GOOG 4Q 2010 Earnings Bolan 1-21-11 Final

8/7/2019 GOOG 4Q 2010 Earnings Bolan 1-21-11 Final

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WILLIAMS CAPITAL RESEARCH

PLEASE SEE THE APPENDIX TO THIS REPORT ON PAGES 8-12 FOR IMPORTANT DISCLOSURES, REG AC ANALYSTCERTIFICATION AND DISCLAIMERS

B r i a n B o l a n B o l a n @ w i l l c a p . c o m T r a d i n g N Y 8 0 0 - 9 2 4 - 1 5 1 1 C T 8 0 0 - 6 8 8 - 6 3 4 9

Earning Review for 4Q10

Google announced earnings per share of $8.75 on revenues $6.37B, easily beating Wall Street consensus and ouraggressive estimates of $8.24 and $5.96B. The real news, however, was that Larry Page will become the CEO inApril as Eric Schmidt moves to the role of Executive Chairman. The purpose of the move was to allow thecompany to move faster and improve the overall organizational structure.

Sergy Brin will work more on personal passions and other new products that will be announced in the future.Eric Schmidt will take on more strategic external issues as opposed to the internal issues that have been themajority of his focus. Schmidt reiterated several times on the call that Larry is ready for this new role and that hehad been preparing for it for some time.

All three did a good job of smoothing over the change at the top. Clearly this was a quarter that saw a lot of potential deals come and go. It used to be thought that Google would have been the best buyout for anytechnology company as a tax free swap of stock would give entrepreneurs liquidity and all the resources thatGoogle brings to the table. Lately, start ups that have explored the option of cashing out have opted to look atthe possibility of going public versus consummating a deal with Google. Examples like Twitter, Groupon, Yelpto name a few were all rumored to have spoken with Google about a possible purchase. The change at the top

could streamline future discussions and allow the company to move more quickly and possibly more aggressivelyif other opportunities present themselves.

We are maintaining our Outperform rating and $700 price target, based on a 20.7x multiple of our new 2011earnings estimate of $33.73. Our increased revenue estimates are negated by higher expenses as margins contract.

GOOG Outperform Curr. Q. 1 yr ago

Price: $626.77 Mar-11 Mar-10 Mar-11 Jun-11 Sep-11 Dec-11

Price Target: $700.00 F1Q11E F1Q10 F1Q11E F2Q11E F3Q11E F4Q11E

52 Week High: $642.96 Rev prev: NA 21.59 25.65 NA 21.59 25.65 6.14 NA 6.14 6.25 6.44 $6.83

52 Week Low: $433.63 Rev 17.48 22.00 28.06 17.48 22.00 28.06 6.59 5.06 6.59 6.79 7.12 7.563

NTM P/E : 18.58 EPS NA 29.09 35.79 NA 29.09 35.79 8.29 NA 8.29 8.36 9.09 $10.05

Market Cap ($B): 189.35 EPS 23.21 29.60 33.73 23.21 29.60 33.73 8.10 6.76 8.10 8.09 8.52 $9.01

Ent Value ($B): 170.00 EV/S: 9.73x 7.73x 6.06x 9.73x 7.73x 6.06x

Shares Outstdg (B): 325M P/E 27.x 21.17x 18.58x 27.x 21.17x 18.58x

Avg Daily Volume (M): 1.8M

Cash/Share: 104.39

Key Data(Rev in$bns)

Fiscal Year Calendar Year Next 4 Quarters

CY09 CY10 CY11EFY09 FY10E FY11E

quity Research Google Inc. (GOOG)

ompany Update Current Rating: OUTPERFORM

anuary 21, 2011 Earnings Update

nternet Analyst: Brian Bolan 773-413- 0285; [email protected]

rading Desk: NY 800-924-1511 CT 800-688-6349
mailto:[email protected]:[email protected]


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WILLIAMS CAPITAL RESEARCH January 21, 2011


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Head Count

The 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 1,000 and stood at approximately 24,400 at the endof the year.

In an attempt to maintain or increase the morale of employees, everyone was given a 10% raise effective January1, 2011. To further increase the amount of cash that non executives get, bonus dollars are being shifted into thebase salary. This will increase salary expense by at least 12% from where it was the expected to be.

Display Business

Googles purchase of DoublClick is bearing more fruit as the company mentioned that there are now more than2M publishing partners. Those partners are seeing the number of ads placed against their content triple and areseeing commensurate financial gains.

Interestingly, management noted that while most of the industry thinks of display as a means of branding for anadvertiser, they noted that they are seeing search branding as well.

