Editor’s Note: Welcome to our weekly Reality Check column. We’ve gathered a group of visionaries and veterans in the mobile industry to give their insights into the marketplace.
As many long-term Reality Check and Sunday Brief readers know, Google Inc. (GOOG) is one of the “Four Horsemen” of the tech world. They, along with Apple Inc. (AAPL), Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN), have the brains, clout, and cash to change the telecommunications industry.
When Google released their earnings, I took a quick look before hopping on the plane. Here’s what I saw:
–Twenty-seven percent revenue growth (up $1.8 billion to $8.6 billion).
–Gross margin percentage growth (up $1.3 billion, 2% as percentage of revenue).
–Nearly $37 billion of cash and marketable securities.
–Two cents per share miss versus Wall Street estimates, driven by increased research and development and personnel expense.
Not great, and expenses looked high, but they seem to be on track for $6 billion in revenue growth with increasing margins. So probably a down day, but $600 per share still in reach.
On Friday afternoon, after a busy travel day within Kansas City, I peeked at my portfolio and, to my surprise, Google was down $43 per share! I was really concerned I had missed something, so, in preparing for this week’s column, I re-read the transcript from Seeking Alpha. I looked through the earnings analysis from people I respect in the industry, and I talked to some associates in the tech industry (sorry for the weekend calls). The earnings call was fine – kind of all over the board, but solid answers to some tough questions.
So why did Google lose $17 billion in market capitalization (yes, that’s an entire Sprint Nextel Corp. plus Level3 Communications) in one day? They failed to answer the question “how will you grow?” and, as a result, failed to convince investors that they have a meaningful strategy to capture new market share.
What did Google actually report? Here are some highlights from the conference call:
1. They grew search 32%, which reflects a growing economy. This growth rate parallels the 2007/2008 growth rates in search revenues.
2. They grew display (search results through partner websites) by 19%, which reflects changes to their search algorithms to produce higher quality searches for users.
3. They grew their daily Android activations to 355,000 per day. Over 3 billion Android apps have been deployed to phones.
4. Google Chrome has over 120 million daily users, up about 40 million year-over-year.
5. One thousand nine hundred new hires in the quarter (think of that as an extra $300 million-plus in annual salary expense).
6. The 10% pay raise increased SG&A and R&D expense (no surprise).
7. Enterprise, Chrome, mobile and social are the new growth engines for the company.
Seems pretty logical for a company growing at Google’s rate. Then comes the Q&A and the question is posed: “How does Larry view the company differently today, or how should investors in the company view it differently given Larry’s position?” Patrick Pichette, Google’s CFO, launches into the following answer:
“In short, look, I think that the company’s position has not changed. Google is a technology company focused on users and looking for products that can affect billions of people. So the very first lens that you have to think through when you think of Google is are we developing computer science helping finding answers to problems where billions of people can be served. If you think that way, right, Chrome makes sense. Android makes sense. Search makes sense. All these things are the fundamentals of the company. From there, there’s very clear that – again, to paraphrase an old saying of ours, right, the 70/20/10 is very much alive and well. Search is the next billion-dollar business. Never forget it. Every quarter you’ve heard this time, right? Ninety percent kind of improvement on one side, 40% on the other. And like, that’s one a day, right? That’s a lot of engineering work to keep ahead of the – but these are the next billion-dollar businesses. It’s in its infancy and so are two or three other of our key products, which include mobile, display, enterprise. So – and then the 10%, well, it’s commerce, right? It’s local that we all know is nascent. It’s social that we know also is nascent. And so the strategy the company is continuing to be in the same core lenses, building same products that serve billions of people and to make multibillion-dollar businesses in the waist up.”
It’s responses like this that concern investors, who do not understand the software development process. Google is inventing, developing, and coding. They are also improving current code. Unlike Bell Labs and Xerox PARC several decades ago, Google’s mission is focused (the 70% plus the 20% of the 70/20/10 equation). This company is not a giant science experiment.
What Google realizes, however, is that multi-billion dollar organic growth does not happen overnight. They cannot be a leader in social networks without a strategy focused on non-searchable communication. They will not be a trusted partner as a phone replacement until mobile users are convinced that their service is as reliable and as private as AT&T Mobility or Verizon Wireless. As we have discussed many times throughout countless columns, the value of search is not only to a) deliver the results you want to see for a particular search query; but also b) provide advertisers with a platform that drives future purchases.
Google makes more money when they more accurately predict your next move for potential advertisers. In short, they need to be able to use your current activity, through the Chrome browser, the Android phone, or the Google Search engine, to predict your next dollar spent. The communications process delivers masses of information about your current and (hopefully) future habits.
Can Google deliver this capability better than the next crop of college graduates who are being snapped up by start-ups and other competitors? The answer to this question lies in Google’s breadth. If Google can paint a better picture of consumer and business spending than anyone else and deliver better customers to advertisers, then they will continue to lead. Without breadth, their importance will diminish.
Jim Patterson is CEO and co-founder of Mobile Symmetry, a start-up created for carriers to solve the problems of an increasingly mobile-only society. Patterson was most recently President – Wholesale Services for Sprint and has a career that spans over eighteen years in telecom and technology. Patterson welcomes your [email protected].
