Despite the Moto X launch, Motorola still costs Google money

October 18, 2013

moto-x-aa-black-front

Google’s stock jumped almost eight percent following the release of earnings figures for Q3 2013. Larry Page’s company beat Wall Street’s forecast by a small margin, a welcome change following two quarters of missed targets.

While Google’s core ad business is doing remarkably well, its subsidiary Motorola is ailing, more than a year after it joined the fold, and in spite of the launch of the much hyped Moto X.

Motorola brought Google revenue of $1.18 billion, a marked drop from the $1.78 billion it raked it in Q3 2012. Moreover, the phone maker continued to burn money, with operating losses of $248 million, compared to $192 million in the same period last year.

The Moto X, which some expected to bring Motorola’s big comeback, launched on August 23, but the sales it generated have been apparently insufficient to offset increasing expenditures. Still, Google says it’s optimistic about the device, which critics and customers received warmly, and that it will continue to support Motorola’s growth with marketing and distribution funds.

One of the most touted features of the Moto X is the ability to customize the device’s appearance through the Moto Maker program. However, only AT&T users can customize their Moto X for now, with other carriers rumored to join the program in November. The Moto X is assembled in Ft. Worth, Texas to the tune of 100,000 units per month, a figure that some have found disappointing back in September.

Besides the Moto X, rumors suggest Motorola will launch a low-cost device dubbed DVX by the end of the year.

Show Press Release

Google Inc. Announces Third Quarter 2013 Results

MOUNTAIN VIEW, Calif. – October 17, 2013 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended September 30, 2013.

“Google had another strong quarter with $14.9 billion in revenue and great product progress,” said Larry Page, CEO of Google.  “We are closing in on our goal of a beautiful, simple, and intuitive experience regardless of your device.”

Q3 Financial Summary

Google Inc. reported consolidated revenues of $14.89 billion for the quarter ended September 30, 2013, an increase of 12% compared to the third quarter of 2012. Google Inc. reports advertising revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the third quarter of 2013, TAC totaled $2.97 billion, or 24% 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.

  • GAAP operating income in the third quarter of 2013 was $3.44 billion, or 23% of revenues. This compares to GAAP operating income of $2.74 billion, or 21% of revenues, in the third quarter of 2012. Non-GAAP operating income in the third quarter of 2013 was $4.34 billion, or 29% of revenues. This compares to non-GAAP operating income of $3.76 billion, or 28% of revenues, in the third quarter of 2012.
  • GAAP net income including net income from discontinued operations in the third quarter of 2013 was $2.97 billion, compared to $2.18 billion in the third quarter of 2012. Non-GAAP net income in the third quarter of 2013 was $3.64 billion, compared to $2.96 billion in the third quarter of 2012.
  • GAAP EPS including impact from net income from discontinued operations in the third quarter of 2013 was $8.75 on 339 million diluted shares outstanding, compared to $6.53 in the third quarter of 2012 on 333 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2013 was $10.74, compared to $8.87 in the third quarter of 2012.
  • Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense, as well as restructuring and related charges. Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits, as well as net income or loss from discontinued operations. In the third quarter of 2013, the expense related to SBC and the related tax benefits were $886 million and $207 million compared to $706 million and $155 million in the third quarter of 2012. In the third quarter of 2013, restructuring and related charges and the related tax benefits were $12 million and $3 million, compared to $313 million and $67 million in the third quarter of 2012. In addition, net income from discontinued operations in the third quarter of 2013 was $15 million, compared to net income from discontinued operations of $18 million in the third quarter of 2012.

Q3 Financial Highlights

Revenues and other information – On a consolidated basis, Google Inc. revenues for the quarter ended September 30, 2013 were $14.89 billion, an increase of 12% compared to the third quarter of 2012.

Google Segment Revenues – Google segment revenues were $13.77 billion, or 92% of consolidated revenues, in the third quarter of 2013, representing a 19% increase over third quarter 2012 Google segment revenues of $11.53 billion.

  • Google Sites Revenues – Google-owned sites generated segment revenues of $9.39 billion, or 68% of total Google segment revenues, in the third quarter of 2013. This represents a 22% increase over third quarter 2012 Google sites segment revenues of $7.73 billion.
  • Google Network Revenues – Google’s partner sites generated segment revenues of $3.15 billion, or 23% of total Google segment revenues, in the third quarter of 2013, compared to $3.13 billion of Google network segment revenues in the third quarter of 2012.
  • Other Google Revenues – Other revenues from the Google segment were $1.23 billion, or 9% of total Google segment revenues, in the third quarter of 2013. This represents an 85% increase over third quarter 2012 other Google segment revenues of $666 million.

Google Segment International Revenues – Google segment revenues from outside of the United States totaled $7.67 billion, representing 56% of total Google segment revenues in the third quarter of 2013, compared to 55% in the second quarter of 2013 and 53% in the third quarter of 2012.

