Thursday, January 19, 2012

Google Earnings Disappoint: Net Income & EPS Dip

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Google Earnings Disappoint: Net Income & EPS Dip

Google Summary Q4 2011 Google Q4 financial performance was disappointing and a triple instead of a home run. Q4 is normally the annual cyclical high with a drop in Q1. Therefore, this is as good as Google can do until probably Q3 2012. One notable positive is cost containment, that is, operating expenses continue stable while revenues grow. Financial position continues very strong, liquid, and stable. Ultimately, it may have been hedging the Euro that prevented an overall record Q4, as Other Income was a -$18 million, is normally $100+ million, and resulted in the lower net margin and earnings per share. The financial charts below illustrate several concerns about Google profitability and growth until another overall record quarter is reported:
1) Cash flow and earnings per share flattened during the historically strong and normally record Q4.
2) Net margin decreased (see above commentary)
3) Return on assets is downtrending, mostly the result of Google having more money than core business to invest in.
4) Earnings per share growth YoY was erratic in 2011, first because of the DOJ $500 million settlement and then the flat Q4.
5) The downtrend in traffic acquisition costs reversed in Q4. Management would not elaborate during the conference call.
6) Revenue growth in the United States increased while "Rest of World" growth slowed, raising concerns about the upside potential for Google worldwide.
7) International revenues of 52.95% correspondingly decreased to a 4-quarter low, because of 6) above.

Google Income Statement Q4 2011 Google financial performance was record total revenues $10.58 billion,  near-record net income $2.71 billion, near-record earnings per share $8.22, and near-record operating cash flow per share of $11.93. From the prior quarter Q3 2011, QoQ, total revenues were up +8.89%, net income down -0.88%, and earnings per share down -1.32%. From the prior year quarter Q4 2010, these were up +25.40%, +6.37%, and +5.25%, respectively. Gross margin of 65.02% and operating margin of 33.13% are historically strong. Net margin of 25.56% is an 11-quarter low.

Google Balance Sheet Q4 2011 Total assets increased +5.05% QoQ and +25.45% YoY to a record $72.57 billion. The capital to assets ratio increased to a very strong 80.12%. Google is incredibly liquid with a current ratio of 72.70%. Google has over $44.63 billion in cash, cash equivalents, and marketable securities! Capital expenditures increased to $951 million and was related to " IT infrastructure investments, including data centers, servers, and networking equipment."

Google Financial Performance by the Quarters

Google Cash Flow from Operations per Share and Earnings Per Share Current Cash Flow from Operations per Share of $11.93 is down QoQ and up YoY. Current Earnings per Share of $8.22 -1.32% QoQ, +5.25% YoY, and the 2nd highest all-time. The chart averages for CFS and EPS are $7.32 and $5.06, respectively.

Google Total Revenues, Operating Income, and Net Income Current Total Revenues of $10.58 billion are +8.89% QoQ, +25.40% YoY, another all-time high, and have increased for 11 consecutive quarters. Current Operating Income  of $3.51 billion is +14.68% QoQ and another all-time high. Current Net Income of $2.71 billion is -0.88% QoQ, +6.37% YoY, and 2nd highest all-time. The chart averages for TR, OI, and NI are $6.31 billion, $2.06 billion, and $1.63 billion, respectively.

Google Gross Margin, Operating Margin, and Net Margin Current Gross Margin of 65.02% is down slightly QoQ and YoY. Current Operating Margin of 33.13% is up QoQ and down YoY. The current Net Income Margin of 25.56% is down QoQ and YoY plus a 12-quarter low. The chart averages for GM, OM, and IM are 62.39%, 32.78%, and 25.99%.

Google Return on Assets Current Return on Assets of 15.01% is down QoQ and YoY plus a 9-quarter low. The chart average ROA is 17.36%.

Google Growth Rates YoY Current Total Revenues Growth YoY of +25.40% has slowed QoQ and YoY and is a 5-quarter low. Current Earnings per Share Growth YoY of +5.25% has slowed QoQ and YoY and is a 3-quarter low. The chart averages for TRG and EPSG are +26.65% and +21.32%, respectively.

Google Revenue Sources Advertising  continues to generate 96%+ of revenues. The chart averages for AR and OR are 97.16% and 3.87%, respectively.

Google Traffic Acquisition Costs Current Traffic Acquisition Costs of 24.1% are a 2-quarter high and reverse the downward trend. The TAC chart average is 26.09%.

Google Geographic Revenues The data below is what Google chooses to disclose. International revenues accounted for 52.95% of Google's total revenues in the latest quarter, a 4-quarter low. Overall the long-term trend has been the Rest of the World gaining on the United States while the UK  has increased slightly. The current quarter reversed this trend.

Google Operating Expense Ratio The current Operating Expense Ratio of 31.89% is a 4-quarter low. The OER chart average of 29.60%.

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