Google reported its Q4 2015 results along with providing splits between Google the advertising business and what it terms Other Bets. The results beat analyst expectations and that colored the analysts questions on the earnings call. But what about those pesky taxes that have exercised the minds of tax watchers and senior European government officials. Nary a word from analysts on the call on that topic but plenty of questions about future growth and the extent to which Google is plundering its lucrative advertising business to continue making...other bets. Let's have a quick overview of the financial highlights:
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On detail, Google grew the advertising business by 13% year over year to $21.1 billion, earning a healthy $8 billion in operating income. Other Bets took in a relatively miserly $151 million, but that was up 42.4% year over year for a total of $448 million or up 37% for the full year. Not shabby by any standards until you look at the margins. On the advertising business, margin was up 1% to 32% but Other Bets incurred a thumping loss of $3.5 billion for the full year.
On the analyst call, about the only detail provided was a high level view of how Google is combating the ever declining ad revenue cost per click (CPC) metric, stating that mobile (unsurprisingly) is making weight. The company gave almost no detail at all about Other Bets which include its Fiber (high speed infrastructure in selected cities) business, Nest, Google Cars and other bets. Instead, Ruth Porat, CFO Google restricted herself to this comment on Other Bets:
Given their stages of development, these businesses will have idiosyncrasies with respect to the timing of revenue, expenses and cap ex, resulting from milestones, partnerships and other factors.
That's about as vague an answer as I've ever heard on an earnings call. And just for ease of understanding, see below for the structure that Google sent to the SEC when it restructured the business.
Google has long said that it is serious about the enterprise but with 'non-advertising' revenue at $7.1 billion out of a total $74.5 billion for the full year and no breakdown of the lines of business numbers it is hard to know how well Google's marketing words match reality. About the best we got was that YouTube is 'doing well.' No details on Apps, no detail on Android.
The losses on Other Bets was well within the anticipated range but again, you have to ask the question, where is the operating bleed? In the past, Ventures has been thought to be a good earner for Google, but once again, no detail. And no analyst on the call prepared to ask that question.
On to taxes. We have written extensively about this topic (see insert) but here is how it panned out based upon the information contained in the detailed numbers. In short, Google estimates its overall tax rate for 2015 to be 20% compared to 27% in 2014. That comes out in the profit and loss account at a whopping $3.3 billion based on total operating profit of $16.3 billion. In the balance sheet, Google records a net tax liability due at some mythical point in the future of $2 billion. However, in the year, the cash flow impact for the whole year is pegged at $358 million. This is the bit that surprises everyone.
What it boils down to is this: Google's global tax structure allows it to effectively get tax back on much of its earnings while still leaving a substantial amount on the balance sheet as an amount owed. The amount it gets back is recorded as a receivable of $1.9 billion. So even though it has recently reached a settlement with the UK tax office, and will likely reach settlements with other European states, it can confidently reckon on offsetting those amounts against what it owes in the US. Quite how it manages to record a global tax rate of 20% is something of a mystery but I can only assume there are some hefty write downs it will be allowed to compute to arrive at its final liability. Here are the numbers:
The interesting thing here is the change between 2014 and 2015. The net turn around on cash flow between 2014 and 2015 is $845 million. So, despite the fact governments are attempting to squeeze Google and the moral outrage from tax equality advocates, Google is starting to play fairer - if that's the right expression - albeit at a negotiated snail's pace.
Summing up - there's now a good line of sight into how well Google performs as an advertising business and it should now be possible to make sensible comparisons with the likes of Facebook. Given that Facebook is quite happy to provide extensive detail on advertising performance, I wonder how long it will be before Google has to start giving up things like mobile numbers.
At some point, Google will have to start giving up additional detail about Other Bets. The losses are just too large to warrant a cover blanket. Google's ongoing tax fights in Europe are not going away any time soon but if the company has got it right, then this latest result suggests to me that Google is very hopeful of mitigating the potential damage, even if that means large settlements in places like Italy and France. Not that it will be fretting about any of these topics too much. Despite tremendous currency headwinds, Google still ended up with more than $73 billion in cash and marketable securities. That's up $8.6 billion from the previous year.
Image credits: Alphabet structure via The Guardian - source SEC, Tax calculations, the author