Google's Quarterly Earnings Analysis: By the Numbers

Google Mountain View
SiliconValleyStock/Alamy
Google (GOOG) just reported its preliminary financial results for the quarter that ended Sept. 30, based upon which we provide a unique corporate earnings release based analysis of its performance. Our analysis focuses on the company's performance for the same quarterly period on a year-on-year basis (unless stated otherwise). Google is one of the first companies amongst its peer group to announce earnings for this period.

Highlights
  • Summary numbers: Revenues of $16.523 billion, Net Earnings of $2.998 billion and EPS of $4.09. Performance focus more on top-line than bottom-line: same period year-on-year revenue change of 11.11% vs. change in earnings of 1.46%.
  • Gross margins now 68.84% from 63.43% compared to the same period last year, EBITDA margins now 31.90% from 29.63%
  • Ability to strengthen the balance sheet? Year-on-year change in Operating Cash Flow of 17.92% better than change in earnings.
  • Earnings growth due to the contribution of unusual items

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues14871.0016855.0015412.0015949.0016523.00
Revenue Growth (Qtr YOY)5.9318.6810.6113.3511.11
Earnings2955.003381.003650.003490.002998.00
Earnings Growth (Qtr YOY)35.8016.319.8136.651.46
Net Margin19.8720.0623.6821.8818.14
EPS4.364.965.044.994.09
Return on Equity14.6115.8816.3114.8912.33
Return on Assets11.4612.5212.8411.729.69
Revenue Growth Versus Earnings Growth

Companies sometimes focus on growing their top-line (Sales or Revenues) more than their bottom-line i.e. Earnings or Net Income. Investors should look at revenue growth to understand a company's ability to grow its market share, and earnings growth to look at the company's ability to generate returns. Comparing revenue growth to earnings growth helps understand a couple of items: (1) A company's focus on gaining market share vs. generating profits and (2) How additive or dilutive the revenue performance has been to earnings.


Google's year-on-year change in top line compared to the same period last year of 11.11% is better than its change in earnings which was 1.46%. The company's performance this period suggests a focus on the top-line at the expense of bottom-line earnings. It remains to be seen how the rest of the peer group results turns out and if Google's performance suggests any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 3.60% and earnings by -14.10% compared to the immediate last quarter.


Earnings Growth Trend

The company's earnings growth has been influenced by the following factors: (1) Year-on-year improvements in gross margins from 63.43% to 68.84% and (2) better cost controls. As a result, operating margins (EBITDA margins) improved from 29.63% to 31.90% year-on-year. In addition, gross margins were 68.43% and EBITDA margins 33.43% in the immediate last quarter.
Gross Margin Trend

Companies sometimes tradeoff for improvements in revenues and margins by extending friendlier terms to customers and vendors. One quick way to check against such activity is to compare the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is quite possible that the company's performance is a result of truly delivering in the marketplace and not simply a prop up using the balance sheet.

The company's improvement in gross margins have come at the expense of a deterioration in working capital management, suggesting that the improvements in gross margins are likely trade-offs with the balance sheet and not strictly from operating decisions. Its working capital days have gone up to 338.72 from last year's levels of 324.06 days.




Operating Cash Flow Growth Versus Earnings Growth

Companies often post earnings numbers that are influenced by non-cash activities. One way to gauge the quality of the declared earnings number is to judge the deviation in the growth in earnings from the growth in operating cash flows. In general, an earnings growth rate that is higher compared to the operating cash flow growth implies a higher proportion of non-operating and even one-time activities - such activities are typically not sustainable over long periods.

Google's year-on-year change in Operating Cash Flow of 17.92% is better than its change in earnings suggesting some ability to strengthen the balance sheet.


Unusual Items

The company's EBIT margins declined and went from from 23.09% to 22.54%. In spite of this, the company's earnings went up - influenced primarily by the presence of unusual items, which improved pretax margins from 23.32% to 23.34%.

EPS Growth Compared To Earnings Growth


Google's year-on-year change in Earnings per Share (EPS) of -6.18% is less than its change in earnings of 1.46%.

Supporting Data

The table below shows the preliminary results along with the recent trend for revenues, net income and other relevant metrics:
2013-09-302013-12-312014-03-312014-06-302014-09-30
Revenues14871.0016855.0015412.0015949.0016523.00
Revenue Growth (Qtr YOY)5.9318.6810.6113.3511.11
Earnings2955.003381.003650.003490.002998.00
Earnings Growth (Qtr YOY)35.8016.319.8136.651.46
Operating Cash Flow5083.005238.004391.005627.005994.00
Operating Cash Flow Growth (Qtr YOY)30.7110.821.6115.7410.71
Gross Margin63.4361.9968.3768.4368.84
EBITDA Margin29.6329.2333.6933.4331.90
Net Margin19.8720.0623.6821.8818.14
Working Capital Days324.06300.62342.53341.92338.72
EPS4.364.965.044.994.09
EPS Growth (Qtr YOY)33.8715.021.3135.85-6.18
Return on Equity14.6115.8816.3114.8912.33
Return on Assets11.4612.5212.8411.729.69
Company Profile

Google, Inc. focuses on improving the ways people connect with information. It provides variety of services and tools for advertisers of all sizes, from simple text ads to display and mobile advertising and to publishers, whether small or large. The company primarily focuses on the areas which include search, advertising, operating systems, platforms, enterprise and hardware products. The search area consists of a vast index of websites and other online content which is made available through its search engine to anyone with an Internet connection. The advertising area includes AdWords, AdSense, Google Display, Google Mobile programs and Google Local. Google Mobile offers on developing easy-to-use ad products to help advertisers extend their reach the publisher partners, and deliver relevant and useful ads to users on the go. Google Local provides users with relevant local information, including addresses, phone numbers, hours of operation, directions and local queries like shops, restaurants, parks and landmarks right on Google.com, on Google Maps and on Google Maps for mobile. The AdWords program delivers ads which are useful and relevant to search queries. The AdSense program enables websites that are part of the Google Network to deliver ads. The Display advertising program comprises the videos, text, images and other interactive ads that run across the web on computers and mobile devices, including smart phones and handheld computers such as netbooks and tablets. The operating systems and platform area is comprised of Android, Google Chrome OS and Google Chrome, Google TV and Google Books. Android is a free, fully open source mobile software platform which can be used by any developer to create applications for mobile devices. Google Chrome OS is an open source operating system with the Google Chrome web browser as its foundation. Both the Google Chrome OS and the Google Chrome browser are built around the core tenets of speed, simplicity, and security. Google TV is a platform that gives consumers the power to experience television and the Internet on a single screen, with the ability to search and find the content they want to watch. The Google Books platform is designed to help people discover, search and consume content from printed books online. Google's enterprise products area provides familiar, easy-to-use Google technology for business settings. The company operates through two segments: Google and Mobile: The Google segment includes the advertising and other non-advertising businesses. The Mobile segment includes mobile devices business acquired from Motorola. The company was founded by Sergey Brin & Lawrence E. Page on September 4, 1998 and is headquartered in Mountain View, California.

CapitalCube does not own any shares in the stocks mentioned and focuses solely on providing unique fundamental research and analysis on approximately 50,000 stocks and ETFs globally. Try any of our analysis, screener or portfolio premium services free for 7 days. To get a quick preview of our services, check out our free quick summary analysis of GOOG.
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