What a difference a quarter can make. When it issued its Q1 financial results, fears about Google’s rising costs and profits that missed analyst forecasts dragged the share price down by 5% in the immediate aftermath (see Google share slump 5%) . Now that Q2 is out of the door, excitement about accelerating growth overcame any concern about costs that are still rising, causing a share price jump of 12% in after market trading.
Google had a stonking Q2 (for the period ending 30 June 2011), there’s no question about that. Revenue for the quarter was up 32% on the year ago quarter to reach a record high $9.03bn. Operating income stands at 32% of revenue, $2.88bn, compared to 35% last year. Net income rose to $2.51bn from $1.84bn a year ago. These results were despite higher costs contributed to by higher capital expenditure – which Google says will continue to rise – and a higher then expected headcount. The company ended the quarter with £39.1bn in cash.
Here at TechMarketView Richard Holway has been warning that Google’s glory days are over (see Growing doubts about Google) due to its reliance on sponsored search and because the approaches used by Facebook, and Apple for its application market place, effectively close out opportunities for Google search. One of the messages from the Q2 results is that Google continues to be massively reliant on search ads for its growth, which is no surprise, but it doesn’t look like it is sustainable. However, it is actively seeking out new markets, specifically mobile and display ads. Mobile is certainly an opportunity, given the massive growth of Android phones. The Google+ social networking site is another potential revenue generator, although whether it will be able to challenge let alone knock Facebook from its premier position once it is widely launched (currently it is an invitation-only pilot albeit with 10m+ members), is the very big and very open question.
It looks like Google is aware of its vulnerabilities. Since taking over as chief executive in April Larry Page has overseen a management change and reorganized the business to concentrate on three categories of products (search in advertising products; consumer products such as YouTube, Android and Chrome; and new products such as Google+), with clear lines of responsibility for each. But it announced recently that it was closing down Health and PowerMeter, despite signs that Health is a growth market (see Google pulls the plug on Google Health and PowerMeter). These areas may have been out of its comfort zone but there is an argument that Google has to expand into non-traditional areas that have medium-term mainstream potential (as opposed to the long term and beyond potential of the driverless car).
Of particular relevance to the UK market was the news that the UK contribution to Google’s overall revenue remained at 11%, the same as it was in Q2 2010, generating revenue of $976m. Although take-up by small advertisers accelerated, Google’s experience is that the UK is lagging in the global economic recovery stakes.