Google Keeps Scoring

On Thursday, Google (GOOG) reported Q2 earnings of $4.63 a share (excluding stock-based compensation costs), missing Wall Street’s expectations of $4.74 EPS. The company reported a weaker-than-expected 35% rise in quarterly net profit, according to Reuters. Google attributes this to lower returns from its cash pile (which is now $12.7 billion), rather than slacking online ad sales.

Net income for the second quarter was $1.25 billion, compared with $1.31 billion in the first quarter. Operating income for the second quarter was $1.58 billion, which is 29% of revenues, compared to 30% in the first quarter. All in all, operating income was up from $1.55 billion in Q1.

Quarterly revenues were $5.37 billion, a 3% increase compared to the first quarter of 2008 and a 39% increase over the same period last year. The steady rise in revenue can be seen in the chart below.

Although most companies could only hope for such results in this dismal economic climate, Google’s stock was quick to reflect Wall Street’s disappointment - shares were down as much as 12% after market close on Thursday.

Google’s growth rate has decelerated while its annual revenue has jumped from $3.2 billion to $16.6 billion in the past three years. Last quarter (Q1 2008) the company’s revenue rose 42% in a difficult financial environment. Approximately 51% of this revenue came from international markets, whose contribution increased to 52% in the second quarter, but the company had to spend more to cover its foreign exchange exposure.

Google’s share of the search engine market was 58.5% in January 2008. This figure had grown to scary 62% in May. In a previous post, I mentioned that Google controls 79% of the pay-per-click ad market and derives 99% of its revenue from advertising. However, according to Eric Schmidt, CEO,

Traffic and revenue have held up well despite uncertain economic conditions, as everybody knows.

Analysts were bullish on the stock because of the company’s stronghold in the search engine market. Another contributing factor to Street opinion is the potential revenues from the acquisitions of DoubleClick and YouTube.

In the near future, revenue from ads on mobile phones will also be a part of Google’s profits. As I mentioned earlier, Google still needs to increase its vertical scope and enter verticals such as Jobs, Travel, Auto, Real Estate Health and Personals.

Analysts still feel strongly about Google and believe that the company’s fundamentals haven’t changed. According to analyst Colin Gillis from Canaccord Adams,

If you want to own anything in the Internet sector, it is still Google. They are not losing (market) share.

I have to agree. No one is yet able to hit Google where it is weak: vertical search, vertical ad networks, personalization. Microsoft (MSFT) and Yahoo! (YHOO) are mired in their own messy maneuverings, leaving the field wide open for Google to keep scoring!

Disclosure: None

Comments

[GoogleDoubter:]

Google will dominate search probably for the balance of my natural life and may one day be the search engine of choice for 90% of search users.

The question is can Google make inroads in other areas of business life that can be monitized and generate bottom line results?

So far, the answer to that question is no!

Google seems to not be able to make Google Apps pay for itself. Maybe some good old fashioned marketing would help here, but then again Googler's are way toooo smart (HA!) to do anything that is even remotely considered old school.

What about YouTube? Google can't seem to monitize that aquistion.

What about Postini? Google has totally destroyed a healthy and growing revenue and customer base by doing things that a first year marketing student in college would never do.

Google is today, and is destined to be for the next few years, a one trick dog. Search is their game and they are the best.

What is the price per share for a one trick dog?

2008 Jul 20 09:23 AM

[Joe2:]

SilentGoogle Guy - I agree with your comments! As Larry Ellison said "Google is a one trick pony but it's one helluva trick". That just about sums it up.

However every one trick pony needs a second trick. For Google, Sramana's recommendation appears to be for the company to focus on personalization + vertical search + ad networks. I agree that the vertical angle is interesting because I agree that a travel site (eg Expedia or equivalent), or say Monster are better that just Google for planning travel, finding jobs etc.

However, there are a few distinctions that are important to whether a particular vertical search system succeeds or not. Remember, these vertical search engines are competing with the convenience of just typing in something into Google. I don't think all vertical engines will or should succeed (eg a women's accessories search engine as an example - it fails many of the tests below).

1. Breadth vs depth. What makes each engine good is likely the focus on one niche area. But determining the niche is non trivial. For example, right now I am looking for a high speed Laser Printer. Should there be a vertical search engine for High Speed Laser Printers, High Speed Printers, Printers, computer peripherals, or plate / film / digital printing presses? But how does an average person even know of the multitude of such search engines and what their niche areas are? How would one EVER remember this?

2. "Search to Find" vs. "Search to Act". Effective vertical sites focus on offering more value than just Finding the item desired. There should be some immediate follow on activity that's not as convenient to do as a separate step of going to the vendor's website, logging in etc etc. Travel is an example. You want the cheapest air, hotel, car rental reservations for the same time period. Then you want to buy all of these things but only if ALL are available (you can't get into a situation where all of a sudden hotels aren''t available / too expensive / too far from destination, but you just booked a non refundable air fare). Even Expedia doesn't do this and it should! Next, you want ongoing tracking of your reservations etc etc. If you cancel your reservation, you want to cancel all - air, car, hotel vs doing each one, one by one. This is an example of "Search to Act" vs "Search to Find. The deeper the follow on business process, the greater the perceived value to the customer.

3. Deterministic vs Subjective assessment of value of purchased items. The more defined the product is (eg Flight from A to B on a known airline or buying a specific book vs buying a home without looking at it), the easier it is to do comparison shopping and buy online.

Just my $0.02. Would love to hear yours. Hope all is well.
Nimish

2008 Jul 20 05:05 PM

[Michael Eis...:]

I think the delta on the profits vs. expectations may be the 10s of millions of dollars per quarter they are losing on YouTube hosting and bandwidth.

2008 Jul 21 06:28 AM