Google Inc. (NASDAQ:GOOGL)(NASDAQ:GOOG) is expected to report a jump in profit for the first quarter of 2014, as its strategy of packaging desktop, mobile and tablet advertising begins to pay off. Analysts say the move proves major tech companies have begun a successful transition from desktops to smaller devices.
The Mountain View, Calif., company, which reports first-quarter earnings Wednesday after the markets close, is expected to report a 12 percent jump in net income to $4.38 billion and a 10.4 percent increase in earnings per share to $6.39, according to a poll of analysts by Thomson Reuters. Revenue is expected to climb to $15.52 billion from $13.97 billion.
Google will host a conference call live stream on YouTube, scheduled for 4:30 p.m. EDT.
Online advertising has struggled in the transition from traditional desktop PCs to smartphones and tablets, and analysts say Google's success shows that tech companies that focus on mobile can win big. Google develops the Android operating system, which now powers most of the world’s smartphones.
“Google is building a comprehensive mobile presence, which places it in the center of mobile Internet ecosystem” with Android, Credit Suisse analyst Stephen Ju said in a research note to investors. Android's focus on Google products helped it prevail in the first months of 2014, and will solidify its position there in the future, he said.
In January, Google surprised the market when it announced higher earnings for the last three months of 2013 thanks in large part to the success of enhanced campaigns, a series of policy changes to the company’s advertising sales that does not differentiate between clicks on mobile devices or tablets and those on traditional desktop PCs. Google’s enhanced campaigns have helped the company’s ad sales to overcome declines in how much advertisers pay per click.
Streaming site YouTube has led Google to become the market leader in online video content, according to market research firm comScore. YouTube’s popularity will help Google increase ad revenue “as offline brand budgets continue to migrate online,” Ju said in a note.
Despite the first quarter being “seasonally weak” for retail search, Ju said companies would maintain “relatively constant retail budget allocations to Product Listing Ads.” PLAs are a different source of Google’s revenue from search ads, and analysts say that along with YouTube, they could help speed along the shift from offline to online advertising.
Youssef Squali, an analyst with Cantor Fitzgerald, said in a note that thanks to a “superior user experience, greater engagement and higher conversion, PLAs are revolutionizing the way retailers are buying keywords on Google.”
Google acquired Nest Labs Inc. in January for $3.2 billion; Nest is a manufacturer of Wi-Fi-connected devices for the home like the Nest Learning Thermostat. The company had to halt sales of its Nest Protect smoke and carbon monoxide detector earlier this month, but poor sales at Nest Labs might reflect its recent acquisition rather than longer-term problems for the acquisition. Google does not traditionally offer a detailed breakdown its revenue sources, making it difficult to pinpoint the company's successes and failures.
Google announced the sale of Motorola Mobility in March for $2.9 billion to Lenovo. Google had operated Motorola at a loss after acquiring it for $12.5 billion in 2011. Needham analysts Kerry Rice said in a note to investors at the time that they should "rejoice" over the sale.
“Google’s revenue growth and margin structure should accelerate and increase with the weight of Motorola Mobility lifted from the financials,” Rice wrote. “Importantly, we believe Google should retain the vast majority of Motorola Mobility’s patents. Ultimately, we believe the acquisition of Motorola by Google was a successful defensive play to ward off patent litigation by its primary competitors.”
Hardware sales could also bolster Google's revenue, as sales of its Chromecast streaming device have remained strong on marketplaces like Amazon.com. The company also sells the Nexus 5 smartphone and Nexus 7 tablet through partnerships with original equipment manufacturers like LG and ASUS.
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