Earnings Crush Expectations as Google Announces Split, Offers Dividend

Joel Anderson  |

Google (GOOG) released its earnings report for the first quarter of 2012, and it knocked expectations out of the park. The company, potentially feeling the squeeze to help out shareholders after Apple (AAPL) announced its new dividend and share buyback program, also announced that it would effectively be making a 2 for 1 split in its stock, issuing one new class B share for every existing share.

Earnings Above Analyst Estimates

Google reported earnings before certain costs to be $10.08 per share, beating the average analyst estimate of $9.64 per share that was pulled from accumulated data from Bloomberg. Sales were at $8.14 billion after leaving out revenues passed on to partner sites, a number that was largely in line with analyst expectations.

“The viability of Google is still very, very strong,” said Ron Josey, an analyst at ThinkEquity LLC who has Google listed as a "Buy." “There’s still a lot of room for growth across its multiple businesses.”

However, the bigger news appeared to be the announced stock split. The company called the move an "effective" stock split, creating a new class of nonvoting shares and issuing one new share of the stock to shareholders for each existing share that they currently hold through a stock dividend. In doing so, Google found a way to pay back its shareholders without diluting the voting power of existing shares. The company explained in its founder's letter:

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"Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure."

Shift to Mobile Means Changes

While earnings were better than expected, the earnings report also showed signs of some headwinds that the company may need to address in the future. On the whole, the shift towards mobile phones and tablets appears to be a source of some concern for Google.

"Google (GOOG) continues to experience the good and bad of consumers going mobile," wrote George Stahl of the Wall Street Journal. "Consumers are increasingly clicking on ads found on smartphones and tablets. As a result, GOOG’s paid clicks — which measures how frequently consumers click on ads — rose 39% in 1Q, a bigger increase than in 4Q. However, mobile ads produce less revenue for GOOG, lowering the company’s cost-per-click, which measures the average amount advertisers pay for a click. GOOG’s CPC fell 12%, wider than the 4Q. This rocky shift to mobile has contributed to GOOG’s less consistent earnings performance recently, although analysts see the trend smoothing out. 'Over time, we expect average mobile CPCs to rise,' JP Morgan (JPM) writes."

Google is also continuing to play catch-up with Google+, it's social networking arm. While Google+ now has 170 million users, those users spent an average of 3.3 minutes on the site in January compared to the 7 hours they spent on Facebook (FB). This could become a more important consideration in the future as Erik Sherman points out on CBSnews.com.

"For years, people went to search engines to get their information. Google came out on top and rode that trend to fame and fortune. But there are already indications that, in the long run, Internet users may lean toward getting recommendations from friends and acquaintances. When people first go to services such as Facebook, Twitter, Pinterest, and others for online suggestions, how long before an important part of Google's business begins to wither away?"

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