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Motorola nerves cloud strong Google outlook

Search giant expected to report impressive Q4 results today, with mobile a highlight, but Motorola purchase will hit margins


Published: 18 January, 2012

READ MORE: Financial | Google | Applications (Search) | Handset | Android

Google is expected to report strong results on Thursday, boosted by mobile and search activities, but there will also be warning signs of risks it is taking as it expands more aggressively into the wireless market. In particular, there are fears about the impact its Motorola Mobility acquisition will have on margins, and about the higher spending that will be necessary to support further expansion.

The Wall Street consensus is that the web giant will post a 20% year-on-year growth in earnings to about $10.50, and an even bigger jump in revenue, to $8.37bn, for its fourth quarter. In the year-ago quarter, Google reported earnings of $8.75 per share on revenue of $6.37bn.

The core search business has been performing strongly, withstanding recessionary pressures, especially in Europe - though this may change as the Eurozone crisis deepens. Display advertising, mobile services and Android-driven revenues will also be highlights for the top line.

The direction of the company has changed somewhat since co-founder Larry Page took over the CEO role from Eric Schmidt, now executive chairman. Page's administration has pared down the range of activities and products at Google and been more ruthless with under-performing offerings and with 'self-indulgent' R&D projects. However, he is also trying to accelerate the pace of innovation and expansion, which could involve higher spending on development and marketing.

And there is nervousness about the effect the Motorola purchase will have on the balance of business, although the transaction is still to be approved (and Google may still take the rational course of offloading the hardware activities once it has the patents it needs). Having its own handset unit will present a fierce dilemma for Google. It could boost Motorola's market share and margin with its marketing power, but if it does its new subsidiary any real favors, such as preferential access to Android technologies, it will splinter the wider Android ecosystem and alienate other partners.

But if it does not, it will be stuck with Motorola's current trajectories in terms of profits, share and competitive response, all of which seemed underwhelming at its most recent financial report. On January 6, the handset maker preannounced lower than expected smartphone sales for the fourth quarter, partly because it had overpriced its new RAZR 3 - showing the difficult balance between preserving margins and gaining share, one Motorola has seldom got quite right. Google' s operating margins will fall from 46% in 2012 to just over 30% once Motorola is digested, say analysts.

Even so, some believe the search major does need greater control over Android's hardware destiny. Goldman Sachs analysts wrote in a recent client note: "While Google's initiatives in mobile and display continue to grow rapidly and the core search business remains strong, in our view the pending MMI acquisition remains an overhang on the shares as the company's business model will evolve. We see Google as leveraging MMI not only to strengthen its patent position in mobile, but also we believe it needs a way to build a strong presence in the tablet market given Windows 8 tablets will likely hit the market in 4Q2012 and as Apple is likely to lower the price of iPad 2 upon the introduction of iPad 3 late in the March quarter."

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