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Highlights From GOOG's Q4 Conference Call: Continued Growth in Search and Mobile, But First EPS Miss in Years


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January 20, 2012 2:35 PM EST
GOOG Hot Sheet
EPS Growth %: +24.8%

Financial Fact:
Provision for income taxes: 655M

Today's EPS Names:
CIM, KH, BLOX, More
Google, Inc. (NASDAQ: GOOG) reported Q4 EPS of $9.50, $0.99 worse than the analyst estimate of $10.49. Revenue for the quarter came in at $8.13 billion versus the consensus estimate of $8.4 billion. Shares are currently trading at $584.10, down $55.47 (-8.67%)

Highlights From GOOG's Q4 Conference Call:

  • (Lawrence E. Page) Google had a very strong quarter, with revenues up 25% year-on-year, 9% quarter-on-quarter, and we blew past the $10 billion mark for the first time.
  • With Google+, we shipped on average a new feature every day since we launched in June. That's more than 200 updates in total, and those things include a bunch of new hangout features.
  • We launched Circles in Gmail and Plus Pages for businesses and many, many other things. I'm also pleased to announce that there are over 90 million Google+ users, well over double what I announced just a quarter ago.
  • Engagement on Plus is also growing tremendously Over 60% of them engage daily and over 80% weekly.
  • Android is quite simply mind-boggling; 700,000 phones are lit up every day, and I'm pleased to announce 250 million Android devices in total, up 50 million since our last announcement just in November.
  • In just two days over the holiday weekend, 3.7 million Androids were activated, and today we're announcing over 11 billion downloads from Android markets.
  • Ice Cream Sandwich, which is a new Android release in October, is by far our best build yet, and they're exciting new phones.
  • From an internal data project eight years ago, I'm proud to tell you today that Google Gmail now has more than 350 million active users, and it's growing rapidly.
  • Take Display. We brought the science of Search to the art of the Display, creating a business that our latest figures show has now reached an annualized run rate of over $5 billion.
  • I have some exciting new numbers also for the DoubleClick Ad Exchange. Spending is up over 130% year-on-year, and the number of buyers and Sellers have both more than doubled over the same period. I'm very pleased with the advertising on YouTube.
  • Enterprise is doing great, with over 5,000 new customers signing up every day. In fact, last week, we signed our biggest-ever deal, about 110,000 users at BBVA, one of the world's leading banks.
  • TrueView gives users much more choice over what they watch, and advertisers only pay when someone watches their ad. It's not just in advertising that we're doing well. Enterprise is doing great, with over 5,000 new customers signing up every day. In fact, last week, we signed our biggest-ever deal, about 110,000 users at BBVA, one of the world's leading banks.
  • (Patrick Pichette) Our gross revenue grew 25% year-over-year, to $10.6 billion, 9% quarter-over-quarter growth. By the way, it's worth noting that although currency rates had an immaterial impact year-over-year, they in fact had a negative impact on revenue quarter-over-quarter.
  • In fact, it if we applied last quarter's exchange rate to our Q4 revenue, these would have been roughly $240 million higher. So FX is a key component here.
  • Google Website revenue was up, in fact just shy of 30% year-over-year, to $7.3 billion, and 8% quarter-over-quarter, with strength across most major geographies and verticals.
  • Our Google Network revenue was up 15% year-over-year, to $2.9 billion, and 11% quarter-over-quarter. It's important to note here that the Network revenue was, again, negatively impacted by the Search quality improvements we made early last year and also that the momentum in our Display business continues, something that Susan will talk about in a few minutes.
  • Our Other revenue was up 50% year-over-year, to $410 million, and 6% quarter-over-quarter.
  • Our global aggregate paid click growth was very strong, up 34% year-over-year and 17% quarter-over-quarter. Our aggregate cost-per-click growth was down 8% year-over-year and quarter-over-quarter. Remember, too, that this is an aggregate number which includes both Google.com and our AdSense properties.
  • Revenue from the U.S. was up 23% year-over-year, to $5 billion. Our non-U.S. revenue accounted for 53% of our total revenue, or $5.6 billion, up 28% year-over-year, which includes a modest $25 million benefit from our hedgings program. The U.K. was up 21% year-over-year, to $1.1 billion.
  • Let me now turn to expenses. Traffic acquisition costs were $2.5 billion, or 24.1% of total advertising revenue. Other cost of revenue was $1.2 billion, excluding stock-based compensation of $77 million. And finally, operating expenses, which excludes stock-based compensation, totaled $2.9 billion.
  • Our stock-based compensation totaled $459 million, and the increase year-over-year in OpEx was primarily due to payroll, increased advertising and promotional spend, and legal and professional services.
  • As a result of all this, our non-GAAP operating profit was $4 billion in Q4, resulting in a non-GAAP operating margin of 38.2%, a strong margin performance that gives us the confidence to continue to fully fund our strategic growth areas in Search, Display, Mobile, and Apps.
  • If we turn to head count, it was up approximately 1,100 for the quarter, and we ended the year roughly at 32,500 full-time employees.
  • Our effective tax rate was 22% in Q4
  • Let me now turn to cash management. In other income and expenses, our line was minus 18, which is a large negative variance; in fact, over $300 million quarter-over-quarter. This reflects a couple of things. First is the impact of our significant FAS 133 expense from hedging program, which accelerated the expense of our portfolio this quarter, now that this portfolio is much deeper in the money. In addition, as I mentioned, we took an impairment charge for Clearwire, and so for more details on our OI&E, which changed quite a bit this quarter, again, please refer to the slides that accompany this call on our IR website.
  • Our operating cash flow was very strong, at $3.9 billion, just shy of $4 billion. Our CapEx for the quarter was $951 million, versus last quarter at $680 million; and remember that the majority of our CapEx spend was related to facilities and production equipment.
  • In consequence, we're very pleased with our free cash flow, which was $3 billion.
  • (Nikesh Arora) Good growth over the holiday season, robust year-on-year growth on Black Friday and Cyber Monday has led to strong performance across our product portfolio and $10.6 billion in revenue this quarter.
