Friday, July 19, 2013

Google Inc. 2Q13 Earnings: Surprising miss, Optimism regarding new revenue streams

Google Inc. Reported 2Q13 earnings on July 18th and held a corresponding conference call market close at 4:30pm E.S.T. The stock reacted negatively sliding approximately ~3.5% in after hours to the low $870’s as investors were thwarted over a top and bottom line miss. Gross consolidated revenue came in at $14.1BB up 19% yoy and non-GAAP EPS of $9.56 vs. $10.16 last year missing Street consensus of $14.5BB and $10.80 EPS respectively.

Earnings were affected by an uptick in expenses caused by a revaluation of their depreciation policy in regards to their real estate portfolio. This resulted in additional $121MM in depreciation expense, about half of which were one-time charges for assets that are now fully depreciated. Despite the earnings miss Google’s standalone business saw steady performance in the U.S and in the rest of the world.  Advertising revenue posted a respectable gain up 20% yoy, which continues to be the main driver to our thesis. 

Not surprisingly, the Motorola Division posted another operating loss as it has continued to since its acquisition in August of last year. Nonetheless, we view the hardware division as marking an exciting opportunity for Google as chatter of a smartphone dubbed “Moto X” is confirmed and speculated to be released in the next month- as soon as “in the coming weeks,” hinted by Google's senior vice president, Patrick Pichette. The move adds ‘fuel’ to the ‘fire’ as a speculated low price smartphone available across multiple carries can make Google a notable player in the hardware industry as it’s hardware and software businesses advance in conjunction. 

We are reiterating our BUY rating on Google as their standalone business continues to capture meaningful advertising revenue across an expanding ecosystem of devices. The deal enhances as Google continues to fund strategic acceleration in new businesses such as hardware, digital content and enterprise with the same discipline it has grown Android, YouTube and Chrome.

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