Google Inc. (NASDAQ:GOOG) announced its financial results for fiscal Q1 2014 on Wednesday, 16 April 2014 and the results have disappointed investors, despite 19% Y-O-Y growth in revenue. The company recorded consolidated revenues of $15.4 billion USD, and an operating income of $4.12 billion USD, as it tries to perform a delicate balancing act between its business agendas and future bets. The stock price fell by about 6% to $524.33 USD, after the release of Q1 2014 earnings.
Google CEO Larry Page seemed more interested in the new upcoming businesses, despite missed targets:
“We completed another great quarter. Google’s revenue was US$15.4 billion, up 19% year on year. We got lots of product improvements done, especially on mobile. I’m also excited with progress on our emerging businesses.”
The Major Highlights Of The Q1 2014 Earnings Report Were:
- $15.4 Billion USD revenue for Q1 2014, and profit per share were $6.27 USD.
- Operating income was $14.2 billion USD or 27% of revenue, compared to 29% of revenue from Q1 2013.
- Google sites generated revenues of 10.47 billion or 68% of total revenue in Q1 2014. This is a 21% increase Y-O-Y, with partner sites generating revenue of $3.4 billion USD.
- Financial results of Motorola Mobility are presented as net loss from discontinued operations.
- Revenue from outside the United States totaled $8.76 billion USD, or 57% of total revenue.
- Cash, cash equivalents and marketable securities were $59.38 billion USD compared to $58.72 billion USD as of December 31, 2013.
- The company has 49,829 full time employees, including 3,894 from Motorola mobile.
Google Making Unusual And Costly Acquisitions
Google sold Motorola Mobility for $2.9 Billion USD to Chinese smartphone vendor Lenovo Group Limited (ADR) (OTCMKTS:LNVGY), after acquiring it for $12.5 billion USD in 2011. Despite operating at a loss, Google has retained the majority of Motorola’s patents and gained a defensive move to fight patent litigation by its primary competitors. Nest labs was also acquired for $3.2 billion USD in January 2014, which was the second biggest acquisition by Google in recent times. Through this purchase, the search engine giant hopes to gain an entry into the upcoming internet of things. Google has also made acquisitions in other fields which include apps (Bitspin), robotics (Meka, Redwood), internet security (Imperium) and artificial intelligence (DeepMind technologies). Acquiring new technologies and patents are Google’s ways of ensuring it remains ahead of competitors when it comes to future technologies.
Weaknesses In Advertising Model
Analysts have expresses their main concerns in Google’s advertising business. According to the earnings report, paid clicks, a measure of the number of times, ads from Google’s websites and other sites were clicked on during the period, grew by 26%. However CPC or costs per click, which measures the revenue generated when ads are clicked on, fell by about 9%. More paid clicks, and fewer losses from CPC were expected, signaling a downward trend. Some of this decline in ad revenue can be attributed to seasonal factors, as not a lot of shopping takes place during the first half of the year.
Google has repeatedly failed to assure investors on how it hopes to monetize from mobile ads, even as the advertising market shifts away from the desktops towards tablets and smartphones. New advertising strategies, such as improved video advertisements on YouTube and Product listing ads, have been implemented by Google to appease worried advertisers. In a report by e-marketer, the advertising giant controlled 49.3% of the mobile internet ad revenue share in 2013 ,while Facebook Inc. (NASDAQ:FB) had 17.5% share.
Google’s Play store has surpassed Apple’s App store in downloads, though Apple still generates much more revenue. A new report from App Annie indicates that Google may be closing the gap with Apple Inc. (NASDAQ:AAPL) in revenue generated from apps. Android devices are extending their lead in worldwide installed base, allowing Google Play to make significant gains. It is estimated that in 2015, one out of every two devices sold worldwide will be powered by Android. The launch of Android wear, and the rumored Android TV will allow Android OS to expand to even more platforms.
Can New Businesses Become More Profitable?
Investors have also been spooked by the impact of investments on profit margins in Google’s vast empire. These include all upcoming projects including Google Glass, robots, self driven cars, Wi-Fi balloons and cloud computing. All of these new initiatives, currently seem less profitable than the search-ad business. Google’s spending on Research and Development was an estimated $2.11 billion USD by Dec 31, 2013.
Hardware sales are also contributing to Google’s revenue, thanks to strong sales of its Chromecast device, Nexus 5 and Nexus 7, through partnerships with ASUSTEK Computer Inc. (TPE:2357) and LG Electronics Inc. (KRX:066570). Recently, the company held a one day sale of its Google Glass explorer addition and the $1500 USD devices sold quickly. Google’s renewed focus on the cloud computing segment will face fierce competition from Amazon and Microsoft. In the meanwhile several of the company’s projects including Project Ara and Project Tango and other rumored projects including Project Android silver, Project Hera signal Google’s intent to dominate the smartphone platform.
Through these results, a clear picture is emerging of a company willing to sacrifice its growth and profits to focus on the future through acquisitions and research projects. Analysts and advertisers may worry about Google’s declining advertising might, but the giant is definitely defying the odds as it grows its revenue by at least 19% every year.