Google Q4 2011 earnings: Analysts expectations not met despite record quarter, stock plummets

Élyse Betters | Jan 19 2012 - 4:12 pm PT

Google just announced its record-breaking fourth-quarter earnings and, within minutes of reporting, the Mountain View, Calif.-based Company dropped a whopping 10 percent in early-after hours trading due to missed expectations.

Google missed analyst expectations for earnings per share during Q4 2011 and its stock immediately plummeted. Analysts predicted the company would produce $10.49 in non-GAAP earnings per share, but it only amounted to $9.50 in earnings per share (versus $8.75 in the Q4 2010).

Nevertheless, the earnings’ upswing surpassed the $9.72 billion revenue reported in Q3 2011. Google revenue hit a record $10.58 billion in Q4 2011, before deducting traffic acquisition costs, which is a 25 percent increase from $8.44 billion a year earlier. Profit also grew to $2.71 billion, compared to $2.54 billion in the Q4 2010.

“Google had a really strong quarter ending a great year. Full year revenue was up 29 percent, and our quarterly revenue blew past the $10 billion mark for the first time,” said Larry Page, CEO of Google, in a press release.

Android, Gmail, and Google+ are also growing. The new social network reached 90 million users globally, which is “well over double what I announced just three months ago,” Page explained. The CEO also announced today that Google saw 250 million Android device activations, and over 11 billion apps downloaded from the Android Market.

“I’m very excited about what we can do in 2012 – there are tremendous opportunities to help users and grow our business,” Page said.

Although Google did not meet analysts’ expectations, the company is trumpeting its first $10 billion quarter.

The Q4 2011 financial summary and highlights are detailed below.

Google-owned websites generated revenues of $7.29 billion in the Q4 2011, or 69 percent of total revenues —a 29 percent increase over Q4 2010 revenues of $5.67 billion. Meanwhile, Google’s partner websites generated revenues of $2.88 billion in Q4 2011, or 27 percent of total revenues, representing a 15 percent increase from Q4 2010 network revenues of $2.50 billion.

Revenues from outside of the United States totaled $5.60 billion in Q4 2011, or 53 percent of total revenues, compared to 52 percent in Q4 2010. The United Kingdom’s revenues totaled $1.06 billion in Q4 2011.

The Q4 2011 earnings’ press release elaborated on gains related to foreign exchange risk management program:

Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2011 through the fourth quarter of 2011, our revenues in the fourth quarter of 2011 would have been $239 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2010 through the fourth quarter of 2011, our revenues in the fourth quarter of 2011 would have been $39 million lower.

Traffic acquisition costs are amounts paid to Google’s Network members, and it includes amounts paid to distribution partners who direct traffic to Google (which totaled $442 million in the Q4 2011). With that said, TAC’s portion of revenues shared with Google’s partners increased to $2.45 billion in the Q4 2011, versus $2.07 billion in the Q4 2010.

Google also mentioned other cost of revenues, such as: data center operational expenses, content acquisition costs, amortization of intangible assets, and credit card processing charges. The total increase is 12 percent, or $1.25 billion in the Q4 2011, compared to 10 percent in the Q4 2010.

It should be noted that paid aggregated clicks, including clicks related to ads on Google websites and Network member websites, increased 34 percent compared to the Q4 2011. Average cost-per-clicks, however, decreased 8 percent.

The remainder of the Q4 2011 earnings results’ press release is available below.

Operating Expenses – Operating expenses, other than cost of revenues, were $3.38 billion in the fourth quarter of 2011, or 32% of revenues, compared to $2.51 billion in the fourth quarter of 2010, or 30% of revenues.
Stock-Based Compensation (SBC) – In the fourth quarter of 2011, the total charge related to SBC was $536 million, compared to $396 million in the fourth quarter of 2010.
We currently estimate SBC charges for grants to employees prior to January 1, 2012 to be approximately $2.0 billion for 2012. This estimate does not include expenses to be recognized related to employee stock awards that are granted after December 31, 2011 or non-employee stock awards that have been or may be granted.
Operating Income – GAAP operating income in the fourth quarter of 2011 was $3.51 billion, or 33% of revenues. This compares to GAAP operating income of $2.98 billion, or 35% of revenues, in the fourth quarter of 2010. Non-GAAP operating income in the fourth quarter of 2011 was $4.04 billion, or 38% of revenues. This compares to non-GAAP operating income of $3.38 billion, or 40% of revenues, in the fourth quarter of 2010.
Interest and Other Income (Expense), Net – Interest and other income (expense), net was an expense of $18 million in the fourth quarter of 2011, compared to an income of $160 million in the fourth quarter of 2010.
Income Taxes – Our effective tax rate was 22% for the fourth quarter of 2011.
Net Income – GAAP net income in the fourth quarter of 2011 was $2.71 billion, compared to $2.54 billion in the fourth quarter of 2010. Non-GAAP net income was $3.13 billion in the fourth quarter of 2011, compared to $2.85 billion in the fourth quarter of 2010. GAAP EPS in the fourth quarter of 2011 was $8.22 on 329 million diluted shares outstanding, compared to $7.81 in the fourth quarter of 2010 on 326 million diluted shares outstanding. Non-GAAP EPS in the fourth quarter of 2011 was $9.50, compared to $8.75 in the fourth quarter of 2010.
Cash Flow and Capital Expenditures – Net cash provided by operating activities in the fourth quarter of 2011 totaled $3.92 billion, compared to $3.53 billion in the fourth quarter of 2010. In the fourth quarter of 2011, capital expenditures were $951 million, the majority of which was related to IT infrastructure investments, including data centers, servers, and networking equipment. 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 2011, free cash flow was $2.97 billion.
Cash – As of December 31, 2011, cash, cash equivalents, and short-term marketable securities were $44.6 billion.
Headcount – On a worldwide basis, Google employed 32,467 full-time employees as of December 31, 2011, up from 31,353 full-time employees as of September 30, 2011.