Google Q3 Earnings Preview: Search, Display, And Social In Focus

Oct.16.12 | About: Alphabet Inc. (GOOG)

Google (NASDAQ:GOOG) is set to report third-quarter earnings after the market close on Thursday, Oct. 18. The company’s focus on aggressively pursuing alternative businesses to its core search platform, in an effort diversify its revenue stream, will be one of the focus points during the earnings announcement. In addition to Google's progress on its new products, we will watch its search ad revenue growth and the results of its efforts at display advertising on sites such as YouTube.

Q2 Results

Google’s consolidated revenues grew to approximately $12.2 billion during the second quarter, an increase of 35% year over year and 15% quarter over quarter. Note that these consolidated revenues included Motorola revenues.

Core Google earnings (earnings ex-Motorola) grew to approximately $11 billion, an increase of 21% year over year and 3% over the previous quarter. During the quarter, the company’s cost per click continued its downward trend, but it was more than offset by an increase in the number of paid clicks. You can review our recap of Google's Q2 earnings here.

Paid Click Growth Key

We will be closely watching Google's year-over-year paid click growth, which is extremely important for the search ad segment's growth, because in recent quarters it has helped offset declines in average revenue per click (16% in Q2). The company has posted accelerating growth in paid clicks for the past four quarters, reaching an astonishing 42% year-over-year growth rate during Q2.

Additionally, from a qualitative perspective, paid click growth signals Google’s success in monetizing its search platform. A rapid increase in paid clicks is likely a combination of an increase in users and searches and a greater willingness among advertisers to advertise on Google. If the firm is able to post similar growth in paid clicks during the third quarter as it did in the second quarter, it would allay investor concerns that its search business could be slowing.

YouTube Can Drive Display Revenue

We think Google's foray into display advertising is central to its attempts to diversify its revenue streams. In our opinion, YouTube will be the key in driving display ad growth as yearly account sign-ups on the site doubled year over year in Q2, and users are said to be uploading 42 hours of video every minute.

We will be closely watching YouTube's user and revenue growth figures to get more signs about the segment’s potential as another cash cow for Google. According to our model, YouTube makes up around 8% of the company’s value and, in our opinion, it provides the much needed diversification to Google's search revenue.

Social Integration

Google+ hit a key landmark during the third quarter, reaching 100 million active users and 400 million user sign-ups since its inception. With social ads expected to provide a higher ROI to advertisers, Google has been trying to integrate Google+ with its other services. We will be closely watching to see whether or not the company releases any new operating or revenue metrics related to the platform, which should help us assess its viability against competitors such as Facebook (NASDAQ:FB).

We currently have a $661 Trefis price estimate for Google, which stands 10% below its market price. Mobile search ads account for approximately a third of Google’s overall value, while standard PC search ads account for another 30%. Google derives most of its value from advertising, a space where it competes primarily with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO), and Facebook.

Disclosure: No positions.