Google’s Q4 profit spikes 17 percent, but badly misses estimates

google-headquarters

Google faced lofty expectations for its fourth-quarter earnings and the company missed by posting earnings of $12.01 per share on revenues of $16.86 billion. The consensus expectation for Google’s Q4 2013 earnings had been a $12.26 EPS on revenues of $16.75 billion. The big issue for Google seemed to be that its cost-per-click — a key metric used to determine how much money Google can charge for advertisements — plunged by 11 percent in Q4 2013 from Q4 2012 and also decreased sequentially by 2 percent between Q3 2013 and Q4 2013. Google’s Motorola Mobility division also lost $384 million on the quarter, although that’s not as big an issue now that Motorola won’t be part of the company for much longer.

Google stunned the tech world earlier this week when it announced that it was dumping its Motorola Mobility division onto Lenovo for just $2.9 billion, or a nearly $10 billion less than it originally paid for the company. Google faced a lot of pressure to deliver on its Q4 earnings after both Microsoft and Apple beat expectations and delivered strong earnings over the holiday quarter.

Google’s press release follows below.

Google Inc. Announces Fourth Quarter and Fiscal Year 2013 Results

MOUNTAIN VIEW, Calif. – January 30, 2014 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter and fiscal year ended December 31, 2013.”We ended 2013 with another great quarter of momentum and growth.  Google’s standalone revenue was up 22% year on year, at $15.7 billion”, said Larry Page, CEO of Google.  ”We made great progress across a wide range of product improvements and business goals.  I’m also very excited about improving people’s lives even more with continued hard work on our user experiences.”Google Inc. announced today that its Board of Directors has approved a distribution of shares of the Class C capital stock as a dividend to our stockholders with a dividend record date of March 27, 2014 and a dividend payment date of April 2, 2014.

Q4 Financial Summary

Google Inc. reported consolidated revenues of $16.86 billion for the quarter ended December 31, 2013, an increase of 17% compared to the fourth quarter of 2012. Google Inc. reports advertising revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the fourth quarter of 2013, TAC totaled $3.31 billion, or 24% of advertising revenues.

Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures at the end of this release.

  • GAAP operating income in the fourth quarter of 2013 was $3.92 billion, or 23% of revenues. This compares to GAAP operating income of $3.39 billion, or 24% of revenues, in the fourth quarter of 2012. Non-GAAP operating income in the fourth quarter of 2013 was $4.84 billion, or 29% of revenues. This compares to non-GAAP operating income of $4.27 billion, or 30% of revenues, in the fourth quarter of 2012.
  • GAAP net income, including net loss from discontinued operations, in the fourth quarter of 2013 was $3.38 billion, compared to $2.89 billion in the fourth quarter of 2012. Non-GAAP net income in the fourth quarter of 2013 was $4.10 billion, compared to $3.57 billion in the fourth quarter of 2012.
  • GAAP EPS, including impact from net loss from discontinued operations, in the fourth quarter of 2013 was $9.90 on 341 million diluted shares outstanding, compared to $8.62 in the fourth quarter of 2012 on 335 million diluted shares outstanding. Non-GAAP EPS in the fourth quarter of 2013 was $12.01, compared to $10.65 in the fourth quarter of 2012.
  • Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense, as well as restructuring and related charges.  Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits, as well as net loss from discontinued operations. In the fourth quarter of 2013, the expense related to SBC and the related tax benefits were $902 million and $191 million compared to $700 million and $152 million in the fourth quarter of 2012. In the fourth quarter of 2013, restructuring and related charges and the related tax benefits were $15 million and $11 million, compared to $178 million and $65 million in the fourth quarter of 2012. In addition, net loss from discontinued operations in the fourth quarter of 2013 was $5 million, compared to $21 million in the fourth quarter of 2012.

Q4 Financial Highlights

Revenues and other information – On a consolidated basis, Google Inc. revenues for the quarter ended December 31, 2013 were $16.86 billion, an increase of 17% compared to the fourth quarter of 2012.

Google Segment Revenues – Google segment revenues were $15.72 billion, or 93% of consolidated revenues, in the fourth quarter of 2013, representing a 22% increase over fourth quarter 2012 Google segment revenues of $12.91 billion.

  • Google Sites Revenues – Google-owned sites generated segment revenues of $10.55 billion, or 67% of total Google segment revenues, in the fourth quarter of 2013. This represents a 22% increase over fourth quarter 2012 Google sites segment revenues of $8.64 billion.
  • Google Network Revenues – Google’s partner sites generated segment revenues of $3.52 billion, or 23% of total Google segment revenues, in the fourth quarter of 2013. This represents a 3% increase over fourth quarter 2012 Google network segment revenues of $3.44 billion.
  • Other Google Revenues – Other revenues from the Google segment were $1.65 billion, or 10% of total Google segment revenues, in the fourth quarter of 2013. This represents a 99% increase over fourth quarter 2012 other Google segment revenues of $829 million.

Google Segment International Revenues – Google segment revenues from outside of the United States totaled $8.77 billion, representing 56% of total Google segment revenues in the fourth quarter of 2013, compared to 56% in the third quarter of 2013 and 54% in the fourth quarter of 2012.

  • Google segment revenues from the United Kingdom totaled $1.50 billion, representing 10% of total Google segment revenues in the fourth quarter of 2013, compared to 10% in the fourth quarter of 2012.

