A Google result that is merely 'great'

Google has produced another stunning set of results, growing faster than the internet advertising market with huge upside beyond the anglosphere. Not that the market cared.

It says a lot about the market expectations of Google when their first quarter results demonstrated topline year-on-year earnings growth of 30 per cent and a quarterly net profit of $3.47 billion and the response was pretty much muted.

In after hours trading post the earnings announcement Google is up just a little over 1 per cent.

Once again the results were generally positive, Google continuing to grow faster than the overall internet advertising market in the key areas such as search and display. Excluding the loss-making Motorola business, Google’s core business of internet advertising was up 21.6 per cent

These were the numbers in a nutshell.

– Total revenue for the quarter was $13.969 billion

– $8.6 billion came from Google.com sites (Google owned and operated properties, such as search and YouTube)

– $3.262 billion came from Google’s network of external sites (website properties which carry Google-sold ad inventory)

– $1.049 billion came from 'other' (Android, Doubleclick business-to-business, Google Apps and other non-advertising related paid services)

– $1.01 billion came from Motorola Mobile

– Overall net income was $3.34 billion, up 15.7 per cent year-on-year

Not bad at all. In fact, every media company worldwide would love to see a set of numbers like that. Robust revenue growth off a significantly large base, controlled margins and a neat $3 billion-plus in net income. So why isn’t it being more celebrated? Well, with Google great results are expected and these results are for the most part just that, great.

Is there anything to be concerned about with Google’s quarter? No, not really. The numbers remain staggering. In a challenging advertising market, Google has over the past 12 months increased annual revenue for its properties by a whopping $5 billion. For the same period it has increased network revenues by an impressive $2 billion. And, most impressively, it’s ‘other’ revenue has increased over the past 12 months by $1.4 billion.

Combine these and there’s more than $8 billion in new revenue coming through the door. That is $3.5 billion more than the total revenue for Facebook for the same period and close to double the total revenue for Yahoo for calendar 2012. Make no mistake, Google is adding revenue faster than any of its competitors, swallowing up an even bigger chunk of the digital advertising market.

However, there were a few small things that investors and analysts will want to keep an eye on. 'Traffic acquisition costs' came down from a historic high in the fourth quarter of 2012, but still remain significantly higher year-on-year, up 18 per cent. However, these TAC costs are increasing in line with overall revenue increases and continue to sit around 24-25 per cent of total advertising revenue.

Network advertising revenue rose 12 per cent year-on-year for th quarter, down from 19 per cent for the fourth quarter in 2012. There is still impressive volume growth in this area of Google’s business but the 12 per cent growth for the 2013 first quarter is far lower than the 20 per cent growth for the same period the year prior. 'Search' for the quarter was up 18 per cent, also down from the same period in 2012 where it was up year-on-year 24 per cent. There is definitely a slowdown in Google’s ad growth but that has to be expected when the company has been doing such a sound job of taking share from competitors over the past two or three years.

Motorola mobile is, as expected, lousy when it comes to a material contribution to revenue. It lost $271 million in the quarter, following on from a $353 million loss the first quarter in 2012. Combine these and it has burnt through more than $600 million in cash in a six-month period. All this from an acquisition that cost the company $12.5 billion. Google has already agreed to offload Motorola’s Home Unit for $2.3 billion, and the purchase came with a collection of valuable patents, but it’s still unclear whether the Motorola acquisition will deliver Google an appropriate value relative to the purchase price.

US revenue year-on-year grew 13 per cent, the UK was up 20.6 per cent and the rest of the world (excluding the US and UK) jumped 24 per cent. International growth rates will be important to watch as, in markets like the US, UK and Australia, Google has an unrivalled market position and market share close to 50 per cent whereas in other markets there is more upside to be had even in territories with moderate digital advertising growth.

A staggering figure to see is the amount of money Google spends on research and development per quarter. For Q1 Google dropped $1.8 billion on R&D. This means over a 12 month period Google is spending $1 billion plus more on R&D than it does on sales and marketing expenses. Part of the reason why Google is crushing the competition is its unwavering dedication to R&D investment. What other media company spends more on R&D than sales? Not many, in fact in a market like todays advertising market many are focusing more on aggressive sales and extraction rather than research and development.

The big one to watch is Google’s $50 billion cash pile – already big and getting bigger by the quarter at a rate of about $1 billion per month. This, combined with the above mentioned research and development spend is significant and representative of the state of the media world now. It is the one player with more money than it knows what to do with, while everyone else is seemingly struggling to sort out the new normal of lower yield and increased competition.

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