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Google (GOOG) Q3 2011 Earnings Preview : Color On Motorola Buy

 October 13, 2011 02:31 PM

Google (GOOG) is scheduled to report third quarter 2011 earnings today after market close. For the last five years, GOOG's third quarter results have come better than second quarter. However, I expect the trend to reverse in this quarter.

Google generated nearly 96.2 percent of its Q2 revenues from advertising. For Q3, istock is expecting ad revenue share to slightly fall as compared to Q2 2011. The fall in ad revenue is attributable to lower ad spend by Google's advertisers. However, the fall in ad revenue is expected to be slightly offset by a gain in US market share.Google is reported to have increased its US market share to 65.3 percent in September, up from 64.8 percent in August, as Yahoo! Inc. dropped to less than 16 percent, according to ComScore Inc.

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I think it will take two more quarters for June launch of Instant Pages, which provides quicker connections to links in query results, to have meaningful impact on ad revenue expansion.

Though momentum in other revenue (from offering display advertising management services to advertisers, ad agencies, and publishers, as well as licensing its enterprise products, search solutions, and web search technology) is positive, yet it isn't much of a needle mover at least in the near future. Moreover, TAC (traffic acquisition costs i.e., advertiser fees the company pays to its content providers) is expected to have increased at a faster rate than other revenue in Q3.

I don't expect Motorola's buy in the second quarter to have contributed to revenue expansion as the deal will not be earnings accretive until sometime. However, the deal is a game changer. Though it is too early to say how Google's Heineken N.V. multi-million euro advertising partnership that was signed in Q2 is shaping up, any news regarding that could color my views on Google's earnings. However, legal expenses could poke a spike in the company's earnings. The average analyst earnings estimate from 22 analyst stands at 7.59 with high estimate of 7.9 and low estimate of 7.09. Overall, iStock expect the company's to report an EPS of $8.26 on revenue of $6.8 billion, compared to an EPS of $7.64 on revenue of $5.48 billion a year ago.

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