Google Stuns the Market

Google Inc. (GOOG - Analyst Report) reported third quarter results that blew away all estimates. Earnings beat the Zacks Consensus Estimate by a dollar and 20 cents. Revenue beat the consensus by around 40%.

Revenue

Gross revenue of $5.94 billion was up 7.6% sequentially and 7.3% year over year. Management stated that strength was broad-based, with all served markets showing signs of exiting the recession.

Traffic continues to improve, with traffic acquisition cost (the portion of revenue shared with Google’s partners) increasing 7.7% sequentially. However, traffic acquisition cost as a percentage of total advertising revenue was down 15 basis points. Net revenue, excluding traffic acquisition cost was flattish sequentially (down 0.6%).



Advertising revenue increased 7.9%, with the Google website component increasing 8.3% and partner website component increasing 7.0%. Licensing and other revenue was flattish (up 0.8%).
 

 
By geography, the U.S. generated 47% of revenue (increasing 7.3% sequentially), the U.K. generated 13% (up 7.0%), while other countries accounted for the balance (up 8.2%).

Operating Results

The pro forma gross margin for the quarter was 62.8%, up 72 basis points (bps) from the previous quarter’s 62.1%. The improvement was related to higher volumes, as the number of paid clicks increased 4% sequentially. This was partially offset by the average cost-per-click, which increased 5% sequentially.

Operating expenses of $1.34 billion were higher than the previous quarter’s $1.26 billion. The operating margin was 40.2%, up 99 bps from the 62.1% recorded in the previous quarter. The increase was mainly on account of the higher gross margin and helped by lower R&D, S&M and G&A expenses.




Excluding the impact of stock compensation expenses and the associated tax impact, the pro forma net income was $1.88 billion or 31.7% net margin, compared to $1.72 billion or 31.1% in the previous quarter and $1.56 billion or 28.2% in the year-ago quarter.

Including the special items, the GAAP EPS was $5.13 compared to $4.66 in the June 2009 quarter and $4.06 in the Sep quarter of last year. Profit in the year-ago quarter was impacted by the $95.1 million (30 cents per share) settlement amount paid to the Authors Guild and the Association of American Publishers.

Balance Sheet

The company has a solid balance sheet, with cash and short-term investments of $21.99 billion, up $2.65 billion in the last quarter alone. The company generated $2.7 billion from operations in the last quarter and spent $186 million on capex, netting a free cash flow of $2.5 billion. Capex in the last quarter was related to its data center operations. Management has stated that it is ready to make suitable acquisitions as it deems fit.

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