On Friday, October 18, 2013, Google Inc (NASDAQ.GOOG) shares rose +122.61 to a new high of $1011.41 or +13.80% following a stellar Q3 2013 earnings report the day before (Click Image To Enlarge)
MOUNTAIN VIEW, Calif. – October 17, 2013 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended September 30, 2013.
Larry Page, Google CEO said.
“Google had another strong quarter with $14.9 billion in revenue and great product progress. We are closing in on our goal of a beautiful, simple, and intuitive experience regardless of your device.”
Q3 Financial Summary
Google Inc. reported consolidated revenues of $14.89 billion for the quarter ended September 30, 2013, an increase of 12% compared to the third quarter of 2012. Google Inc. reports advertising revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the third quarter of 2013, TAC totaled $2.97 billion, or 24% of advertising revenues.
Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures at the end of this release.
- GAAP operating income in the third quarter of 2013 was $3.44 billion, or 23% of revenues. This compares to GAAP operating income of $2.74 billion, or 21% of revenues, in the third quarter of 2012. Non-GAAP operating income in the third quarter of 2013 was $4.34 billion, or 29% of revenues. This compares to non-GAAP operating income of $3.76 billion, or 28% of revenues, in the third quarter of 2012.
- GAAP net income including net income from discontinued operations in the third quarter of 2013 was $2.97 billion, compared to $2.18 billion in the third quarter of 2012. Non-GAAP net income in the third quarter of 2013 was $3.64 billion, compared to $2.96 billion in the third quarter of 2012.
- GAAP EPS including impact from net income from discontinued operations in the third quarter of 2013 was $8.75 on 339 million diluted shares outstanding, compared to $6.53 in the third quarter of 2012 on 333 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2013 was $10.74, compared to $8.87 in the third quarter of 2012.
- Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense, as well as restructuring and related charges. Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits, as well as net income or loss from discontinued operations. In the third quarter of 2013, the expense related to SBC and the related tax benefits were $886 million and $207 million compared to $706 million and $155 million in the third quarter of 2012. In the third quarter of 2013, restructuring and related charges and the related tax benefits were $12 million and $3 million, compared to $313 million and $67 million in the third quarter of 2012. In addition, net income from discontinued operations in the third quarter of 2013 was $15 million, compared to net income from discontinued operations of $18 million in the third quarter of 2012.
Click Image To Enlarge
Q3 Financial Highlights
Revenues and other information – On a consolidated basis, Google Inc. revenues for the quarter ended September 30, 2013 were $14.89 billion, an increase of 12% compared to the third quarter of 2012.
Google Segment Revenues – Google segment revenues were $13.77 billion, or 92% of consolidated revenues, in the third quarter of 2013, representing a 19% increase over third quarter 2012 Google segment revenues of $11.53 billion.
- Google Sites Revenues – Google-owned sites generated segment revenues of $9.39 billion, or 68% of total Google segment revenues, in the third quarter of 2013. This represents a 22% increase over third quarter 2012 Google sites segment revenues of $7.73 billion.
- Google Network Revenues – Google’s partner sites generated segment revenues of $3.15 billion, or 23% of total Google segment revenues, in the third quarter of 2013, compared to $3.13 billion of Google network segment revenues in the third quarter of 2012.
- Other Google Revenues – Other revenues from the Google segment were $1.23 billion, or 9% of total Google segment revenues, in the third quarter of 2013. This represents an 85% increase over third quarter 2012 other Google segment revenues of $666 million.
Google Revenues By Source by Quarter - Q1 2011 Through Q3 2013 - Business Insider (Click Image To Enlarge)
Google Segment International Revenues – Google segment revenues from outside of the United States totaled $7.67 billion, representing 56% of total Google segment revenues in the third quarter of 2013, compared to 55% in the second quarter of 2013 and 53% in the third quarter of 2012.
- Google segment revenues from the United Kingdom totaled $1.39 billion, representing 10% of total Google segment revenues in the third quarter of 2013, compared to 11% in the third quarter of 2012.
Google Revenues - U.S. vs International by Quarter - Q1 2011 Through Q3 2013 (Click Image To Enlarge)
Foreign Exchange Impact on Google Segment Revenues – Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the second quarter of 2013 through the third quarter of 2013, our Google segment revenues in the third quarter of 2013 would have been $41 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2012 through the third quarter of 2013, our Google segment revenues in the third quarter of 2013 would have been $135 million higher.
- In the third quarter of 2013, we recognized a benefit of $22 million to Google segment revenues through our foreign exchange risk management program, compared to $62 million in the third quarter of 2012.
Reconciliations of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues are included at the end of this release.
Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 26% over the third quarter of 2012 and increased approximately 8% over the second quarter of 2013.
Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 8% over the third quarter of 2012 and decreased approximately 4% over the second quarter of 2013.
TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.97 billion in the third quarter of 2013, compared to $2.77 billion in the third quarter of 2012. TAC as a percentage of advertising revenues was 24% in the third quarter of 2013, compared to 26% in the third quarter of 2012.
