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Google Shows Core Strength, but Mobile Questions Remain


Google's Motorola acquisition made sense from a strategic point of view, but there's no denying it hurts the overall numbers.

Last quarter, Internet search and advertising titan Google (NASDAQ:GOOG) took a big hit as its Motorola unit significantly dragged down revenue growth. (See: Google and Motorola: Destroying Larry's Fuzzy Math.)

The fourth quarter of 2012, however, was another story altogether as Google saw a major acceleration in its core business, offsetting the ongoing decline in demand for Motorola devices. Core Google revenues rose an impressive 22% year-over-year, an acceleration from the 19% increase seen in the third quarter.

Additionally, cost-per-click (CPC) decreased by just 6% -- a big improvement from last quarter's 15% drop.

In the end, Motorola dragged down Google's results enough to drive a top-line miss, but the company's earnings of $10.65 per share came in above consensus.

So let's talk about Google's mobile business.

Google's Motorola mobile device unit saw a stunning 40% drop in revenues, even though the smartphone market is booming. In the third quarter of 2012, global smartphone unit sales rose by 47% according to Gartner. (Q4 numbers aren't yet available.)

The problem is simple: The Apple (NASDAQ:AAPL) iPhone and Samsung (PINK:SSNLF) Galaxy juggernauts are gaining market share at at the expense of Motorola and other competitors like HTC (TPE:2498).

Additionally, the smartphone market will get more crowded with the release of Research In Motion's (NASDAQ:RIMM) BlackBerry 10 devices on January 30, which to virtually everyone's surprise, have become hotly anticipated, resulting in a near-tripling in RIMM shares since September.

For now, people seem willing to forgive Google for the Motorola drag, but there are some things worth nothing.

During the Q3 2012 conference call, the company said its mobile business was moving at an $8 billion annual run rate. Google did not update that figure on yesterday's call. One would think it would be strong, particularly since Facebook's (NASDAQ:FB) mobile ad business has taken off, so it was disappointing that investors didn't get a revised number.

The likely explanation is that Google does not want to set a precedent for disclosing this piece of information every quarter as it would emphasize volatile quarter-to-quarter movements over the long-term big picture.

One other point of contention is that CEO Larry Page was unclear about the rate of improvement in mobile CPCs, which are weaker than those on desktop.

So looking forward, from a broad perspective, Google's mobile business is a bit of a question mark. In all likelihood, it's going to dominate mobile search until the end of time, and with that comes plenty of dollars.

But on the negative side, the Motorola device unit is a big drag from a financial standpoint. The Motorola acquisition made sense from a strategic point of view because it bolstered Google's patent portfolio, but we can't deny that it hurts the overall numbers.

For now, Google's core business is doing quite well, but its mobile business is worthy of a little skepticism.

Twitter: @MichaelComeau

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