Saturday, April 21, 2012

Google Reports Record Financial Performance on Slower Growth, Lower Margins

Google reported Q1 2012 financial results on Thursday, April 12, 2012

Google reported all-time highs for total revenues, net income, and earnings per share, but is there trouble in Internet paradise? CEO Larry Page began the earnings call explaining Google was a large company and implying not the young, high-growth Google of yore. Then CFO Patrick Pichette, one of the better earnings call CFOs to listen to, used phrases such as "complex set of dynamics" and "multiple variables in play" to qualify some declining metrics.

The exuberance of past earnings calls was missing and an apologetic tone prevailed. Why do I have this weird feeling Apple is sucking the air out of the room? A stock split was announced whereby existing Class A and a new Class C non-voting stock will be traded, via a stock dividend, but that is outside the scope of this review and left to disgruntled stockholders.

What's the problem here? Have I become so jaded that I'm knocking Google's record financial performance? Yes to both questions, because the upside to further Google web glory may be waning. The problem is slowing revenue growth and lower margins. Operating income dipped on record revenues, the result of a lower gross profit margin. The operating margin is the lowest since the QE September 2008.

Google continues as a legendary company but the long-held Internet advertising edge may be losing traction. Q1 is normally the annual cyclical low, so the assumed upside in Q2 should maintain and exceed this latest financial performance. If not, Google is facing a tougher, more competitive advertising market, notably in mobile and specifically with Apple, than management is willing to admit.

Google Income Statement Q1 2012 Google financial performance was record total revenues of $10.65 billion, record net income of $2.89 billion, record earnings per share of $8.75, and near-record operating cash flow per share of $11.19. From the prior quarter Q4 2011, QoQ, total revenues were +0.58%, net income +6.84%, and earnings per share +6.45%. From the prior year quarter Q1 2011, these were +24.14%, +60.73%, and +58.80%, respectively. Gross and operating margins dipped to 64.14% and 31.84%. Net margin of 27.15% is solid.

Google Balance Sheet Q1 2012 Total assets increased to a record $77.14 billion. The capital to assets ratio is steady at a very strong 80.00%. Google is incredibly liquid with a current ratio of 73.71% and over $49.32 billion in cash, cash equivalents, and marketable securities! Capital expenditures decreased to $607 million and the "majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment."

Google Cash Flow from Operations per Share and Earnings Per Share Current Cash Flow from Operations per Share of $11.19 is down QoQ and up YoY. Current Earnings per Share of $8.75 is +6.45% QoQ, +58.80% YoY, and an all-time high.

Google Total Revenues, Operating Income, and Net Income Current Total Revenues of $10.65 billion are +0.58% QoQ, +24.14% YoY, another all-time high, and have increased for 12 consecutive quarters. Current Operating Income  of $3.39 billion dipped slightly -3.36% QoQ below last quarter's all-time high. Current Net Income of $2.89 billion is +6.84% QoQ, +60.73% YoY, and an all-time high.

Google Gross Margin, Operating Margin, and Net Margin Current Gross Margin of 64.41% is down QoQ and YoY. Current Operating Margin of 31.84% is down QoQ and YoY. The current Net Income Margin of 27.15% is up QoQ and YoY, saving the quarter.

Google Return on Assets Current Return on Assets of 15.76% is slightly up QoQ and slightly down YoY.

Google Growth Rates YoY Current Total Revenues Growth YoY of +24.14% is about the historical (chart) average of +26.37%. Current Earnings per Share Growth YoY of +58.80% is outstanding and well above the historical (chart) average of +25.48%).

Google Traffic Acquisition Costs Current Traffic Acquisition Costs of 24.5% are a 4-quarter high and second consecutive quarterly increase.

Seeking Alpha