Do you feel lucky, Google Inc. (NASDAQ:GOOG)(NASDAQ:GOOGL) investors? Because your favorite search giant reports fourth-quarter 2014 results this Thursday after the bell. And with shares down slightly over the past year, it's time to think about what to expect.
Analysts, on average, will be looking for Google's revenue to grow 9.6% year over year to $18.47 billion, which should translate to an 18.5% increase in earnings per share to $7.12.
But there's a lot more to this $370 billion business than just revenue and earnings. In fact, stacked up against Wall Street's lofty expectations, Google has technically fallen short with each of its past four earnings reports. So what else should investors be watching this Thursday?
Here are three questions I'll have at the ready.
1. How's the "Other" category coming along?
More than anything, Google's third-quarter results were indicative of an ad-driven search giant in transition to more diversified revenue streams. While advertising generated a whopping 88.9% of total sales at $14.68 billion, that also represented the first time Google's ad revenue share had fallen below 89%.
For that, investors can thank its fast-growing "Other" segment, revenue from which jumped 50% year over year to $1.84 billion and made up the remaining 11.1% of Google's total. Most notable among the many up-and-coming businesses Google folds into its "Other" envelope is Google Play, which has enjoyed stellar growth over the past year by riding a wave of in-app purchases originating within the "freemium" style mobile games it serves. Google CFO Patrick Pichette also later vaguely cited a complementary increase in licensing revenue last quarter as helping drive this segment higher.
In any case, whether Google chooses to break down its "Other" segment in detail is irrelevant. As long as Google's non-ad businesses continue to thrive, they should translate to outsized growth in the "Other" category and, in turn, reduced reliance on its more mature cash cow. That's great news for investors who are hungry for sustained growth at Big G.
2. How "significant" are capital expenditures and operating expenses?
To Google's credit, it might have actually met Wall Street's earnings expectations last quarter had it not increased operating expenses by over 33% to $6.1 billion. Again, however, this is due to Google's ambitious research and development efforts to foster innovation and invest in longer-term growth -- something that's crucial to maintain an edge in the high-tech world in which Google lives.
Google also increased capital expenditures by 5.6% to $2.42 billion last quarter, mostly aimed at building data centers, and purchasing production equipment and real estate. Keeping in mind that Google's core sites revenue also jumped 20% last quarter to comprise 68% of total sales, Google needs to continue investing in infrastructure and equipment to support that growth at scale.
Sure enough, Google succinctly stated in last quarter's earnings press release: "We expect to continue to make significant capital expenditures."
The question for investors is just how "significant" these capital expenditures and operating expenses will be. If it's enough to negatively affect Google's bottom line -- and however inconsequential this is for long-term investors -- it could dictate how the markets react to Google stock over the near term.
3. Are cost-per-click declines staying in check?
Finally, we can't ignore that Google's advertising business still generates the bulk of its revenue. In addition to paid clicks, helpful in understanding how effectively Google generates that revenue is the average cost-per-click metric, or CPC.
While paid clicks jumped 17% year over year last quarter, average CPCs decreased by 2% over the same period and remained constant on a sequential basis. That might sound bad on the surface, but it was technically much better than expected and represented the slowest decline for the metric since it began falling in late 2011.
To explain the relative strength in Q3, Pichette pointed to "changes this quarter that improved our mobile pricing while impacting low quality clicks." He was also careful, however, to remind investors, "Clicks and CPCs always fluctuate from quarter to quarter."
For example, he explained that Google might test different changes in its mobile sector to determine how to most effectively monetize its ads. But if the changes create a large number of low-quality clicks, that's not a particularly good way to keep both advertisers and users happy. As a result, Google might need to pull back on those changes, which, one way or the other, can cause both CPCs and paid clicks to fluctuate. If those fluctuations happen to be in Google's favor, so much the better.
Steve Symington has no position in any stocks mentioned, and he still kicks himself for not buying Google in 2004. The Motley Fool recommends and owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.