Google whiffs on Q1 2014 earnings with EPS of $6.27

Google’s entire year couldn’t beat Apple’s blowout holiday quarter

This past quarter hasn’t been the most eventful one in Google’s history but analysts were still expecting it to be a profitable one with a consensus earnings estimate of $6.40 per share on about $15.5 billion in revenue. The company on Wednesday missed those expectations by posting a first-quarter profit of $6.27 per share on $15.4 billion in sales.

Aside from the big EPS and revenue figures, Google also saw its cost-per-click — a key metric used to determine how much money Google can charge for advertisements — decline by 9% year-over-year. However, Google also points out that its cost-per-click figures have held steady from Q4 2013 and that the year-over-year decline from Q1 2013 to Q1 2014 wasn’t as steep as the year-over-year decline from Q4 2012 to Q4 2013. Google also says that its total number of paid clicks increased 26% year-over-year, so its overall paid click volume is still growing impressively.

Google shares dropped immediately by 5% in after-hours trading after the release of its Q1 2014 earnings report.

The company’s full press release follows below.

Google Inc. Announces First Quarter 2014 Results

MOUNTAIN VIEW, Calif. – April 16, 2014 – Google Inc. (NASDAQ: GOOG, GOOGL) today announced financial results for the quarter ended March 31, 2014.

“We completed another great quarter. Google’s revenue was $15.4 billion, up 19% year on year”, said Larry Page, CEO of Google. “We got lots of product improvements done, especially on mobile. I’m also excited with progress on our emerging businesses.”

On January 29, 2014, we entered into an agreement with Lenovo Group Limited providing for the disposition of the Motorola Mobile business. As such, financial results of Motorola Mobile are presented as “Net loss from discontinued operations” on the Consolidated Statements of Income for the quarter ended March 31, 2013 and 2014; and assets and liabilities of Motorola Mobile to be disposed of are presented as “Assets held for sale” and “Liabilities held for sale”, respectively, on the Consolidated Balance Sheet as of March 31, 2014.

On April 2, 2014, we issued shares of Class C capital stock as a dividend to our stockholders. Except for the number of authorized shares and par value, all references to share and per share amounts have been retroactively restated for all prior periods shown to reflect the stock split, which was effected in the form of a stock dividend.

Google Inc. reported consolidated revenues of $15.42 billion for the quarter ended March 31, 2014, an increase of 19% compared to the first quarter of 2013. Google Inc. reports advertising revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2014, TAC totaled $3.23 billion, or 23% of advertising revenues.

Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. The non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures at the end of this release.

Q1 Financial Highlights

Revenues and other information - Google Inc. revenues for the quarter ended March 31, 2014 were $15.42 billion, representing a 19% increase over first quarter of 2013 revenues of $12.95 billion.

Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data centers operational expenses, hardware inventory costs, amortization of acquisition-related intangible assets, and content acquisition costs, increased to $2.73 billion, or 18% of revenues, in the first quarter of 2014, compared to $2.17 billion, or 17% of revenues, in the first quarter of 2013.

Operating Expenses - Operating expenses, other than cost of revenues, were $5.34 billion in the first quarter of 2014, or 35% of revenues, compared to $4.07 billion in the first quarter of 2013, or 31% of revenues.

Depreciation and loss on disposal of property and equipment and amortization expenses - Depreciation and loss on disposal of property and equipment and amortization expenses were $1.09 billion for the first quarter of 2014, of which $1.06 billion was related to Google, compared to $899 million in the first quarter of 2013. Of the $1.09 billion, $116 million was related to amortization of Motorola intangibles, which Google will retain subsequent to the disposal of Motorola Mobile.

Stock-Based Compensation (SBC) - In the first quarter of 2014, the total charge related to SBC was $839 million compared to $655 million in the first quarter of 2013. We currently estimate SBC charges for grants to Google employees prior to March 31, 2014 to be approximately $3.22 billion for 2014. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2014 or non-employee stock awards that have been or may be granted.

Operating Income - GAAP operating income in the first quarter of 2014 was $4.12 billion, or 27% of revenues. This compares to GAAP operating income of $3.75 billion, or 29% of revenues, in the first quarter of 2013. Non-GAAP operating income in the first quarter of 2014 was $4.95 billion, or 32% of revenues. This compares to non-GAAP operating income of $4.40 billion, or 34% of revenues, in the first quarter of 2013.

Interest and Other Income, Net - Interest and other income, net, was $357 million in the first quarter of 2014, compared to $134 million in the first quarter of 2013.

Income Taxes - Our effective tax rate was 18% for the first quarter of 2014.

Net Loss from Discontinued Operations - Net loss from discontinued operations in the first quarter of 2014 was $198 million, compared to a net loss of $182 million in the first quarter of 2013. Net loss from discontinued operations in the first quarter of 2014 included a pre-tax adjustment of $74 million related to the deferral of certain revenue for the Motorola Mobile segment. Had we presented Motorola Mobile as an operating segment, the Motorola Mobile segment revenue for the first quarter of 2014 would have been $1.45 billion, $74 million higher than what was included in net loss from discontinued operations.

Net Income - GAAP consolidated net income in the first quarter of 2014 was $3.45 billion, compared to $3.35 billion in the first quarter of 2013. Non-GAAP consolidated net income was $4.30 billion in the first quarter of 2014, compared to $4.04 billion in the first quarter of 2013. GAAP EPS in the first quarter of 2014 was $5.04 on 685 million diluted shares outstanding, compared to $4.97 in the first quarter of 2013 on 673 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2014 was $6.27, compared to $6.00 in the first quarter of 2013.

Cash Flow and Capital Expenditures - Net cash provided by operating activities in the first quarter of 2014 totaled $4.39 billion, compared to $3.63 billion in the first quarter of 2013. In the first quarter of 2014, capital expenditures were $2.35 billion, the majority of which was for production equipment, data-center construction, and real estate purchases. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the first quarter of 2014, free cash flow was $2.05 billion.

We expect to continue to make significant capital expenditures.

A reconciliation of free cash flow to net cash provided by operating activities, the GAAP measure of liquidity, is included at the end of this release.

Cash - As of March 31, 2014, cash, cash equivalents, and marketable securities were $59.38 billion, which excludes cash classified as held for sale, compared to $58.72 billion as of December 31, 2013.

Headcount - On a worldwide basis, we employed 49,829 full-time employees (46,170 in Google and 3,659 in Motorola Mobile) as of March 31, 2014, compared to 47,756 full-time employees (43,862 in Google and 3,894 in Motorola Mobile) as of December 31, 2013.

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