Late yesterday afternoon Google reported its Q3 2013 earnings. The numbers were appropriately Google-esque in scale, and Google handily beat consensus analyst estimates, enough so that in pre-market trading this morning the company's stock price has pushed up to $974.50, up $85.71 from its normal hours market close of $888.79. This huge kick strikes us as irrational exuberance in one sense, because the company clearly demonstrated that its key revenue stream - the cost of ads (what it collects per ad) - continues to drop and has done so regularly for almost two years.

But the big but that perhaps justifies a good deal of exuberance is that even in the face of these declining ad costs Google continues to move forward with plans for its future that feel to us "satisfyingly right" for where the company needs to go over the next five years in order to maintain its leadership position in its core advertising businesses. This is a key issue because it is the success of its ongoing business here that will both fund and drive the entirely new things Google is pushing out the door on various mobile fronts and its experimental efforts - by which we mean driverless cars and Calico.

Google CEO Larry Page - who Page noted will be taking part in fewer earnings calls in the future as part of an effort to "ruthlessly prioritize" his time, but we all know it's about the subdued voice - noted a hugely key thing during the Q&A portion of the call. He said that making deep and consequential R&D investments was actually quite hard to do - he noted that the speculative investments in driverless cars and Calico are large but "by Google's scale they are not large at all."

He suggested that investors should be demanding much more and much more aggressive R&D investment from him. That is a vital statement that gives us a good feeling about Google's ability to move ahead with all sorts of possibilities - whether they be new business possibilities (mobile-based advertising), future business possibilities (driverless cars) or investments that simply help people to live better lives (Google Fiber and Calico). Yes, Google Fiber is viewed more as an altruistic endeavor at this point in time, with Page claiming that super-fast broadband will improve peoples' lives. The inexpensive Chromecast is part of its TV and video-focused efforts.


Image via Shutterstock

It's true but of course long term this plays into Google's plans for mobile and online-based advertising. Does it also spell out how Google will take revenue from the cable and TV players? Well, what do you think? By the way, 40 percent of Youtube traffic, according to Page, now comes from mobile devices - up from 6 percent just two years ago. We still have no sense of how Google will truly monetize this but clearly it will play into its video-streaming efforts.

Page also spoke to the need in today's world to address the needs of users who are now fully engaged in using multiple screens. Interestingly he did mention the word "watch" as part of his description here of multiple screens. We wonder what that means (not really).

The Q3 2013 Results

The numbers provided here are for Google's fiscal Q3 2013, which ended Sept. 30, 2013. The numbers are certainly heady, especially given the declining cost of ads.

Consolidated revenues reached $14.89 billion for the quarter, an increase of 12 percent compared to the third quarter of 2012. Traffic acquisition costs (TAC ) totaled $2.97 billion, or 24 percent of advertising revenues.

• GAAP operating income for Q3 2013 of $3.44 billion, or 23 percent of revenues. This compares to GAAP operating income of $2.74 billion, or 21 percent of revenues, in Q3 2012. Non-GAAP operating income in the third quarter of 2013 was $4.34 billion, or 29 percent of revenues. This compares to non-GAAP operating income of $3.76 billion, or 28 percent of revenues, in the third quarter of 2012.
• GAAP net income including net income from discontinued operations for Q3 2013 was $2.97 billion, compared to $2.18 billion in Q3 2012. Non-GAAP net income for Q3 2013 was $3.64 billion, compared to $2.96 billion for Q3 2012.
• GAAP EPS including impact from net income from discontinued operations in Q3 2013 was $8.75 on 339 million shares outstanding, compared to $6.53 in Q3 2012 on 333 million shares outstanding. Non-GAAP EPS for Q3 quarter of 2013 was $10.74, compared to $8.87 in Q3 2012.

We'll skip the non-GAAP numbers. All of the financials are fully detailed in various documents on Google's Investor pages, and we'll leave it to those documents for details beyond the above. The key revenue segments are noted immediately below.

• Google Sites Revenues – Google-owned sites generated segment revenues of $9.39 billion, or 68 percent of total Google segment revenues, in Q3 2013. This represents a 22 percent increase over Q3 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 percent of total Google segment revenues in Q3 2013, compared to $3.13 billion of Google network segment revenues in Q3 2012.
• Other Google Revenues – Other revenues from the Google segment were $1.23 billion, 9 percent of total Google segment revenues for Q3 2013. This represents an 85 percent increase over Q3 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, which represents 56 percent of total Google segment revenues in Q3 2013, compared to 55 percent for Q3 2013 and 53 percent in the third quarter of 2012.
• Google segment revenues from the United Kingdom totaled $1.39 billion, 10 percent of total Google segment revenues for Q3 2013, compared to 11 percent in Q3 2012.

The key advertising revenue numbers are provided below. Pay attention to the Cost per Click number.

• Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of its Network members, increased approximately 26 percent over Q3 2012 and increased approximately 8 percent 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 its Network members, decreased approximately 8 percent over Q3 2012 and decreased approximately 4 percent over Q2 2013.
• TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.97 billion in Q3 2013, compared to $2.77 billion in Q3 2012. TAC as a percentage of advertising revenues was 24 percent in Q3 2013, compared to 26 percent in Q3 2012.
• The majority of TAC is related to amounts ultimately paid to Network members, which totaled $2.22 billion in Q3 2013. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to Google's website, which totaled $755 million in Q3 2013.

Finally, we note that Motorola Mobile Segment Revenues were $1.18 billion, or 8 percent of consolidated revenues in Q3 2013, compared to $1.78 billion, or 13 percent of consolidated revenues in Q3 2012. There is still not much to say about how Motorola Mobility will work for Google long term. We did not hear anything on the call concerning the success of the Moto X. The division bears watching but this time around it's simply more of the same seemingly stagnant results.

Cash on hand as of Sept. 30, 2013, cash, cash equivalents, and marketable securities were $56.52 billion. On a worldwide basis, Google now employs 46,421 full-time employees (42,162 in Google and 4,259 in Motorola Mobile) compared to 44,777 full-time employees (40,178 in Google and 4,599 Motorola Mobile) as of June 30, 2013.

Finally, the real reason - as always - for the stock skyrocketing is that it beat consensus analyst estimates by a whopping margin. The results exceeded the expectations of analysts, who had predicted revenue of $14.82 billion (compared to the $14.89 billion Google reported) and earnings, excluding the cost of stock options, of $10.35 a share (compared to the $10.74 Google reported). These are non-trivial increases over the analyst estimates.

Irrational exuberance or justifiable exuberance? We'll call it a little bit of both for Q3 2013.