The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.22 billion in the third quarter of 2013. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $755 million in the third quarter of 2013.
Motorola Mobile Segment Revenues – Motorola Mobile segment revenues were $1.18 billion, or 8% of consolidated revenues in the third quarter of 2013, compared to $1.78 billion, or 13% of consolidated revenues in the third quarter of 2012.
Elimination and Other – Beginning in Q3 2013, Google and Motorola segment revenues are impacted by intersegment transactions that are eliminated in consolidation. Additionally, segment revenues associated with certain products were recognized this quarter in the segment results, but deferred to future periods in our consolidated financial statements. Such intersegment revenues and deferred revenues were $63 million in the third quarter of 2013.
Other Cost of Revenues – Other cost of revenues, which is comprised primarily of manufacturing and inventory-related costs, data center operational expenses, amortization of intangible assets, and content acquisition costs, increased to $3.44 billion, or 23% of revenues, in the third quarter of 2013, compared to $3.19 billion, or 24% of revenues, in the third quarter of 2012.
Operating Expenses – Operating expenses, other than cost of revenues, were $5.04 billion in the third quarter of 2013, or 34% of revenues, compared to $4.61 billion in the third quarter of 2012, or 35% of revenues.
Amortization Expenses – Amortization expenses of acquisition-related intangible assets were $281 million for the third quarter of 2013, compared to $287 million in the third quarter of 2012. Of the $281 million, $153 million was as a result of the acquisition of Motorola, of which $116 million is included in Google segment results and $37 million is included in Motorola Mobile segment results.
Stock-Based Compensation (SBC) – In the third quarter of 2013, the total charge related to SBC was $886 million, compared to $750 million in the third quarter of 2012. We currently estimate SBC charges for grants to employees prior to September 30, 2013 to be approximately $3.29 billion for 2013. This estimate does not include expenses to be recognized related to employee stock awards that are granted after September 30, 2013 or non-employee stock awards that have been or may be granted.
Operating Income – On a consolidated basis, GAAP operating income in the third quarter of 2013 was $3.44 billion, or 23% of revenues. This compares to GAAP operating income of $2.74 billion, or 21% of revenues, in the third quarter of 2012. Non-GAAP operating income in the third quarter of 2013 was $4.34 billion, or 29% of revenues. This compares to non-GAAP operating income of $3.76 billion, or 28% of revenues, in the third quarter of 2012.
- Google Segment Operating Income – Google segment operating income in the third quarter of 2013 was $4.64 billion, or 34% of Google segment revenues. This compares to segment operating income of $3.95 billion in the third quarter of 2012, or 34% of Google segment revenues.
- Motorola Mobile Segment Operating Loss – Motorola Mobile segment operating loss in the third quarter of 2013 was $248 million, or -21% of Motorola Mobile segment revenues. This compares to segment operating loss of $192 million, or -11% of Motorola Mobile segment revenues in the third quarter of 2012.
Interest and Other Income, Net – Interest and other income, net, was $24 million in the third quarter of 2013, compared to $65 million in the third quarter of 2012.
Income Taxes – Our effective tax rate was 15% for the third quarter of 2013.
Net Income – Consolidated GAAP net income in the third quarter of 2013 was $2.97 billion, compared to $2.18 billion in the third quarter of 2012. Non-GAAP consolidated net income was $3.64 billion in the third quarter of 2013, compared to $2.96 billion in the third quarter of 2012. GAAP EPS in the third quarter of 2013 was $8.75 on 339 million diluted shares outstanding, compared to $6.53 in the third quarter of 2012 on 333 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2013 was $10.74, compared to $8.87 in the third quarter of 2012.
Cash Flow and Capital Expenditures – Net cash provided by operating activities in the third quarter of 2013 totaled $5.08 billion, compared to $4.0 billion in the third quarter of 2012. In the third quarter of 2013, capital expenditures were $2.29 billion, the majority of which was for production equipment, data-center construction, and real estate purchases. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the third quarter of 2013, free cash flow was $2.79 billion.
We expect to continue to make significant capital expenditures.
A reconciliation of free cash flow to net cash provided by operating activities, the GAAP measure of liquidity, is included at the end of this release.
Cash – As of September 30, 2013, cash, cash equivalents, and marketable securities were $56.52 billion.
Headcount – On a worldwide basis, we employed 46,421 full-time employees (42,162 in Google and 4,259 in Motorola Mobile) as of September 30, 2013, compared to 44,777 full-time employees (40,178 in Google and 4,599 Motorola Mobile) as of June 30, 2013.
