Google Earnings Review: Profitability Weakens Again

I repeat, this isn’t the Google (GOOG) that Granny used to talk about. Things have changed significantly. That is, Google fundamentals have changed with the acquisition and merger of Motorola (MSI) in Q2 2012 (Fundamentals Change With Motorola Acquisition). Motorola is negatively affecting financial performance. Google’s core business is not as profitable and therefore is also negatively affecting financial performance.

Both the revenue mix and margin mix have changed and hence the uncertainty about Google’s operations. This will continue negatively, impacting the bottom line, net income and earnings per share, at least for the short-term. The top line revenues surge upwards with no positive bottom line impact. The long-term impact is the uncertainty.

The 3rd and 4th calendar quarters can be the strongest for Google on an annual cyclical basis. The solid gains in net income and earnings per share were not reported year over year as expected. That leaves next quarter, the Holiday Q4, for a rebound. Holiday Q4 should be stronger than the current Q3, but the annual surge in earnings per share may not follow suit.

Revenue growth, year over year, had previously slowed but the Motorola acquisition reversed the trend significantly to the upside. Yet this has not mattered with regards to net income nor earnings per share. Consolidated margins decreased significantly, caused mostly by Motorola but to some extent by core operations. Net income and operating income continue decreasing on record revenues, the result of the gross profit margin, then operating margin, then net margin dropping to multi-year lows.

And finally we arrive at the earnings per share and ultimately GOOG stock prospects. The race and goal is to become the Anti-Apple with integration across software and hardware while continuing as an advertising company. Whether this can in fact be done, how long it will take, and if Apple’s profitability levels can be reached are the 3 questions and uncertainties.

“We had a strong quarter. Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter,” said Larry Page, CEO of Google. “I am also really excited about the progress we’re making creating a beautifully simple, intuitive Google experience across all devices.”