During Google's (GOOG) earnings conference call CEO Larry Page, despite a hoarse voice, sounded excited about several initiatives going forward, including expanding mobile ad spend by advertisers. The firm continues to make incremental improvements to search, which may save market share, but the changes haven't been able to slow the shift to mobile search. Google continues to spend hundreds of millions of dollars on research and development on projects like Google Fiber and self-driving cars, which may drive growth in the future but have weighed on near-term profitability.
Page hit on some other positive notes, like YouTube's increase in ad effectiveness relative to traditional TV, as well as the success of the mobile adoption, which maintains an $8 billion revenue run-rate. That figure includes Google Play, which is essentially an Android app store, as well as advertising revenues. Due to the firm's accounting principles not all of that revenue will hit the income statement, but we think the number is still fairly strong.
Exchange rates weighed heavily on revenues. As per the earnings slideshow, foreign exchange rates swung "rest of the world" revenue by $454 million and U.K. revenue by $41 million (both net of hedging gains). We also noticed effective tax rates surged from 18.8% in the third quarter of 2011, to 22.3% during the third quarter of 2012.
We think it's important to remember that Google spends above-market dollars on acquiring talent and working pet projects. If necessary, the firm could cut pay and R&D expenses to "meet" earnings expectations, but that's not how this company operates. With Page and co-founder Sergey Brin in control of most voting interests, we think the company will continue to shrug off Wall Street worries and manage its business how it likes. This worked out incredibly well for Steve Jobs at Apple (AAPL) and Bill Gates at Microsoft (MSFT), but it hasn't fared very well for Mark Zuckerberg at Facebook (FB).
Regardless, while the quarter was undoubtedly weak, we think Google has a strong future in search -- both on the desktop and via mobile devices. However, we think the Motorola Mobility acquisition will destroy shareholder value, and we continue to remain bearish on Android's profit potential (not market share potential). We've been considering adding shares to our Best Ideas Newsletter (please see the links on the left sidebar for more information), and we continue to evaluate the opportunity after the sharp sell-off. Google scores a rare 10 on our Valuentum Buying Index. You can read our initial thoughts on Google's premature quarterly release here.
Disclosure: MSFT is included in our Dividend Growth portfolio. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.