Income Statement

Over the coming quarters, we believe that Cost Per Click growth will see significant increases. This will make upfor some increases that management announced that will hit payroll and could make up for the increases weexpect to see in sales and marketing. We are raising our revenue estimates for the next year, but our increases inexpenses will eclipse all of the gains. The end result of higher revenue expectations and higher expenses justmeans that margins are contracting. We do not believe that Wall Street will punish Google as the revenue growthwill more than blind most market participants.

Exhibit 1

Source: Company Reports and Williams Capital Research


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Paid Clicks

Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of AdSensepartners, increased approximately 18% over the fourth quarter of 2009 and increased approximately 11% over thethird quarter of 2010.

Exhibit 2

Source: Company reports & Williams Capital Research

Our estimates for 2011 are subject to change as market participants budgets tend to fluctuate when troublingeconomic times appear to be around the corner. With potential for further economic troubles in Europe(specifically Greece) lingering, international ad spend may be adversely affected in the second half of the year.Google also maintains a strict policy of zero forward guidance, but this most recent quarter we heard thatexpenses will increase significantly.

Balance Sheet

At the current time, the balance sheet remains strong. At the end of 4Q10, Google had approximately $35B incash and equivalents and marketable securities on the balance sheet. We expect the yields on cash and securitiesto continue to be at or near records lows for 2011.

Exhibit 3



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Exhibit 4


Recommendation and Valuation

We are maintaining our Outperform rating on Google and a one-year price target of $700. 2011 is likely to be avery important year for Google, as the company streamlines top management in order to move faster whenopportunities present themselves. We have increased our revenue and expense estimates and the end result islower expected EPS. Our 2011 EPS estimate is reduced from $35.79 to $33.73. That said, we believe thepotential revenue increases will grab the headlines and distract those that believe that margin increase should bethen end goal of Googles efforts.

Our price target is derived using a multiple of 2011 earnings of $33.73 per share. Markets are currently seeingcontractions for most multiples and using some conservative views, we believe that 20.7x next year s earningswill prove to be a worthy multiple. We note that 20.7x our 2011 earnings estimate produces our $700 price targetfor the stock. We rate the stock OUTPERFORM.

Investment Risks

If the company experiences any or all of the following risk factors, as well as others, the companys stock pricemay be affected.

Advert isers reduce internet budgets. Advertising is the source of 99% of Googles revenue. Shouldadvertisers lose faith in the internet as a medium for advertisements Google would suffer a significantrevenue slowdown.

A better advertising platform is developed for internet advertising. Search has been the dominantapplication on the internet for the last ten years. Should another application become more acceptable thansearch, advertisers could move budgets from search to that platform.

Competition is intense and moves quickly. Google faces intense competition from Yahoo! and Microsoftamong others. Should a competitor develop a more efficient and relevant search engine, Google would beadversely 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 Googles Android open source operating system not beadopted by developers and carriers, its effectiveness would be adversely impacted.

Loss of key management. A loss of the CEO or co-founders would be viewed as a significant loss to thecompany.

Sustained weakness in the stock market. Portfolio liquidations and margin calls may force investors to sellpositions in stocks, being a higher priced stock may make Google a likely candidate to be a source of funds.


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Exhibit 6 4Q10 Income Statement Analysis

Source: Company reports and Williams Capital Research


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Exhibit 7 Income Statement

Source: Company reports and Williams Capital Research


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APPENDIX

ANALYST CERTIFICATION

I hereby certify that the views expressed in the foregoing research report accurately reflect mypersonal views about the subject companies and their securities mentioned in this report. I furthercertify that no part of my compensation was, is, or will be directly, or indirectly, related to thespecific recommendations or views contained in this research report.

Financial Interests : Neither I, Brian Bolan, nor a member of my household owns securities in any of the subject companies mentioned in this research report. Neither I, nor a member of my householdis an officer, director, or advisory board member of the subject company or has another significantaffiliation with the subject company. I do not know or have reason to know at the time of this

publication of any other material conflict of interest.

By: Brian Bolan

___________________________________________________________________________

IMPORTANT DISCLOSURE INFORMATION

Analyst Compensation: The author's compensation is based upon the value directly or indirectlyattributed to the research services by Williams Capital institutional brokerage clients. The author of

this report is compensated based on the performance of the firm, and has not received any

compensation in the past 12 months from any of the subject companies mentioned in this report.The performance of the firm is driven by its secondary trading revenues, investment banking revenues, and asset management revenues.

