As the video denotes below, here we have big brother, traded on an exchange. The following are anecdotal notes and observations on Google's Q4, 2012. As is customary, I'm willing to discuss my views, opinions and findings with any professional or institutional BoomBustBlog subscriber over the phone or via Google+ Hangout. If you wish to have such a discussion, please email me.
Revenues were up 36% year-on-year, and 8% quarter-on-quarter. Google hit $50 billion in revenues last year - the company is only 15 years old. Motorola is still pulling income margin down, but I (and it appears the market) am confid-ent that Google will successfully monetize the IP and OEM production assets, if they have not already done so. Of concern is the fact that margins are shrinking sans the Motorola acquisition (see below). Does this concern me? Well...
Fears of maturation and saturation in Google’s core ad business appear to have been drastically overblown:
Paid Clicks increased approximately 24% over the fourth quarter of 2011 and increased approximately 9% over the third quarter of 2012. 24% growth in a business that was supposed to start leveling off is a hell of an achievement. What the armchair pundits apparently failed to realize is that the mobile market is akin to almost an entirely new field for Google to plunder. If anything, one should be looking at this from a bullish perspective, not a bearish one. Alas, the margins on this high growth, big opportunity market are bound to be lower – at least thus far, which brings us to…
Cost-Per-Click, which decreased approximately 6% over the fourth quarter of 2011 and increased approximately 2% over the third quarter of 2012. Google is apparently losing some pricing power with the shift to mobile, as has everybody else in the business. It appears that some firmness has been found Q on Q, as was the case with Facebook as well. Time will tell if this is a seasonal thing, a temp blip, or the start of something more lasting. Remember, this is a new market and a new business for all.
TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.08 billion in the fourth quarter of 2012, compared to $2.45 billion in the fourth quarter of 2011. TAC as a percentage of advertising revenues was 25% in the fourth quarter of 2012, compared to 24% in the fourth quarter of 2011. Google’s cost of revenue acquisition is going up!
Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012, compared to $1.25 billion, or 12% of revenues, in the fourth quarter of 2011. For those who are not paying attention, this is a Google "Call to War"! Google is rapidly ramping investment (incorrectly categorized and classified as expense by GAAP). I believe this is attributable to two things:
- The preparation for mass monetizing of the hardware/cloud integration side of the Motorola acquisition. Motorola brought valuable IP, patents,and a mobile OEM business, but it brought material dead weight as well. This dead weight has been (is being) jettisoned, but we have yet to see the positive results of the handset/tablet business. Expect to see that in 2013.
- Google is in a cloud infrastructure arms race with those most capable of competing in this arena, namely – Microsoft, Amazon and Facebook. No, I no longer believe Apple is a challenge, and I didn’t think they were much of a challenge last year either. See the accompanying video, Apple is more a purveyor of fads than cloud tech. In the push to usurp Windows as an OS (see Chrome OS and the Chromebook), Microsoft Office with Google Docs/Drive, conventional network TV with YouTube (see below) and the smartphone tablet space with Android - Google plans on tying everthing together in a massive cloud infrastructure. It singularly has the assets, infrastructure, IP and managerial expertise to become the world leader in all of the aforementioned categories - and most importantly, it can afford to be very entrepreneurial and take risks for it can subsidize its experiments with the Google Ad revenues.
Rumor has it that Google is reportedly developing real estate in London for about $2 billion and is doubling its investment in a South Carolina data center to $1.2 billion. There is a practical barrier of near impenetrable expense, not unlike a moat around an olde English castle, that protects Google’s primary and secondary revenue producing assets, not to mention many of the tertiary ones.
To replicate or challenge this hegemony will take the massive resources and extant footprint of a company like Microsoft, with the strategic partnership of extant, long time players such as Yahoo to come in a distant second place.
What was the hottest (non smart phone) portable computing device of 2012? Hint: It was designed and marketed by a search company and only costs $200 - the Google Chromebook. See the reviews.
