Google announced an amazing first quarter for 2012, with growth of 24% over the same period last year. Total turnover for the quarter was US$ 10.65-billion and its cash stockpile grew to US $49.3- billion. Of greater significance was the more than doubling of the search giant’s net income which rose 60% to US$2.89-billion, compared to the same period in 2010. That this performance came from a traditionally subdued quarter makes the results even more impressive
Google surprised the market a little with such a strong turnaround from a challenging 2011 where investments in many new areas, notably Android, Chrome and Google +, as well as data centre growth, constrained its financial performance.
Despite the growth in earnings and the good performance in the first quarter of this year, there are a few areas of concern. The results and year on year comparisons indicate the Google is finally showing signs that it has become a grown up multinational company, with a resultant reduction of agility and startup style passion.
The results also highlight one key area of concern, in that despite the increase in quarter on quarter revenue, but slowing year on year revenue growth, there were lower gross and operating margins, which may be attributable to the massive growth of mobile search in the past few quarters.
Google has led the way, and essentially dominated search and search-based advertising as the internet has become pervasive in all our day-to-day lives.
For many in the developed world and elsewhere, a day without a Google search is not a productive day, and the multiple industries from Search Engine Optimisation to online advertising agencies, have driven the internet agenda. They’ve also driven Google’s performance ever higher. The first indication that this may all be changing can be seen in the reduced gross margin and, as a result, operating margin.
The trend of reduced margins is, however, one that has been apparent for the last four quarters and the reason that may explain the trend is the growth in mobile search, which does not offer the same advertising benefits as traditional web-based search.
There is no doubt that Google has focused its not inconsiderable resources on mobile. The Google Android smartphone platform has grown in the last three years to the largest smartphone platform on the planet. Despite this, the returns from mobile platforms and search remain very low.
The concern for many is whether or not Google be able to make the transition from its traditional desktop orientated world to a far more mobile centric one. The key metric that has many analysts concerned was the second straight decline in Google’s cost-per-click. Which is the amount that’s Google advertisers are paying Google for each user click on their adverts.
Patrick Pichette, the chief financial officer of Google was quoted as saying “The drops in cost-per-click “don’t reflect the fundamental health of our business,” and other Google executives maintained that this was just another very strong quarter. In effect this means there are no worries for now. Google’s revenues are mostly from advertising and any reduction of key metrics in this area is of great concern to the market.
The other big news, and very good news for investors, was the announcement of a 2 for 1 stock split. This is the first time that Google has split it shares. The split has been carefully thought out and the new shares will consist of a new class of non-voting shares.
The danger inherent in any stock split is that the controlling shareholders dilute shares and as a result may lose control over the company they have built and managed. The announced scheme will give investors double the number of shares they currently own, but the total voting power of each shareholder, will not change.
The other major benefit of this split is that Google will be able to reward its employees with shares without diluting the influence of existing shareholders. No date has been yet been set for the stock split.
The financial results continue to highlight how dominant Google is in the search arena. With the growth of mobile, and Google’s focus on dominating this area as completely as it has traditional search, there is no doubt that Google will continue to grow strongly.
The new stock structure will also assist in keeping Google’s destiny in the hands of its founders and key visionaries, and allow Google to plan for the long-term, whilst still rewarding investors and staff members.