Google's Operating Margins Disappoint in 3Q

Due to an apparent mistake by its financial printer,  Google (GOOG) released its earnings report midday instead of later in the afternoon on Thursday. We will issue a more detailed note after the company conference call, but we wanted to publish our initial take.

Most interesting in our quick review was the dramatic increase in the "other costs of revenues" line item in the company's income statement. This expense increased 57% sequentially and represents nearly 47% of net advertising revenues, compared with 17% of ad revenues in 2011. We hope to get clarification from management on the earnings call. 

In our view, the company's accelerated investment in producing and licensing content for music and video on its Google Play and YouTube platforms quickly has become less than a rounding error. Generally, we have been relatively neutral on these investments, feeling that the economics were likely to pass to the content owners. Without question, management has not been particularly transparent with many of its initiatives. Although we understand the desire to protect competitive interests, this spike in expenses may lead to additional questions about prudent capital allocation.

With respect to other issues, revenue growth was modestly under our expectations and Motorola Mobility was also disappointing.

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