Google Earnings: Revenues Buoyed By Higher Ad Sales

Google (NASDAQ:GOOG) posted its fourth quarter and full year results on January 30. The company once again posted better than expected results and the stock rose 4% in after-hours trading on the day to $1182. The company reported a 17% year-over-year increase in consolidated revenues to $16.86 billion. Google’s core revenues (revenues ex-Motorola) grew by 22% to $15.70 billion. The company launched enhanced campaigns in third quarter, which once again contributed to the improvement in ad volumes. However, the cost per click continues to decline as advertisers shift their ad budgets to mobile devices and competitors such as Facebook (NASDAQ:FB).

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Multiplatform Strategy Delivers Ad revenue Growth

In our pre-earnings note, we stated that the multiplatform enhanced campaigns program will help the company to post growth in its ad revenues.

Additionally, in our note published earlier, we had argued that mobile is the key to Google’s revenue growth over the long term. Considering that advertisers are increasingly advertising on mobile devices, bundling of ad campaigns proved to be a good move. This new program, which automatically bundles desktop, tablet and cellphone ads for all campaigns, was instrumental in increasing the aggregate paid clicks, which mirrors the number of ads sold by 31% during the quarter. We expect this trend to continue as more advertisers switch to enhanced campaigns in the future. Additionally, we think that the Android platform, which now runs on over a billion devices, will continue to lead as the preferred mobile device platform, and this will increase the number of aggregate paid clicks, which can offset the decline in cost per click (CPC) to some extent going forward.

Cost Per Click Continues To Decline

We currently estimate that mobile search ads contribute approximately 32% to the firm’s value. Gartner has predicted that worldwide mobile ad revenue will exceed $11 billion in 2013, and that the growth rate for ad revenue will exceed 400% during 2011-2016 time frame. ^[1] Even though mobile search ads are expected to only generate 17% of the company’s total revenues in 2013, we expect the proportion to increase to over 35% by 2020.

Traditionally, CPC for mobile ads is lower compared to that of a PC. Advertisers continue to increase their spend on mobile devices, which is resulted in 11% year-over-year decline in average CPC for Google during the quarter. ^[2] The average revenue per search is also lower for mobile ads and the growth in mobile advertising will continue to weigh on average CPC charged to advertisers in the coming quarters. However, by launching the enhanced campaigns, Google is trying to eliminate the difference between PC CPC and mobile CPC. We believe that this program can arrest the decline in CPC in the future.

Robust Growth At YouTube

In our pre-earnings note, we mentioned that we would be closely watching YouTube because it caters to the rapidly growing online video ad space. During the earnings call we got some encouraging metrics from the management, which makes us confident about YouTube as an essential driver of revenue growth going forward. The management stated that time spent on YouTube grew by 50% year over year, and overall it had over 1 billion viewers per month. We think that YouTube is important because, according to our estimates, this division constitutes just under 10% of Google’s value. Revenues from this division were around $3.7 billion in 2013, and we think that they will continue to grow and reach around $18 billion by the end of our forecast period.

Motorola’s Handset Sale To Boost Profitability In The Future

In our pre-earnings note, we mentioned that we would be closely watching the Motorola division because it has continued to post operating losses since its acquisition last year. Motorola posted another quarter of disappointing results as the GAAP operating loss of the division increased to $384 million. However, since the company is selling Motorola’s handset division to Lenovo, we expect that Google’s profitability will improve in the future.

We are currently in the process of updating our Google model. At present, we have a $991 price estimate for Google.

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1. Gartner Worldwide Mobile Advertising Revenue, January 17 2013, www.gartner.com [↩]
2. Most Digital Ad Growth Now Goes to Mobile as Desktop Growth Falters, December 16 2013, www.emarketer.com [↩]