Google (NASDAQ:GOOG) is set to release its Q2 2013 earnings Thursday, July 18. The company has been aggressively pursuing other avenues besides its core search advertising business to drive revenue growth in the coming years. This quarter saw a flurry of activity at Google as it announced major product updates for services like Google Maps and Google+. Google also announced the launch of its music subscription services called All Access that will compete with music streaming services such as Pandora and Spotify. Additionally, Google acquired four companies during the quarter with the most notable acquisition being for social map company Waze. 
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However, in its Q2 earnings release, Google’s core search ads business will be in focus once again. We are also closely following Google’s Motorola division which continues to post operational losses.
Mobile Search Will Continue To Drive Revenue At Search Ads Division
Google derives most of its value from advertising where it competes primarily with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and Facebook (NASDAQ:FB). According to our estimates, mobile search ads accounts for 32% of Google’s overall value while standard PC search ads account for another 33%.
Standard PC search continues to be the cash cow for the company. We expect revenues from search ads will continue to grow going forward as the number of searches and resulting paid clicks continue to rise. However, we believe that revenue per search (RPS) for PC’s is on the decline as advertisers are increasingly routing their budget spend towards mobile devices. In this earnings announcement, we are closely monitoring the cost-per-click (also known as CPC) metric for understanding more of this trend.
Google continues to bolster its search capabilities on its mobile platform with new releases and acquisitions. Google acquired Wavii, a natural-language-processing application, for its mobile feed content that can be integrated with Google’s application. In our opinion, mobile is key for Google’s growth over the long term because more users will access Internet via mobile devices in the coming years. Moreover, Gartner has predicted that worldwide mobile ad revenue will exceed $11 billion in 2013, and the growth rate for ad revenue will exceed 400% during 2011-2016.  During this earnings announcement, we will be closely watching Google’s mobile advertising run-rate given its growth potential. Additionally, we will closely monitor the average cost-per-click (CPC), which declined at a slower rate in Q1 2013. We expect the decline in mobile CPC to slow down further as mobile CPCs converge with PC CPCs.
YouTube To Drive Revenue
According to our estimates, the YouTube division constitutes approximately 10% of Google’s value. In a statement to Bloomberg, Google reported that YouTube’s ad sales from mobile devices had tripled in the first half of the year.  Revenues from this division were around $2.13 billion in 2012, and we think that they will continue to grow and reach around $15 billion by the end of our forecast period.
The consumption of online video is on the rise. According to emarketer, online video ads revenue in the U.S. will increase from $2.93 billion in 2012 to $9 billion by 2017.  Considering this explosive growth in online video ads spent, we expect Youtube to be a key contributor to Google’s revenue growth going forward. In this earnings announcement, we will be closely monitoring the growth in users and revenues at Youtube.
Strategy At Motorola Mobility In Focus
Google’s Motorola Mobility division continues to post operational loss since its acquisition last year. Although, Google has sold most of Motorola’s non-core mobile business, it has only recently announced the launch of new mobile phones. 
According to IDC, smartphones sales are projected to grow by 32% y-o-y in 2013.  Motorola is looking to launch itself back into the mainstream mobile market with the launch of Moto X smartphone. In this earnings announcement, we are closely following Google’s strategy for this division.
We currently have a $800 price estimate for Google, which is approximately 15% below the current market price.Notes:
- See Google’s Waze Deal Will Boost Its Maps Monetization Efforts [↩]
- Gartner Worldwide Mobile Advertising Revenue, January 17 2013, www.gartner.com [↩]
- Google’s YouTube Triples Mobile Sales Amid Wireless Shift, June 6 2013, www.bloomberg.com [↩]
- Online Video Advertising Moves Front and Center, May 14 2013, www.emarketer.com [↩]
- Motorola’s new ‘Moto X’ phone to be made in Texas, May 30 2013, news.yahoo.com [↩]
- Smartphones Expected to Grow 32.7% in 2013 Fueled By Declining Prices and Strong Emerging Market Demand, June 4 2013, www.idc.com [↩]