Goog 1 q11_earnings_review


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Review of Google's 1Q11. Complete earnings model and financial projections included. BBolan1@twitter

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Goog 1 q11_earnings_review

  1. 1. BRIAN BOLAN RESEARCHEquity Research Google Inc. (NASDAQ:GOOG)Company Update Current Rating: OUTPERFORMApril 18, 2011 Earnings UpdateInternet Analyst: Brian Bolan 773 413 0285; Earning Review for 1Q11 Google report earnings for 1Q11 of $8.08, slightly below my estimate of $8.14 and Wall Street consensus of $8.13. This is the first time Google came in under my aggressive EPS expectations since 2Q10. Revenue of $6.535 was just slightly under my estimate of $6.594 for a difference of less than 1%. We knew operating expenses were going to grow and we modeled that in, but were surprised by the actual amounts, with R&D coming in 4% higher than our elevated expectations and Sales and Marketing coming in 5% over my estimate. Add in weaker interest & other income and the bottom line caught only marginal help from a lower than expected tax rate. I am maintaining the Outperform rating but lowering my price target to $650 price target, based on a 19.4x multiple of our 2011 earnings estimate. The contraction on the multiple is due to the overall tone of the call which could only be described as non-googlesque or maybe even “sheepish”. Mobile Mobile still stands out as the area the company is seeing growth that is so solid that even the “no guidance” stance takes a back seat to the numbers. Data points of importance are: o 350,000 daily net additions, up from 300,000. o 3B apps in the app market is an increase of 50% from previous quarter o Mobile Traffic is up 500% o AdMob served 150M mobile requests per month PLEASE SEE THE APPENDIX TO THIS REPORT FOR IMPORTANT DISCLOSURES, REG AC ANALYST CERTIFICATION AND DISCLAIMERS Brian Bolan
  2. 2. BRIAN BOLAN RESEARCH PAGE 2DisplayDisplay was highlighted on the call with YouTube and rich media ads being pointed to as the coming source ofgrowth. Video inside of display ads, especially in the entertainment industry is not something we haven’t seenbefore, but it was rolled out in the UK.Management also mentioned they believed that the addressable market for display to be in the $600B to $700Brange as internet begins to truly compete with broadcast and cable television. With the capabilities of bettertargeting, its easy to see where CPM’s will increase for display, but the likelihood that I see is more of someincrease of CPM’s on display and a lowering at the same time of traditional rates. So not a replacement until acost per action model is more widely adapted which is unlikely in the near future.Looking aheadThis call, more than I can remember in the recent past had a lot more information on display. The idea thatYouTube is being compared vs TV bodes well for the company as the CPM rates for TV vs Display ads is verysignificant. We believe that the revenue from UK will begin to outpace the revenue in US as more marketingspend will offset gains that Google is likely to be seeing in the small business segement / local.With increased awareness towards social, the company more or less confirmed what to me was a given thatChrome and any other Google product will be used to access social data points. That means the browser / phone /google product will be able to report back important data on social networks that may not be as open to Google asthey would other search engines that have made equity investments in them.MarginsOperating margins took a significant blow in the quarter as the higher operating expenses were not offset enoughby increased revenue. The company believes that the investment in the near term will pay off in the future, but Iam lowering my operating margin expectations for the remainder of the year. The contraction in margins is themain reason for the contraction in the price target multiple. Operating Margin 50.0% 48.9% 45.8% 45.3% 46.3% 46.1% 45.0% 43.5% 43.9% 41.5% 42.3% 41.5% 41.8% 41.5% 40.0% 40.3% 38.6% 39.0% 37.0% 35.0% 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11EBrian Bolan
  3. 3. BRIAN BOLAN RESEARCH PAGE 3Head CountThe full-time employee headcount has significantly increased over the last 2 years, growing from 13,786 at June30, 2007 to 19,604 at June 30, 2008, including approximately 1,500 new employees as a result of the acquisitionof DoubleClick. Total headcount increased by approximately 1,900 and stood at approximately 26,300 at the endof the quarter. Net Revenue and Operating Income 8000 7000 6000 5000 4000 3000 2000 1000 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11HotPot is this the social answer for Google?HotPot is likely to be at least part of the Google solution for Social, with more features to be added at a later date.With little to no fan fare, HotPot rolled out in 5 cities throughout the country in 1Q01, with the Northeastnoticeably being left out. Some would say a slow a methodical launch allows the company to learn from earlymistakes, but from my vantage point there isn’t a lot “new” here, and that in itself could be the mistake.I will note that check-ins on Google places is an excellent, albeit already thought of, first step. Google user baseis certainly bigger than that of Foursquare and other geo-tagging companies, and being built into all Androidphones gives it a lasting and solid advantage.Brian Bolan