  • Google segment revenues from the United Kingdom totaled $1.39 billion, representing 10% of total Google segment revenues in the third quarter of 2013, compared to 11% in the third quarter of 2012.

Foreign Exchange Impact on Google Segment Revenues – Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the second quarter of 2013 through the third quarter of 2013, our Google segment revenues in the third quarter of 2013 would have been $41 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2012 through the third quarter of 2013, our Google segment revenues in the third quarter of 2013 would have been $135 million higher.

  • In the third quarter of 2013, we recognized a benefit of $22 million to Google segment revenues through our foreign exchange risk management program, compared to $62 million in the third quarter of 2012.

Reconciliations of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues are included at the end of this release.

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 26% over the third quarter of 2012 and increased approximately 8% over the second quarter of 2013.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 8% over the third quarter of 2012 and decreased approximately 4% over the second quarter of 2013.

TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.97 billion in the third quarter of 2013, compared to $2.77 billion in the third quarter of 2012. TAC as a percentage of advertising revenues was 24% in the third quarter of 2013, compared to 26% in the third quarter of 2012.

The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.22 billion in the third quarter of 2013. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $755 million in the third quarter of 2013.

Motorola Mobile Segment Revenues – Motorola Mobile segment revenues were $1.18 billion, or 8% of consolidated revenues in the third quarter of 2013, compared to $1.78 billion, or 13% of consolidated revenues in the third quarter of 2012.

Elimination and Other – Beginning in Q3 2013, Google and Motorola segment revenues are impacted by intersegment transactions that are eliminated in consolidation. Additionally, segment revenues associated with certain products were recognized this quarter in the segment results, but deferred to future periods in our consolidated financial statements. Such intersegment revenues and deferred revenues were $63 million in the third quarter of 2013.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of manufacturing and inventory-related costs, data center operational expenses, amortization of intangible assets, and content acquisition costs, increased to $3.44 billion, or 23% of revenues, in the third quarter of 2013, compared to $3.19 billion, or 24% of revenues, in the third quarter of 2012.

Operating Expenses – Operating expenses, other than cost of revenues, were $5.04 billion in the third quarter of 2013, or 34% of revenues, compared to $4.61 billion in the third quarter of 2012, or 35% of revenues.

Amortization Expenses – Amortization expenses of acquisition-related intangible assets were $281 million for the third quarter of 2013, compared to $287 million in the third quarter of 2012. Of the $281 million, $153 million was as a result of the acquisition of Motorola, of which $116 million is included in Google segment results and $37 million is included in Motorola Mobile segment results.

Stock-Based Compensation (SBC) – In the third quarter of 2013, the total charge related to SBC was $886 million, compared to $750 million in the third quarter of 2012. We currently estimate SBC charges for grants to employees prior to September 30, 2013 to be approximately $3.29 billion for 2013. This estimate does not include expenses to be recognized related to employee stock awards that are granted after September 30, 2013 or non-employee stock awards that have been or may be granted.

Operating Income – On a consolidated basis, GAAP operating income in the third quarter of 2013 was $3.44 billion, or 23% of revenues. This compares to GAAP operating income of $2.74 billion, or 21% of revenues, in the third quarter of 2012. Non-GAAP operating income in the third quarter of 2013 was $4.34 billion, or 29% of revenues. This compares to non-GAAP operating income of $3.76 billion, or 28% of revenues, in the third quarter of 2012.

  • Google Segment Operating Income – Google segment operating income in the third quarter of 2013 was $4.64 billion, or 34% of Google segment revenues. This compares to segment operating income of $3.95 billion in the third quarter of 2012, or 34% of Google segment revenues.
  • Motorola Mobile Segment Operating Loss – Motorola Mobile segment operating loss in the third quarter of 2013 was $248 million, or -21% of Motorola Mobile segment revenues. This compares to segment operating loss of $192 million, or -11% of Motorola Mobile segment revenues in the third quarter of 2012.

Interest and Other Income, Net – Interest and other income, net, was $24 million in the third quarter of 2013, compared to $65 million in the third quarter of 2012.

Income Taxes – Our effective tax rate was 15% for the third quarter of 2013.

Net Income – Consolidated GAAP net income in the third quarter of 2013 was $2.97 billion, compared to $2.18 billion in the third quarter of 2012. Non-GAAP consolidated net income was $3.64 billion in the third quarter of 2013, compared to $2.96 billion in the third quarter of 2012. GAAP EPS in the third quarter of 2013 was $8.75 on 339 million diluted shares outstanding, compared to $6.53 in the third quarter of 2012 on 333 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2013 was $10.74, compared to $8.87 in the third quarter of 2012.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the third quarter of 2013 totaled $5.08 billion, compared to $4.0 billion in the third quarter of 2012. In the third quarter of 2013, capital expenditures were $2.29 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 third quarter of 2013, free cash flow was $2.79 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 September 30, 2013, cash, cash equivalents, and marketable securities were $56.52 billion.