  • First on Search, our core Desktop Search maintained robust growth, as we continued to help our customers grow their businesses. Beyond our robust core growth supporting online sales, we're increasingly helping our advertisers to use Search for branding, as well as something interesting, which is driving in-store sales for them.
  • Let's move to Mobile. We had another record quarter for Mobile advertising, as Mobile Search continues to search across all platforms. A number of our clients that are using Mobile within their campaigns continue to grow rapidly.
  • Let's move to Enterprise. As Larry mentioned, we are seeing great traction in our Enterprise business, both from large partners, who tend to be early adopters and future-looking, and at many small businesses who see Google Apps as a comprehensive and quick solution. We now have more than 5,000 customers signing up to Google Apps every day.
  • Let's move quickly to country performance. From a regional perspective, we continue to see strong performance in the Americas. However, generally, country growth rates were flat or softened slightly, partly due to comparisons with a very strong Q4 in 2010. North America saw slight decreases from preceding quarters. Year-on-year growth rates, however, the U.S. certainly remained robust, boosted by a strong holiday season. In particular, Cyber Monday led the way as the biggest day of the quarter. Western Europe was broadly stable, as the U.K., France, and Italy held steady, while Spain accelerated slightly for third quarter in a row. However, revenue growth in Germany slowed this quarter. Our key emerging countries continued to see rapid growth across all of our product areas.
  • Additionally, we continued the momentum of our Get Your Business Online program. In 2011, this program has helped bring hundreds of thousands of businesses online across the world, and we got 100,000 businesses to come online in 20 countries in Q4 alone.
  • (Susan Wojcicki) For small local businesses, we ramped up AdWords Express. This product lets businesses get up and running with a campaign in just a few minutes. Customer sign-ups have more than tripled in the past six months. We now offer AdWords Express in the U.S., U.K., Germany, and France, and we are trialing it in several other countries.
  • In Display, which now has reached a $5 billion annualized run rate, as Larry mentioned, we're creating a comprehensive solution to buy and sell Display ads across many types of digital media, such as desktop video and mobile. One key driver of growth has been our success in audience-buying.
  • We also expanded to video and mobile inventory on the Ad Exchange. And on the Google Display Network, we're also growing audience-buying. From Q3 to Q4, the number of active advertisers using interest-category marketing increased over 60%, and that was from an already large base. By understanding users' interests, we've been able to serve much more relevant and useful ads to our users.
  • (Q&A) Maybe you could just give us a sense for mobile usage. Did you see a major shift in mobile usage among the consumer during the holiday? And then I've got a quick follow-up. (A) Brian. Look, we're seeing mobile usage grow by leaps and bounds. It's happening by a proliferation of Android devices around the world. It's happening by a proliferation of tablets around the world, and it's happening generally by people getting more and more active on their mobile devices as they discover the utility and the various apps that allow them to be able to go find things, whether they're local searches, they're product searches, or they're searches to generate things on Google. So, yes, we are seeing tremendous mobile usage, and we also saw - seemed to be an uptick during the holiday season where people were looking for products and searching for e-commerce related activities during the holiday season.
  • So just as a follow-up to that, so do you think that the reason for the significant decline in the CPCs, the down 8%, is a function of the clicks going through mobile more so, or is it more some of the other factors that you explained to us? Because I'm just trying to get a sense for the down - 8% CPC number was, I guess, significantly different than what we were expecting. And I understand the trade-off with the clicks, but is mobile largely responsible for that? (A) So there are definitely multiple factors whenever we look at these metrics because these metrics are aggregate. But I would say the two biggest factors this quarter were FX as well as the changes that we had made, either ad quality or format changes, which increased the paid clicks, and again, were revenue-positive, advertiser-positive, user-positive. But those clicks, as I explained, may be lower CPC, like an example that I gave in my script with Sitelinks. So those were the two factors, but again, it's always important to remember there are many factors that contributed to these aggregate numbers.
  • (A) Two quick questions; I guess first for Nikesh. It looks like international, excluding the U.K. revenue, probably slowed the most kind of sequentially. Was wondering if the macro-economy played at all a role, and if so, any sense of magnitude there? And then secondly for Susan, with respect to the $5 billion Display run rate number, there's obviously a lot of stuff that goes in there between YouTube and mobile and the ad network. I was wondering if you could just give us some maybe color on what the blended TAC rate would be for that $5 billion. (A) So I'll take both questions, if you don't mind. So, first, we don't provide a TAC rate on the blended. And you're right, that if you think of the big properties that are in there, so we'll have the GDN, we'll have YouTube, we'll have all of the additional elements of our Display business, which includes the Teracents and all of the other optimizers, but also the AdMob on mobile, so that's the kind of key element. But we don't comment on the details of the blended TAC on them. On the economy, look, we had actually quite a solid Q4 performance, and were really pleased of our revenue growth. I mean even -- despite the FX issues - so you have to separate the FX issues from the economics fundamentals of our business, and performance in Europe was actually quite healthy despite the environment that we got there. And that's driven by the secular shift of offline to online continues, and the secular shift of more mobile continues, so from that perspective, right? Obviously, we don't control the economy and we don't control exchange rates, but we're actually quite pleased with the performance that we've had internationally, in addition to the U.K. and the U.S. So thanks for your question.


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