What was the hottest mobile OS last year? Which one grew the fastest? Which one had the largest market share? Which had the most tech innovations and capability? Hint: It came from a search engine company. There's no need to tout the Android OS. With roughly 76% market share and still growing faster than all of its competitors combined, Android will soon be the de facto mobile computing platform, much as Windows was the de facto desktop computing platform. Imagine the profit potential that came from thinking different!!!
Online video (YouTube)
Currently has no true competitors, with the second runner up being roughly 90% smaller AND growing slower. If you look at the second and third most popular video sites, you can probably tell where Google is heading with YouTube.
See http://www.ebizmba.com/articles/video-websites for more info.
Expect the barriers to network TV and subscription TV (ex. cable TV & satellite) to be cost shifted, just as the newpsaper, mobile advertising, classifieds and mobile OS industries have been.
Yes, TV is will soon be Googled! One would expect the TV and Movie distribution industries to be on their toes, looking for a new model that will actually usher in paradigm change versus sitting on their collective asses waiting to be commoditized. Yeah, one would expect...
Of additional concern is the fact that Google's total cost of business appears to be rising. Not only is the cost of revenues increasing (alhtough there was a QonQ decrease), but their operating expenses are increasing as well. Operating expenses, other than cost of revenues, were $4.81 billion in the fourth quarter of 2012, or 33% of revenues, compared to $3.38 billion in the fourth quarter of 2011, or 32% of revenues. This should be of concern to the casual observer. The not so casual observer should realize that much of what is being characterized as expense in the Google statements, is actually investment. GAAP accounting is deficient in capturing efficient economic investment vs actual expenses. Google is a master of long term vision, investment and risk taking. Subscribers should reference page 49 in the "Google Final Report" to see the results of Google's historical investment actions.
Operating Income – Although Google's net income is growing briskly, their margins have been shrinking. One obvious cause of the shrinking was the monstrous Motorola acquisition. The question is, "Was that the only reason?".
On a consolidated basis, GAAP operating income in the fourth quarter of 2012 was 24% of revenues as compared 33% of revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was 30% of revenues as compares to 38% of revenues in the fourth quarter of 2011. Even when separating the Motorola acquisition, we find Google's margins are still dropping...
Google Operating Income – GAAP operating income for Google was $3.75 billion, or 29% of Google revenues, in the fourth quarter of 2012. This compares to GAAP operating income of $3.51 billion, or 33% of Google revenues, in the fourth quarter of 2011. Non-GAAP operating income in the fourth quarter of 2012 was $4.42 billion, or 34% of Google revenues. This compares to non-GAAP operating income of $4.04 billion in the fourth quarter of 2011, or 38% of Google revenues.
Motorola Mobile Operating Loss – GAAP operating loss for Motorola Mobile was $353 million, or -23% of Motorola Mobile revenues in the fourth quarter of 2012. Non-GAAP operating loss for Motorola Mobile in the fourth quarter of 2012 was $152 million, or -10% of Motorola Mobile revenues.
I feel that margins may increase slightly but for advertising they are on a long-term downward trend. That is the price Google will pay as digital advertising becomes more ubiquitous. What will be bought at this price? Google will permeate all aspects of digital life with cost-shifted products, based in large part on advertising revenues. In general, margins will drop, but revenues will explode. No longer will we get to keep 40% of our single dollar, but we will get 20% on the $10 dollar revenue bill. While Apple is pondering the Apple TV, Google is working on a wide variety if literally paradigm changing products - many of which are literal game changers: Google Glass, driverless cars, Google Fiber...
- More Evidence That Google Is Already The New Microsoft, and Android Is The New Windows (To YOUR OWN Information)
- Cost Shifting Your Way To Prominence Using The Network Effect, Or Google Wins - Apple, RIM & Microsoft Have ALREADY LOST!
- As Lower Margin, High Price iPad Minis Outsell All Other iPads The BoomBustBlog Apple Margin Compression Theory Is Incontrovertible & Mainstream
- Real Numbers That Show Why Facebook's Ad Model Means Google Will Put It Out Of Business
Industry Leading, Subscription Based Google Research
Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.
Google Final Report 10/08/2010
A couple of bits from our archives...
The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as valuation for each business line.
Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.
Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.