COMMENTARY:
Motorola Disappoints
In spite of Google's stellar Q3 2013 earnings report, Motorola, continues its downward decline, as it posted another $250 million dollar loss in spite of the Moto X launch -- evidently those personalized phones haven't been selling swiftly enough to stem the tide. Page is optimistic about Motorola, as he waxed poetic about its voice recognition features and stated that the Android ecosystem is healthy -- it now numbers 1 billion devices strong, and continues at a pace of 1.5 million more activations per day. The problem? Well, Moto's manufacturing is up to speed, but the process of building marketing and distribution are what's holding Moto back.
Motorola's Moto X smartphone (Click Image To Enlarge)
Unveiled on August 1, 2013, the new 4.7-inch screen smartphone is aimed at market leaders like the iPhone and the Galaxy S phones. The Moto X features “all-day” battery life, a choice of colors and materials, and an instant-start camera, the company said today at a press event in New York. The Moto X is priced starting at $199 with a two-year contract and will be available on all the major U.S. carriers by the end of August or early September.
Bloomberg's panel of technology experts discusses Motorola's new Moto X smartphone designed to compete against the iPhone. Google acquired Motorola in 2011 and I covered it in my blog on September 7, 2011 (Click Image To View Video)
Dennis Woodside, chief executive officer of Motorola Mobility, said at the unveiling press event.
“This is a relaunch of Motorola. A year ago today, the Google team sat before a whiteboard and said, ‘What do we want to build? And how do we make it different?’ And this is it.”
The Moto X is assembled by contract manufacturer Flextronics International Ltd. (FLEX) at a former Nokia Oyj facility in Fort Worth, Texas. Staffing the facility will require about 2,000 jobs, Woodside said in May.
Working initially with AT&T Inc. (T), customers can customize the colors of the front, back and accents of the Moto X on website Motomaker.com. The customization work is done in Fort Worth, and Motorola guarantees phone delivery in four days, said Osterloh. One of the custom options available is a wooden back made from a choice of rosewood, teak, bamboo or ebony.
Woodside said in an interview with Bloomberg Television.
“You can build this phone in 2,000 combinations. By giving consumers the option to customize phones, that’s going to be fun and interesting.”
Boy, I thought Apple had gone crazy with its iPhone C color combinatins, but Motorola topped the iPhone C's color combinations by a factor of 10.
Google Still Leads In Search, But Market Share Is Flat
The company's share of the search market has remained relatively flat and its margins on desktop search advertising — Google's bread and butter — have declined as PCs are replaced by smartphones and tablets. Last quarter its cost per click, a metric of how much brands pay to advertise with Google, declined 6 percent. It fell again this quarter, down 8 percent year of year and 4 percent from last quarter. But the total volume of paid clicks (when people click on ads across Google's sites and on ad networks it serves) rose 26 percent year over year, offsetting that decline.
Google Bullish On Mobile Video
Page and Google are also bullish on mobile video, announcing that a full forty percent of YouTube's revenue now flows from phones and tablets. Just two years ago, the video service only got six percent of its cash from such devices. And, as YouTube has continued to beef up its video library -- be it livestreaming events or sponsored weeks of original content -- video continues to grow in importance to Google's overall bottom line. However, when asked about a rumored partnership to broadcast NFL games, the company remained coy. Nikesh Arora, Google's Chief Business Officer would only say that YouTube's always talking to content providers, but remains satisfied with its current business plan.
Chromebooks Big With U.S. Schools
As for the company's other main hardware, Chromebooks, well, things are looking up there too. Over 8,000 locations worldwide are now selling them, and twenty percent of US school districts have deployed Google-fied laptops. Gotta get 'em on the Google bandwagon early, right?
Google's Chromebook is a laptop that uses the Chrome operating system and all applications and user-generated files are stored in the Google cloud ecosystem (Click Image To Enlarge)
Search Ad Revenue Growth Slows
As Colin W. Gillis, a technology analyst at BGC, pointed out in Time on Friday morning, Google has seen a substantial deceleration from the 35 percent annual growth that the company delivered as recently as 2011, averaging around 20 percent in its last several quarters. Gillis says.
"We see the slowing core business as a one reason why Google is investing so heavily in new ventures as new products are needed to reignite revenue growth."
R&D
all topics on the earnings call revolved around making money, there was some talk of spending it, too. Through the first three quarters of this year as compared to last, Google's R&D budget has increased by almost $1 billion. And, if Larry Page had his way, he'd be spending even more. Part of Page's job is to spend on long-term R&D -- projects that are "speculative" according to Page. You know, stuff like Calico, Project Loon and Google's self-driving cars. Current spending on such projects "isn't consequential for Google" according to Page, and he wants to do more of it.
Earnings Report Conference Call Transcript
For a complete transcript of Google management earnings report conference call, please click HERE.
Courtesy of a press release dated October 17, 2013 issued by Google, an article dated August 1, 2013 appearing in Bloomberg, an article dated October 17, 2013 appearing in Engadget, an article dated October 17, 2013 appearing in The Verge, an article dated October 17, 2013 appearing in Business Insider, an article dated October 17, 2013 appearing in SeekingAlpha, and an article dated October 17, 2013 appearing in VentureBeat
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