Headcount – On a worldwide basis, we employed 46,421 full-time employees (42,162 in Google and 4,259 in Motorola Mobile) as of September 30, 2013, compared to 44,777 full-time employees (40,178 in Google and 4,599 Motorola Mobile) as of June 30, 2013.

 

Comments

  • Blowntoaster

    whohoo, first comment.
    Motorola should release the Moto X worldwide… it’ll sell, and it’ll sell well…

    • Luka Mlinar

      No it won’t. Why would i buy a 630$ phone that i need to talk English to when i can get a Nexus 5 for 350€.

      • Blowntoaster

        If it was better priced (read: cheaper) it would sell for sure. I’d take a Moto X over a Note 3 / Xperia Z1 etc if it was a bit cheaper…say around the $400 mark…
        But alas. my Note 3 purchase is imminent.

  • Luka Mlinar

    They spent half a billion to advertise a phone that’s not selling in a market where even if you had the best phone, you could only get a fraction of the market. By the time they get to Europe it will turn into what the US market is now. If Motorola’s idea is to be one step behind everyone else, then they are doing a good job.
    Also Asia is not closed. The fact that the Chinese phones are dominating well there should incurage everyone to push there. One thing most of those new Chinese manufacturers don’t have is a brand. I think it’s about time they get of their ass and start collecting on it.

  • Sandro

    Make moto maker available to all carriers

    • Blowntoaster

      and other countries…

      • Sandro

        Yes, it is being widely advertised in Brazil and in a competitive price. Moto Maker would be a great addition in here.

  • AndroidBrian

    Maybe Moto should actually release a good phone…. Just an idea.

    • Luka Mlinar

      Removing the voice command feature -> X8 processing unit would be admitting defeat. This is the hole Dennis is in.

  • trwb

    “which critics and customers received warmly”… because they received those advertising dollas from Google

  • Groud Frank

    This phone was way too expensive for the specs it offered. I am not American, nor do I live in America, but I doubt the majority of Americans cared that this thing was made in the USA; enough for it to positively influence their decision to buy. All the did was make it expensive for everyone. Motorola needs to stick to a narrative: good prices(Nexus Cheap) and good specs(Nexus Quality). Motorola can be the Xiaomi of the West. They got some things right though. I love the always on feature and the hardware customization. It’s just not enough.

    • gommer strike

      They didn’t amp up the marketing. There was little to no marketing anywhere, where it should have been…sports events, stadiums, TV, internet ads plastered everywhere you looked…o heartstring-tugging ads, no one singing the national anthem with the phone proudly showing what it means to be an American…

      They could have totally played up the patriotism…they could have capitalized on American events, holidays, and just went all out on how the Moto X is the *only* phone completely and entirely made in USA(even though OK fine, it’s not totally true), but they just never did that.

      It was fail marketing on the level of HTC, and they’re paying the price.

  • Resh

    Last resort solution if Motorola continues its financial losses nonstop: Motorola Mobility would be absorbed entirely by Google and become Google’s phone/tablet manufacturing division.

  • Tochi Obudulu

    Let them make a Nexus

  • Downtoearth2

    That means the vast majority hate stock Android.

    • phoenixx5

      man… you just went full retard…

      • Muhammad Zohaib™

        No he’s right. I love HTC Sense and I find Touchwiz quite attractive as well. But stock Android is just too simple and it has been the same since ICS upgrade. I dont need super-user-implemented-settings-what-so-ever. All I ask for is a redesigned refreshing UI.

  • Timothy Anderson

    The Moto X is truly an awesome phone. There is no other phone that can do what it can do (besides the droid moto x clones). The launch, however, was poorly conceived. Only AT&T had moto maker. It was slow to be adopted across carriers. Slowly, each carrier got on board, many weeks later. Successful companies do not do it this way (Samsung and Apple). The launch is a huge deal with a great amount of fan fair. With the Motorola launch, it leaves potential customers on the fence, whether they want to wait to get the color they want, on the carrier they want, etc. By this time, the whole excitement has died down, new phones have arrived, etc. This was a disaster, not from a technical standpoint, but from a business standpoint.

    • gommer strike

      I checked out the Moto X at Best Buy and right beside it was the HTC One and the Samsung S4. People were looking at the phones and there were remarks made on how beautiful the HTC One looked.

      The Moto X just didn’t grab people’s attention. There was no sales rep there to extoll the virtues of the Moto X, and because customization just isn’t available here(no AT&T), and plus no external cases sold for the Moto X…it just didn’t stand out. As I used it…OK, feels like basically stock Android…but I wasn’t wow’ed by the experience. I tried the Active notifications thing, picking up the phone and flipping it over to see the breathing…neat sure, but not so awesome that I was ready to sell my HTC One and get the Moto X…

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  • onlyy

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    v