Foreign Exchange Impact on Google Segment Revenues – Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2013 through the fourth quarter of 2013, our Google segment revenues in the fourth quarter of 2013 would have been $156 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2012 through the fourth quarter of 2013, our Google segment revenues in the fourth quarter of 2013 would have been $141 million higher.

  • In the fourth quarter of 2013, we recognized a benefit of $3 million to Google segment revenues through our foreign exchange risk management program, compared to $37 million in the fourth quarter of 2012.

Reconciliations of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues are included at the end of this release.

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 31% over the fourth quarter of 2012 and increased approximately 13% over the third quarter of 2013.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 11% over the fourth quarter of 2012 and decreased approximately 2% over the third quarter of 2013.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $3.31 billion in the fourth quarter of 2013, compared to $3.08 billion in the fourth quarter of 2012. TAC as a percentage of advertising revenues was 24% in the fourth quarter of 2013, compared to 25% in the fourth quarter of 2012.

The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.49 billion in the fourth quarter of 2013. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $824 million in the fourth quarter of 2013.

Motorola Mobile Segment Revenues – Motorola Mobile segment revenues were $1.24 billion, or 7% of consolidated revenues in the fourth quarter of 2013, compared to $1.51 billion, or 11% of consolidated revenues in the fourth quarter of 2012.

Elimination and Other – Beginning in Q3 2013, Google and Motorola segment revenues have been impacted by intersegment transactions that are eliminated in consolidation. Additionally, segment revenues associated with certain products are recognized in the segment results, but deferred to future periods in our consolidated financial statements. Such intersegment revenues and deferred revenues were $105 million in the fourth quarter 2013.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of manufacturing and inventory-related costs, data center operational expenses, amortization of intangible assets, and content acquisition costs, increased to $4.13 billion, or 24% of revenues, in the fourth quarter of 2013, compared to $3.14 billion, or 22% of revenues, in the fourth quarter of 2012.

Operating Expenses – Operating expenses, other than cost of revenues, were $5.50 billion in the fourth quarter of 2013, or 33% of revenues, compared to $4.81 billion in the fourth quarter of 2012, or 33% of revenues.

Amortization Expenses – Amortization expenses of acquisition-related intangible assets were $279 million for the fourth quarter of 2013, compared to $289 million in the fourth quarter of 2012. Of the $279 million, $153 million was as a result of the acquisition of Motorola, of which $116 million was included in Google segment results and $37 million was included in Motorola Mobile segment results.

Stock-Based Compensation (SBC) – In the fourth quarter of 2013, the total charge related to SBC was $902 million, compared to $708 million in the fourth quarter of 2012. We currently estimate SBC charges for grants to employees prior to December 31, 2013 to be approximately $3.13 billion for 2014. This estimate does not include expenses to be recognized related to employee stock awards that are granted after December 31, 2013 or non-employee stock awards that have been or may be granted.

Operating Income – On a consolidated basis, GAAP operating income in the fourth quarter of 2013 was $3.92 billion, or 23% of revenues. This compares to GAAP operating income of $3.39 billion, or 24% of revenues, in the fourth quarter of 2012. Non-GAAP operating income in the fourth quarter of 2013 was $4.84 billion, or 29% of revenues. This compares to non-GAAP operating income of $4.27 billion, or 30% of revenues, in the fourth quarter of 2012.

  • Google Segment Operating Income – Google segment operating income in the fourth quarter of 2013 was $5.32 billion, or 34% of Google segment revenues. This compares to segment operating income of $4.42 billion in the fourth quarter of 2012, or 34% of Google segment revenues.
  • Motorola Mobile Segment Operating Loss – Motorola Mobile segment operating loss in the fourth quarter of 2013 was $384 million, or -31% of Motorola Mobile segment revenues. This compares to segment operating loss of $152 million, or -10% of Motorola Mobile segment revenues in the fourth quarter of 2012.

Interest and Other Income, Net – Interest and other income, net, was $125 million in the fourth quarter of 2013, compared to $152 million in the fourth quarter of 2012.

Income Taxes – Our effective tax rate was 16% for the fourth quarter of 2013.

Net Income – GAAP consolidated net income in the fourth quarter of 2013 was $3.38 billion, compared to $2.89 billion in the fourth quarter of 2012. Non-GAAP consolidated net income was $4.10 billion in the fourth quarter of 2013, compared to $3.57 billion in the fourth quarter of 2012. GAAP EPS in the fourth quarter of 2013 was $9.90 on 341 million diluted shares outstanding, compared to $8.62 in the fourth quarter of 2012 on 335 million diluted shares outstanding. Non-GAAP EPS in the fourth quarter of 2013 was $12.01, compared to $10.65 in the fourth quarter of 2012.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the fourth quarter of 2013 totaled $5.24 billion, compared to $4.67 billion in the fourth quarter of 2012. In the fourth quarter of 2013, capital expenditures were $2.26 billion, the majority of which was for production equipment, data-center construction, and real estate purchases. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the fourth quarter of 2013, free cash flow was $2.98 billion.

We expect to continue to make significant capital expenditures.

A reconciliation of free cash flow to net cash provided by operating activities, the GAAP measure of liquidity, is included at the end of this release.

Cash – As of December 31, 2013, cash, cash equivalents, and marketable securities were $58.72 billion.

Headcount – On a worldwide basis, we employed 47,756 full-time employees (43,862 in Google and 3,894 in Motorola Mobile) as of December 31, 2013, compared to 46,421 full-time employees (42,162 in Google and 4,259 in Motorola Mobile) as of September 30, 2013.