  4. 4. BRIAN BOLAN RESEARCH PAGE 4 Cash and Marketable Securities 40,000,000 35,000,000 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000,000 0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11Recommendation and ValuationIn maintaining our Outperform rating on Google I am also lowering my one-year price target to $650, down from$700. 2011 is likely to be a very important year for Google, as the company streamlines top management in orderto move faster when opportunities present themselves. We have increased our revenue and expense estimates andthe end result is lower expected EPS. This is the second consecutive quarter that these increases are seen, theexception is that this time comes on the heels of a bottom line miss, a rare event for Google.The popularity of Facebook aside, I am beginning to see a real potential threat in Twitter. Real time search andthird party location integrations make the business model one of low cost, but still in its nascent stages. There isstill a ways to go before Twitter is on the scale of Google, but its clear that people are sharing information and itsimportance is growing.Brian Bolan
  5. 5. BRIAN BOLAN RESEARCH PAGE 5Investment RisksIf the company experiences any or all of the following risk factors, as well as others, the company’s stock pricemay be affected.  Advertisers reduce internet budgets. Advertising is the source of 99% of Google’s revenue. Should advertisers lose faith in the internet as a medium for advertisements Google would suffer a significant revenue slowdown.  A better advertising platform is developed for internet advertising. Search has been the dominant application on the internet for the last ten years. Should another application become more acceptable than search, advertisers could move budgets from search to that platform.  Competition is intense and moves quickly. Google faces intense competition from Yahoo! and Microsoft among others. Should a competitor develop a more efficient and relevant search engine, Google would be adversely affected.  Future growth is predicated on success of mobile. Many of our assumptions of growth are based on the future success of all things mobile. Should Google’s Android open source operating system not be adopted by developers and carriers, its effectiveness would be adversely impacted.  Loss of key management. A loss of the CEO / co-founders would be viewed as a significant loss to the company. Other key management members moving to competitors would have an adverse impact.  Sustained weakness in the stock market. Portfolio liquidations and margin calls may force investors to sell positions in stocks, being a higher priced stock may make Google a likely candidate to be a source of funds.Brian Bolan
  6. 6. BRIAN BOLAN RESEARCH PAGE 6 1Q11 Income Statement AnalysisExhibit 6Brian Bolan
  8. 8. BRIAN BOLAN RESEARCH PAGE 8 ANALYST CERTIFICATIONI hereby certify that the views expressed in the foregoing research report accurately reflect mypersonal any of the subject companies mentioned in this report. I further certify that no part ofmy compensation was, is, or will be directly, or indirectly, related to the specificrecommendations or views contained in this research report.Financial Interests: Neither I, Brian Bolan, nor a member of my household owns securitiesin any of the subject companies mentioned in this research report. Neither I, nor a member ofmy household is an officer, director, or advisory board member of the issuer or has anothersignificant affiliation with the subject company. I do not know or have reason to know at thetime of this publication of any other material conflict of interest.By: Brian Bolan BRIAN BOLAN RESEARCH STOCK RATING KEY:Outperform: (BUY) In the analysts opinion, the stock will outperform the sector by 5%over the next 12 months.Perform: (HOLD) In the analysts opinion, the stock or sector will be in line with the sectorover the next 12 months.Underperform: (SELL) In the analysts opinion, the stock or sector will underperform thesector by 5% over the next 12 months. DISCLAIMER The opinions, forecasts, and recommendations contained in this report are those of the analystpreparing the report and are based upon the information available to them as of the date of thereport. The analysts are basing their opinions upon information they have received fromsources they believe to be accurate and reliable and the completeness and/or accuracy isneither implied nor guaranteed. The opinions and recommendations are subject to changewithout notice.BRIAN BOLAN Research has no obligation to continue to provide this institutionalresearch product and no such obligation is implied or guaranteed. The report is provided tothe Institutional clients of BRIAN BOLAN Research for informational purposes only and isnot an offer or a solicitation for the purchase or sale of any financial instrument. The firm doesnot make a market in the security of the subject company(ies) or affiliated securities. The firmor its employees may buy or sell the subject company’s(ies’) securities or derivatives that is/arethe subject(s) of this report. And the firm from time to time may buy or sell the subjectBrian Bolan
  9. 9. BRIAN BOLAN RESEARCH PAGE 9company’s fixed income securities from customers on a principal basis. Past performance isnot an indication of future results. Calculations of price targets are based on a combination ofone or more methodologies generally accepted among financial analysts, including but notlimited to, analysis of multiples and/or discounted cash flows (whether whole or in part), orany other method which may be applied.Although the statements of fact in this report have been obtained from and are based uponoutside sources that the firm believes to be reliable, the firm does not guarantee the accuracy orcompleteness of material contained in this report. Any such estimates or forecasts contained inthis report may not be met. Past performance is not an indication of future results. Calculationsof price targets are based on a combination of one or more methodologies generally acceptedamong financial analysts, including but not limited to, analysis of multiples and/or discountedcash flows (whether whole or in part), or any other method which may be applied. Rating,target price and price history information on the company in this report is available uponrequest.Company Ratings History Prior Current TargetCompany Name Ticker Date Action Rating Rating Price PriceGoogle GOOG Initiation of Coverage None Outperform $591.71 $700.00Brian Bolan