Google Q2A – Top of the pops.

Good performance justifies the love

• Google reported good results as advertising volume continued to comfortably outpace pricing declines.
• Q2A Revenues-exTAC / Adj-EPS were $12.7bn / $6.08 compared to consensus at $12.3bn / $6.25 and RFM at $12.9bn / $6.20.
• Margins also improved somewhat as revenue from owned and operated sites where no traffic acquisition cost has to be paid away, grew faster than revenue from third party sites.
• This is mainly due to YouTube which is a key asset for the monetisation of video which is currently the fastest growing area where advertisers are spending their budgets.
• This was somewhat offset by continued strong growth at Google Play (where gross margins are 30%) but this is still not big enough to have a meaningful impact on margins overall.
• These factors allowed EBIT to come in ahead of expectations at $4.4bn compared to consensus at $4.2bn and RFM at $4.0bn.
• However, this was hit by a higher than expected tax rate of 21% compared to RFM’s forecasts of 19%.
• This is what caused EPS to be weaker than expected despite the better than expected revenues and higher margins.
• Cash generation was very solid at $5.6bn from operations of which $2.6bn has been invested mostly in data centres and real estate for future installations.
• No guidance has been given but it is clear that the company is pretty optimistic with its outlook over the next 12-18 months.
• This is something that is not difficult to believe as the fixed internet revenues are remaining steady while mobile continues to grow at over 40%.
• Google is doing a masterful job at getting highly specified handsets into the hands of users and then reaping all the benefits from the increased traffic that results.
• This should keep growth comfortably above 10% until 2017E.
• With no real challenger on the horizon, Google remains one of RFM’s top picks when it comes to the digital ecosystem.
• Microsoft and Yahoo! also make the list.