Google first half and Q2 results

Google reported numbers last evening after the market closed. These are for the second quarter, and of course for the first half. Normally one is always presented with the price (after market) and then the numbers, but I did my best to try and avoid the price entirely and then to focus solely on the numbers. Because after all, price should be last, after the exploration of the business, right? Perhaps not for everyone, but you get the point that I am trying to make.


First, let us try and understand the company itself. The business was founded by two fellows, Larry Page and Sergey Brin who met at Stanford in the mid nineties, which led to the company being founded in 1998. 4 September 1998 to be exact. The IPO was exactly (to the day) 8 years and 11 months ago. The whole idea was to connect everyone through a new technology known as the internet, and to be able to search a whole lot more effectively through what was to become more and more data. No doubt the searching algorithm works harder and harder each and every day, there is more data today than there was yesterday.


Google provides you (the user) with a great search functionality, for free. How they make their money is through displaying advertising in innovative ways. Their customers, the people paying for the adverts across their platforms, sign up and customize their adverts. So essentially it is a lot more pointed advertising than through the traditional old style approach. The advertisers follow this process, and a lot of it is self motivated: Right place, right time. That's the power of the Google Display Network. Excellent. All that is very good, you have a fair understanding of their core business.


So let us look at a few numbers from Google, as per their Financial Tables (Q2 2013). Cash on hand at the end of the period, 54.432 billion Dollars, which is roughly 18 percent of their market capitalisation. Advertising revenues from their website (67% of total) and network members sites (25% of total) topped 28 billion Dollars for the six months for the first time. Google trades at roughly five times annual revenues, revenue for the quarter clocked 14.105 billion Dollars, up 19 percent on the corresponding quarter in 2012. For the six months it was just over 28 billion Dollars. But because they have operating margins of 25 percent plus, there is less anxiety over that number specifically. Facebook for instance trades on 12.5 times annual sales, but is growing "sales" at a cracking pace.


Costs. Well, it is sad for the people at Motorola, but it didn't take that long. What used to be a staff compliment of around 15000 at the two Motorola businesses is now 4599, partly because 4000 odd people were let go, and partly because the Motorola Home business was sold to ARRIS for 2.35 billion Dollars last year. Notwithstanding that headcount cut, costs for the quarter were nearly 2 billion Dollars higher. All costs, R&D, administrative, and in particular cost of sales trending much higher. More servers to serve their YouTube clips! Again, like we said the other day, it is difficult to get to grips with exactly what sales are on YouTube (video) out of the bigger advertising business.

On a per share basis, Non-Gaap EPS clocked 9.56 for the quarter, lower than the 10.16 Dollars on the corresponding quarter. And of course, notwithstanding the big cash pile, you are not getting any dividends any time soon. Until the US government overhauls tax codes, businesses like Google will keep their non US offices in places like Ireland. Google is not doing anything wrong, that is just the way that Ireland have positioned themselves. Many islands attract offshore investments. Do you think that Google employees in Dublin would prefer to live in Rome if the same tax code applied in Italy? Today it is 22 degrees Celsius in Dublin. It is 27 degrees in Rome. And it is Rome. Don't get me wrong, Dublin is probably wonderful, but it is not Rome.


For the time being Google has a great business. The stock is taking a hit in the pre market, because whatever the expectations were, this is a miss. They have a whole host of businesses, ten of which you have never heard of before. Some cute and the applications are years away, think the Google driverless cars and more recently project glass, the Google wearable glasses. Think of the maps and mail applications that you no doubt use often. So Google are innovating and for me they are a company of the future, with an excellent present business. The price is lower at present, pre the market, we will continue to accumulate them.