX.
Heading into Q2, investors could expect some minor headwinds due to decelerating revenue growth and tough Q2 comp. In addition, investors might need additional color on Google's strategy toward Motorola.
Decelerating Revenue a Big Concern
Over the past two quarters, Google's net revenue has decelerated from 27.7% in Q4 2011 to 24.4% in Q1 2012.
Click to enlarge images.
In my view, net revenue growth is not the ideal metric due to FX, and gross revenue is a better indicator of Google's top-line strength.
However, investors have lost focus on FX and hedging-neutral gross revenue because of rising TAC rates and an increasing shift toward mobile. I note that Google's O&O TAC rate of 6.4% last quarter was the highest ever due to renewed partnerships with Mozilla, carriers, and OEM partners. To simplify, investors are solely focusing on net revenue growth heading forward.
Tough Q2 Comps Ahead
In Q2 2011, Google benefited from a large FX gain, which makes the upcoming quarter a tough year-over-year comparable. In addition, Google's Q2 earnings have historically been challenging for Google and the current Street consensus of +4.1% quarter over quarter might not be conservative enough.
Additional Color Needed On Motorola; Integration Risk Remains
In the Q1 earnings call, Google was mute in regard to Motorola, so it is unclear whether Google intends to keep Motorola as part of its business or have a viable strategy for the unit going forward. Motorola places Google in a delicate balancing act of developing its own hardware and maintaining good relationships with its current hardware provider.
In order to make the Motorola acquisition work and attract consumers, Google has to incorporate the newest Android software in Motorola's devices, which could hurt its relationship with partners such as Samsung and HTC. If Google maintains the current status quo, then it is likely Motorola will weigh on Google's margins since the unit does not really make anything that consumers want nowadays.