Google Q2 Results: Not Perfect, But Close
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Written By Drupad Sil | July 20, 2007 | Share This
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In a press release issued today, Google announced their second quarter 2007 results. Revenues excluding traffic acquisition costs were $2.72 billion, exceeding Wall Street estimates by about $40 million and showing that Google can successfully weather the seasonally slow second quarter.
Among other statistics, revenue including traffic acquisition costs ($1.15 billion) was $3.87 billion, up 58% from a year ago. Traffic acquisition costs, or advertising revenue shared with partners, accounted for around 30% of all advertising revenues, down from previous years, which means more revenue is coming directly from core Google sites. Earnings per share came to $3.56 apiece, slightly lower than the expected $3.59 a share. Net profit came in at $925 million, up 28% from last year.
Other metrics were also positive across the board. Google core sites increased 74% year-over-year and accounted for 64% of total revenue. Network revenue through Adsense was $1.35 billion, up 36% year-over-year. International markets were up 78% from Q2 2006, and represented 48% of total revenue, with strength coming from Spain, France, and Italy. The only real blip on the growth radar is that revenue from paid clicks was stagnant from the first quarter to the second quarter. All in all, however, it was a very impressive quarter by any reasonable standards.
So, why did Google miss their projected earnings? Seeking Alpha explains it well:
“Costs and Expenditures. While costs of Revenue stayed flat this quarter at about 40%, there were cost increases across the board for Research & Development, Sales & Marketing and General Administration. These cost increases led to overall margin deterioration from 33% down to 28%. That’s a full 5% fall in profit margins. This is huge and the main reason for the earnings miss, which caused the stock to plummet after-hours.”
Google went on a recent acquisition spree, gobbling nearly a company a week this past month. With companies like YouTube and Postini in the bag, and the DoubleClick merger pending Congressional approval, it is very clear that the company is looking to expand into areas beyond its traditional keyword search. The real reason investors are scared is because Google has traditionally blown away earnings expectations since August 2004, when it first went public, and its failure to do so now is thus unprecedented.
The best way of explaining investor reaction is to look at short-term versus long-term investors. Short-term investors are looking to make money on the rapid ascent of Google’s stock, while long-term investors are looking to grow with Google as it expands its core suite of services over the next couple of years. Unfortunately for short term investors, Google’s cost increase in R&D shows that the company is basically investing in it’s long-term future, giving up its meteoric short-term growth. Despite this shift in expansion direction, Google is still the dominant player in Internet advertising, far outstripping Yahoo! Inc. and Microsoft.
So, the real question for Google investors is whether or not the search engine giant can diversify its revenue stream to make the R&D spending worth it. If it turns out a year or two from now that this money was basically thrown down the drain and Google missed a real opportunity to grow its forte, search advertising, there’ll certainly be some consternation among long-term investors. Google executives are already making plans to slow down their hiring in an effort to cut costs.
The bottom line is that as the leader of a highly volatile and constantly evolving industry, Google is a comparatively risky investment, and that earnings dips like those revealed today should not surprise aware investors.
Topics: Advertising: Online, Google, Investment, M&A |
However Google has successfully weather the seasonally slow second quarter,just as the topic spoken- not perfect,but close.
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