Google (NASDAQ:GOOG) reported its earnings for Q1 2012 on July 19, with gross revenue of $12.2 billion, up nearly 35% year-on-year. However, nearly $1.25 billion on the total revenues were contributed by Motorola, which Google acquired earlier this year. Organic revenue growth was only about 21%, which is still pretty impressive. It also reported a significant jump in operating and net income, and the same ratio of traffic acquisition costs as a percentage of advertising revenues as in 2011 – 25%. 
As a result of its push into mobile advertising, the cost-per-click dropped nearly 16% over last year, but there was a 42% growth in aggregate paid clicks, which led to a significant increase in advertising revenues. We expect this trend to continue as mobile search advertising drives the next phase of earnings growth for Google while traditional online search advertising takes a backseat. Google also started reporting Motorola’s financials this quarter. We expect Motorola to account for around 10% of Google’s revenue every quarter, but a much lower percentage of its profits due to much lower margins on hardware. 
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Mobile and Social to drive Google’s advertising revenue growth
Going forward, we expect mobile search advertising revenue to continue to increase at a rapid pace and eventually supplant traditional search advertising as Google’s primary cash cow. Since the average revenue per search is lower for mobile ads, the rise in mobile advertising should continue to weigh on the average cost-per-click charged to advertisers. However, the increase in the aggregate number of paid clicks driven by increasing mobile internet usage should more than compensate for it and lead to an increase in Google’s search advertising revenues.
Eventually, we expect Google’s average revenue per mobile search to increase as Google improves its mobile ad offerings and attracts more advertisers by offering better targeting features (location, social indicators) and a higher ROI with hyper-targeted ads.
We also expect Google’s Android efforts to pay off in the smartphone and tablet spaces eventually by indirectly helping drive the growth of mobile advertising. Google recently launched the Nexus 7, which could help it beat Apple in the tablet space by offering a much cheaper tablet which offers a great user experience.
While Google continues to be secretive about the usage metrics of Google+, it did reveal that more than 250 million users have upgraded to Google+, and that it is seeing impressive engagement and healthy growth. Google+ is supposed to connect all of Google’s other offerings with a social layer. If Google is able to attract a significant user base, it could not only generate increasing amounts of display advertising revenue from Google+, but also use the social data gathered from Google+ to improve its core search experience and generate more revenue from advertising by offering better targeting features.
With the Motorola acquisition, hardware will now account for a significant portion of Google’s revenues. Motorola generated nearly $1.25 billion in revenue this quarter. While it is a drag on Google’s otherwise mouthwatering margins, Google could see gains from synergies between Android and Motorola’s smartphone/tablet business. We expect the Google – Motorola combination to become a major player in the hardware space going forward.
We currently have a $680 Trefis price estimate for Google, which stands 10% above its market price. We’re in the process of revising our model based on the new numbers reported this quarter and also accounting for Google’s acquisition of Motorola. Google derives most of its value from advertising, a space where it competes primarily with Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and Facebook (NASDAQ:FB).Notes: