3 lessons from Google's Q3 results

The markets didn't like Google's results, but what do the numbers say about its changing business?

by Adam Gale
Last Updated: 17 Oct 2014

With the way the markets have been performing recently, the last thing anyone needed was unexpectedly lacklustre results from one of America’s big boys. But that’s exactly how investors interpreted Google’s third quarter earnings statement yesterday, sending its value down 3% to $518.25 (£322) after the end of trading.

Was it all bad news, though? And what does it mean for the search giant?

Google’s still growing

The tech firm’s revenues rose 20% to $16.52bn in the quarter to September 30th, compared with the same period last year. It also made a neat little profit of $2.8bn, down 5% from last year. At the same time, the company’s costs were unexpectedly high. Operating and capital expenses rose 33% and 18% respectively to $6.1bn and $5.99bn, which can’t have helped the bottom line.

Most people wouldn’t complain if their accounts looked like that, but the results were marginally below market expectations, hence the share fall. The fact remains, however, that all this shows Google is still growing. Its costs have gone up because it’s investing in real estate and data centres, and hiring new employees. There are now 55,030 full-time employees, compared to 52,069 last quarter. And, of course, they’re still making lots of money. These are hardly signs of a company in trouble.

But it’s slowing

As ever, the problem for investors was that they expected better. Everyone knows Google’s expansion is slowing, but this quarter it happened a little too quick for the market’s liking. Revenue growth at Google’s own sites was a strong 20% this quarter, for instance, but it’s down from 23% last quarter.

The above chart would seem to indicate that Google’s rapid growth is tailing off, but it’s too early to say for sure. The proportion of its business done outside of the US has increased from 53% to 58% since 2012, so slowing US growth might be counteracted by expansion into emerging foreign markets.

Besides, did anyone expect a company’s revenues could grow at that rate forever? No matter how it might like to view itself, Google’s not a startup anymore – it’s a mature and established firm now, and its results will surely begin to reflect that.

And it’s changing

One of the key reasons that investors didn’t like the latest data from Google is that it showed worse than expected growth in its number of paid clicks, up 17% on the third quarter of 2013, compared to 25% last quarter. Again, this might seem good, but actually the increase in clicks is offset by the decrease in cost per click (CPC), which this quarter was 2%. While this is an improvement on last quarter, where CPC declined 6%, the trend for online advertising overall isn’t good.

Advertisers are essentially paying less for online ads, because more and more people are searching on their phones, where the ads are less effective. This may present a real problem for Google’s core business, but then the tech giant isn’t exactly ignoring mobiles, is it? The firm is trying hard to get better returns from phone searches, and it’s also diversifying its offering across multiple platforms.

Google isn’t just search any more. Although its results don’t differentiate between many of its operations, it’s likely that Youtube revenues are doing well, as advertisers are still coughing up for video ads. Also, Google’s in or getting into all kinds of other services, from Android phones to driverless cars and delivery drones, and these now provide 11% of its overall revenues ($1.84bn), up from 10% last year.   

Investors may have been spooked, but that’s just because they don’t like unpleasant surprises. Google’s business, however, is still looking mighty strong.

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