Earnings discussion
The company reported a 19% year-over-year improvement on revenues in the second quarter. The growth in revenue primarily came from international growth. Growth excluding the United Kingdom and the United States was 28% year-over-year. The company’s growth is heavily dependent upon international expansion.
The company’s net income per share grew from $8.54 in the second quarter of 2012 to $9.71 in the second quarter of 2013 (14% year-over-year growth). This fell short of the consensus earnings estimates of $10.78. As a result, the stock fell after hours on the day it announced its earnings. At the time of this writing, the stock has declined by 4.14%.
The company fell short on earnings for the quarter because the costs of running the business went up at a much higher rate than revenues could grow. The operating margin from its core operations fell from 31% to 26% year-over-year. The company’s Motorola segment also reported a decline in its operating margin from -6% to -22% year-over-year. The worsening of operating profitability across its main business segments made it difficult for Google Inc (NASDAQ:GOOG) to come out ahead on its earnings.
Outlook
Google Inc (NASDAQ:GOOG)’s management team justified the added spending by saying that it was necessary. The company says that it’s going to be overspending in some quarters and spending less in others. The fundamental issue is that sometimes the long-term goals of the company are in conflict with short-term profit seeking. That being the case, the management believes that Google Inc (NASDAQ:GOOG) is well positioned to exploit growth opportunities in the mobile market in the future.
The company also mentioned that adults have increased the amount of time they spend accessing the Internet on mobile devices by 273% between 2009 and 2012. Mobile is a hotly-contested space, and the company’s management team is working out ways to better monetize mobile advertising.
Google Inc (NASDAQ:GOOG) believes that there is a lot of pent-up growth opportunity in its Motorola segment. The only problem is that it hasn’t been able to perform. Most of the growth at Google Inc (NASDAQ:GOOG) is coming from Android and its core search business. The international side of the company should be able to grow at relatively high rates as the addressable market for Internet search services will continue to grow in the future.
Analysts estimate that the company will be able to grow its earnings by 15.5% for the 2013 fiscal year. Analysts are projecting the company to maintain a growth rate of 15.23% over the next five years. This growth should be maintained so as long as the company manages its cost effectively and is able to sustain its international growth.
How the competition is shaping up
Microsoft Corporation (NASDAQ:MSFT) reported 9% growth in its online services segment. The online services are composed of Bing and other web properties like MSN. Bing’s market share grew by 2.9%, which helped the company to sustain its revenue growth.
In its most recent quarter, Microsoft Corporation (NASDAQ:MSFT) faced headwinds from falling PC demand along with declining revenue growth from Microsoft Office due to the transition to Office 365. The gaming segment reported low rates of growth due to the console refresh. The company seems to have missed on both revenues and earnings. But on the bright side things are expected to improve in 2014, as most of the issues the company faces are temporary. Analysts anticipate Microsoft Corporation (NASDAQ:MSFT) to grow revenues by 6% in 2013, and 6.3% in 2014.
Yahoo! Inc. (NASDAQ:YHOO) also made some solid gains in core search revenue, which grew by 5%. The growth in search revenues was offset by declining price-per-clicks. The falling cost of advertising is driven by the competitive environment, and changing business environment.
Yahoo! Inc. (NASDAQ:YHOO) did a great job of growing its net income in the most recent quarter. The company should be able to sustain higher rates of net income growth so as long as it continues to reduce the size of its research and development budget and reallocates that cash to acquisitions. Yahoo! Inc. (NASDAQ:YHOO) currently owns 24% of Alibaba as well, and its net income growth will further aid Yahoo!’s net income growth.
Analysts on a consensus basis anticipate Yahoo! to grow earnings by 15.6% in the 2014 fiscal year.
Facebook Inc (NASDAQ:FB) has been giving Yahoo! and Microsoft a bit of trouble when it comes to display-based advertising. After all, Facebook Inc (NASDAQ:FB) has important user data that allows advertisers to target their advertising and maximize advertising dollars. As a result, traditional banner advertising will experience a bit of difficulty on the pricing front.
Facebook Inc (NASDAQ:FB) has been able to monetize mobile by allowing companies to advertise on a users news feed. This may have a more favorable impact on the company’s earnings growth than what analysts are currently estimating. The company may also generate net income growth through cost cutting. Analysts currently estimate that Facebook will grow earnings by 29.63% per-year over the next five years.
Conclusion
Google Inc (NASDAQ:GOOG) has had a pretty tough quarter. It still has a lot to prove when it comes to Motorola. On the upside, the company was able to grow its app store sales by 138%. The company’s business strategy is a mixed bag: the software rocks, but the hardware stinks.
Yahoo! saw gains in profitability, which is something Google lacked. On the other hand, Google did great on the top line, which Yahoo! had a bit of trouble with. Microsoft did badly on both the top and bottom line, however this is likely to be temporary. Facebook, on the other hand should be able to grow net income by improving its profitability.
Given enough time, I think that the companies will be able to better adapt to smartphones, cloud computing, and tablets. In other words, I believe that there’s still long-term growth potential in Google Inc (NASDAQ:GOOG), Yahoo!, Facebook and Microsoft.
The article Google Has a Ton of Potential Despite a Miss on Earnings originally appeared on Fool.com and is written by Alexander Cho.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google and Microsoft. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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