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Google posted robust 1Q results topping the consensus estimates by a wide margin – revenues increased 24% to US$10.6 billion as against US$8.6 billion in the same period, a year earlier. This was significantly higher than the consensus estimate of US$8.2 billion for the period.Revenues were in line with our estimates – we expect full year revenues to total US$43.1 billion. Revenues from Google websites accounted for around 69% of total advertising revenues while that from the partner websites contributed to around 27% of revenues. The remaining 4% of revenues were accounted for by licensing and other fees. Geographically, the US generated around 46% of total revenues, UK accounted for 11% of total revenues while other markets accounted for the rest 43% of revenues.

Growth in revenues was driven by an increase in click volumes, especially in the US market. The number of clicks increased by a significant 39% year-on-year and 7% quarter-on-quarter during 1Q highlighting the increasing popularity of the search engine. However, on the flip side, the cost-per-click or the average cost paid by advertisers declined 12% year-on-year during the period – largely due to the growing business in the emerging markets and mobile space, which usually carry lower margins. Nonetheless, Google's strong position in the mobile space – including both smartphones and tablets – is enabling the company to generate robust revenue growth. The Company also continues to benefit from the success of its DoubleClick ad exchange as well as the overall improving quality of advertisements. Google also witnessed growth in the European and Asian markets. Japan registered strong performance largely on account of higher contribution from SMB segment.

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Total costs increased 16% year-on-year to US$3.8 billion as against US$2.9 billion in the same period, a year earlier. This was largely due to the fact that the Company made investments in new products, increased its advertising expenses as well as increased wages. Further, higher amortization charges, the data center operations cost as well as content acquisition costs drove the overall cost of sales higher. As a result, higher costs had a negative impact on gross margins which contracted by 136 basis points to 64.4% as against 65.8% in the year earlier quarter.

Operating expenses increased 16% year-on-year to US$7.3 billion as against US$6.3 billion in the same period, a year earlier. A 25% jump in selling and marketing expenses was largely responsible for the spike in operating expenses. The R&D expenses in fact declined as a percentage of sales during 1Q. Higher operating expenses had an adverse affect on margins which contracted 77 basis points to 31.8% during 1Q.

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From the profitability perspective, Google outshone nearly all its competitors as earnings increased by a significant 61% to US$2.9 billion (or US$8.75 per share) as against US$1.8 billion (or US$5.51 per share). Further, the Company continues to have a strong balance sheet with cash balances at an enormous US$49.3 billion at the end of 1Q.

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