Wall Street analysts expect Google (NSDQ: GOOG) to deliver solid earnings results Thursday afternoon, but investors who have seen the company’s stock fall 10 percent this year will want more, particularly status reports on the company’s mobile, social, and local efforts. They’ll be keen to hear from co-founder Larry Page, who is wrapping up his first full quarter as company CEO. Google’s prodigious spending on people and new products — which has cut into profit margins — also will be a key topic.
Gleacher & Co. analyst Yun Kim captured Wall Street’s conventional view on Google, writing in a recent note to clients: “We expect overall top-line results to be solid, with both pricing and volume trends remaining positive. However, we remain concerned regarding the unpredictable nature of GOOG’s capex (capital expenditure) spending and investments into new and existing strategic initiatives.”
Google shares are down nearly 11 percent so far this year — from $604.35 on Jan. 3 to $538.26 when the market closed today. Here’s what to look for in Google’s earnings report:
Display: Google generates over 90 percent of its revenues from its core search/text ad business. But the booming display ad market is quickly becoming the next internet advertising battleground, as big players like Facebook, Yahoo (NSDQ: YHOO), and AOL (NYSE: AOL) move aggressively into the space. According to UBS analysts Brian J. Pitz and Brian P. Fitzgerald, display ads have 40 to 50 percent better click-through rates than text ads. Google executive chairman Eric Schmidt confirmed the company’s emphasis on — and high hopes for — display ads last month when he told reporters that the display business is “going to end up being a $10 billion, $20 billion kind of business.” Investors will want to hear how the company is progressing toward that goal.
Mobile: Last year, the company said it reached $1 billion in mobile revenues, but the Android platform faces fierce competition from Apple’s iPhone, which recently became available on Verizon Wireless (NYSE: VZ), a key Android launch partner. Investors will be eager for an update on Google’s efforts to monetize Android — and on its progress with mobile advertising. The company may tout the growth of the platform, but mobile revenues still account for a fraction of Google’s overall sales, though they’re growing quickly. Canaccord Genuity analyst Heath Terry predicts that Google’s mobile revenue will grow from $2.5 billion in 2011 to $14 billion by 2015.
Social: Google+ appears to be the company’s most promising entrant into the social market, following several failed attempts. It’s all too clear that Google took its eye off the ball by allowing Facebook to build up such a dominant position in the market, with over 750 million users. Google+ has gotten good reviews so far and is growing quickly, and Google executives view the initiative as central to the company’s long-term strategy. In a recent note to clients, Macquarie analyst Ben Schachter highlighted three reasons for this:
1. Search – the ability to use the social graph as a key signal for personalized search
2. Platform – the ability of a social site to become a platform on top of which users access applications, services, communication, etc…
3. *Time* – simply the time spent on social destinations (and not spent elsewhere), particularly mobile time (which is over-indexed to social)
Local: Google has officially launched trial runs of its Google Offers discount service in Portland, New York, and San Francisco, with more cities on the way, in a direct assault on daily deals market leader Groupon. Meanwhile, the company is moving aggressively into the digital payments space with Google Wallet. It’s not hard to see that the combination of Offers, Wallet and Google Maps — on top of the Android platform — could pose a serious competitive threat to Groupon. Schachter calls Android integration “a key point of differentiation for Google Offers vs. the other daily deal services (Groupon, LivingSocial, etc.)” As with other new initiatives, investors will want to hear about how this space will boost Google’s bottom line.
Expenses: Google is investing heavily in people and new products — and makes no apologies for it. Morgan Stanley analyst Scott Devitt wrote in a recent note to clients that he expects Google to hire as many as 7,000 new employees this year, up 19 percent from 2010, driven in part by red-hot competition for talent in the tech space. Google is also investing aggressively in the product categories listed above, as well as as print, online and TV advertising, which it traditionally eschewed. Meanwhile, Google continues to expand, with new office space in London; Kitchener, Ontario; and its hometown of Mountain View, California, where the the company has leased 630,000 square feet to expand its sprawling campus. As a result, Devitt expects profit margins to continue to decrease. For now, investors seem to accept Google increased spending, even if they’re not thrilled about it. Expect executives to reiterate their argument for spending growth.
Regulatory: Google is being investigated or faces investigations on a variety of fronts in both the U.S. and Europe. Last month, the Federal Trade Commission launched a wide-ranging investigation into Google’s dominance of the web search business. Last Friday, Google reversed course and said that Schmidt will testify before the U.S. Senate Judiciary Committee’s antitrust subcommittee, which is also probing the company’s market power. Investors will be interested in some color from company executives about the potential impact of these probes on the company’s business.
Paging Larry: Google CEO Larry Page irked come investors last quarter with his extremely brief comments. Shareholders and employees look to the CEO for leadership, so Page would be advised to take more visible role as he settles into his job. He seems to realize the need to expand into new markets and has streamlined the company’s management in an effort to recapture some of the company’s old start-up spirit. But questions remain about how visible the aloof and publicity-shy Page will be in his new role.