Google Earnings: What to Watch

Google’s Android operating system dominates the smartphone market, but the shift from desktop PCs to mobile devices hasn’t always benefited the world’s largest Internet search company.
When Google reports first-quarter results Wednesday, Wall Street will be looking for signs that the company is taking its mobile growth in stride.

The worry is that Google can’t charge as much for search ads on mobile devices as it does on PCs.  And when people search using some popular mobile gadgets, like AppleAAPL +0.12%’s iPhone, Google has to pay traffic-acquisition costs, or TAC, which hurts profit margins. Morgan StanleyMS +0.41% recently estimated that Google could pay more than $1 billion this year to be the default search engine on Apple’s iOS mobile operating system.

“The fear that TAC will continue to rise and hurt margins has been a main tenet of the mobile bear thesis on Google,” Mark Mahaney, an Internet analyst at RBC Capital Markets, wrote in a report  Monday.

Google is expected to report first-quarter earnings of $6.33 a share on revenue of $15.58 billion, according to analysts polled by Thomson Reuters. A year earlier, the company reported per-share earnings of $6.19 on revenue of $12.95 billion. In the fourth quarter of 2013, TAC was 7.8% of the revenue Google generated from its own websites, down slightly from the third quarter. TAC was almost 71% of revenue from other websites in Google’s broader network in the three months ended Dec. 31, 2013.
“We anticipate that TAC will rise again in the first quarter in keeping with long-term trends,” Mahaney said.
Here are other key issues to watch for:

Click Trends:  Cost per click– which measures what advertisers pay when people click on search ads that show up alongside the results served up by Google’s search engine — is another metric that investors will be watching closely.

CPC, as it’s known in the industry, fell 11% in the fourth quarter, compared with the same period a year earlier. That was a bigger year-over-year decline than the previous four quarters, according to RBC data compiled from Google disclosures.

It is harder for people to complete transactions on mobile websites, compared to full desktop websites that benefit from larger screens. That means the leads generated by mobile search ads aren’t worth as much, so advertisers bid less. There have also been fewer advertisers bidding on mobile search ads and really valuable searches, such as “luxury golf vacations” or “hybrid cars,” which are more likely to be done on PCs, putting pressure on the price of mobile search ads, Mahaney said.

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About Doru Somcutean

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