15:34 GOOG Google Earnings Preview (554.28 +5.77)
Tech giant GOOG is set to post Q3 results after the close and the market is hoping that the technology space is seeing a better environment than banking. Hopes are high that it will post a second straight blow out quarter as it has run up to the $555 area from $490. The stock has now ran into resistance as $555-560 houses the September highs and the 200 sma. If the co is able to repeat it’s Q2 performance, which was arguably one of its strongest reports in five years and that is saying something coming from GOOG, it will provide a stern test for these levels of resistance.
— Recapping Q2: GOOG flat out demolished expectations in mid-July. It beat bottom line EPS consensus by $0.91 to come in at $8.74 and posted revenue (ex-TAC) of $7.83 bln compared to the $6.92 bln consensus. This represented strong revenue growth of 36% and net income growth of 24%. Net income was approx 37% of revenue down from 39%. Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of AdSense partners, increased ~12% over the second quarter of 2010 and increased ~6% over the first quarter of 2011. Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of AdSense partners, increased ~18% over the second quarter of 2010 and decreased ~2% over the first quarter of 2011.
— Q2 continued: GOOG sites drove the performance which was a plus for analysts. However, the greatest growth came from international revenues which may not have been as supportive this quarter. Another plus in Q2 was a lower than expected tax rate (19% vs 25% consensus) which should be interesting this time around given this morning’s story that the IRS was looking into the co’s possible avoidance of federal income taxes by shifting profit into offshore subsidiaries. Another item of interest was the rise in cost as operating costs were 33% of revenue compared to 29% in prior year. Headcount was a major reason for this so the co will need to justify its activity once again.
— M&A Activity: One of the key initiatives for the co this quarter was the acquisition of Motorola Mobility (MMI). GOOG paid $40 per share or approx $12.5 bln for the phone maker. MMI would remain a licensee of Android and Android would remain open. The transaction is expected to close by the end of 2011 or early 2012. AN update on this move will be expected. The DoJ recently requested materially surrounding the acquisition but it is likely too early for GOOG to be able to comment on that. Android licensing will be an important topic. Because possible software infringements on a number of other products (MSFT, ORCL, AAPL) the makers of Android O/S phones need to pay out licensing fees to other parties. The thought is that the purchase of MMI was to mitigate those licensing fees. The co will never admit to this but questions on the conference call regarding expectations for future litigation on licenses will be a key aspect of the call.
— Losing Market Share?: While GOOG still maintains a dominant position in the US search engine space with 65.3% of the market, it’s worth noting that the company has shown decreases in core search share in 2 of the past 3 months.
— Other activities: Ad continues to drive the lion share of revenue at GOOG so the ability to diversify revenue and monetize in other areas remains key. 1) In the quarter the co also purchased restaurant reviewer Zagats. This has had a negative impact on OpenTable (OPEN) so it will be interesting to hear what the plans are for this site; 2) GOOG also launched itsonline flight search engine. Shares of OWW, PCLN, and EXPE should see some activity on commentary; 3) Google+: the social media site saw strong growth in Q2 and was one of the highlights from the call. The site was running at approx 10 mln strong last quarter so growth results here will be of interest; 4) YouTube: Continued signs of monetization of the highly popular web site will be of interest.