WILLIAMS CAPITAL RESEARCH STOCK RATING KEY:

Outperform: (BUY) In the analyst's opinion, the stock will outperform the sector by 5% over the next12 months.

Perform: (HOLD) In the analyst's opinion, the stock will perform in line with the sector over the next12 months.

Underperform: (SELL) In the analyst's opinion, the stock will underperform the sector by 5% over the next 12 months.


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Exhibit 8 Google, Inc. - One Year Price Chart

Source: BigCharts.com

Prices as of January 20, 2011

__________________________________________________________________________________________________

Company Ratings History

Company Name Ticker Date ActionPriorRating

CurrentRating Price

TargetPrice

Google GOOG 16-Dec-10 Initiation of Coverage None Outperform $591.71 $700.00

Valuation Methodology:

On an Enterprise Value (EV) to EBITDA metric, we note that Google had been relatively stable in thehigh-teens range throughout most of the year. The current multiple of 13.5 is well below the 17xaverage over of past two years. We expect it will move back towards the mean over the course of

the next 12 months. On a Price to Forward Earnings (P/FE) metric, we note that Google contractedfrom a high of 38x to a low of 15x in 2008. This represents a decline of about 60%, compared to arevenue deceleration of 42% (from 52% y/y in 4Q07 to 30% y/y in E4Q08). We believe that Googlewill continue to outperform the market by growing search market share, growing revenue andexpanding into new market opportunities.

Our price target is derived using a multiple of 2011 earnings of $33.73 per share. Markets arecurrently seeing contractions for most multiples and using some conservative views, we believe

that 20.75 x next years earnin gs will prove to be a worthy multiple. We note that 20.75x our 2011earnings estimate produces our $700 price target for the stock. We rate the stock OUTPERFORM.


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Risks:

If the company experiences any or all of the following risk factors, as well as others, the companysstock price may be affected.

Advertisers reduce internet budgets. Advertising is the source of 99% of Googles revenue. Shouldadvertisers lose faith in the internet as a medium for advertisements Google would suffer asignificant revenue slowdown.

A better advertising platform is developed for internet advertising. Search has been the dominantapplication on the internet for the last ten years. Should another application become moreacceptable than search, advertisers could move budgets from search to that platform.

Competition is intense and moves quickly. Google faces intense competition from Yahoo! andMicrosoft 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 basedon the future success of all things mobile. Should Googles Android open source operating systemnot be adopted by developers and carriers, its effectiveness would be adversely impacted.

Loss of key management. A loss of the CEO or co-founders would be viewed as a significant loss to the company.

Sustained weakness in the stock market. Portfolio liquidations and margin calls may forceinvestors to sell positions in stocks, being a higher priced stock may make Google a likely candidate

to be a source of funds.

ADDITIONAL DISCLOSURE INFORMATION:

The Williams Capital Group, L.P. or its Affiliates do and seek to do business with companiesmentioned in its research reports. As a result, investors should be aware that the firm may have aconflict of interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decision. Additional information isavailable upon request.

Investment Banking Clients is defined as companies in respect of which The Williams CapitalGroup, L.P. (the firm) or its affiliates have received or are entitled to receive compensation fo rinvestment banking services in connection with transactions that were publicly announced in thepast 12 months.


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Distribution of Equity Research Ratings as of: January 20, 2010

Outperform Perform Underperform

All Research Coverage: 71.4% 28.6% 0%Universe of IBC: 0% 0% 0%Internet: 40.0% 60.0% 0%Internet - IBC: 0% 0% 0%

Investment Banking Disclosures : Within the past 12 months, the research analyst authoring thisreport has not participated in a solicitation of any subject company mentioned within this report,with or at the request of investment bankers, for investment banking business. Within the past 12months, the firm and its affiliates have not managed or co-managed a public offering of thesecurities of any subject company mentioned within this report, nor has the firm received

compensation for investment banking products or services from those companies. The firm doesnot expect to receive or intend to seek compensation for investment banking services from thissubject company during the next three months.

Firm Compensation : Within the past 12 months, the firm and its affiliates have not receivedcompensation for any non-investment banking products or services for subject companiesmentioned in this report, and none of these subject companies have been a client of the firm during

the past 12 months.

Stock Ownership : The firm and its affiliates do not own 1% or more of any class of equity securitydiscussed in this report, and do not make a market in any such securities.

DISCLAIMER

The information and opinions contained in this report were prepared by the firm and have beenderived from sources believed to be reliable, but no representation or warranty, expressed orimplied, can be made as to their accuracy. All opinions expressed herein are subject to changewithout notice. This report is for information purposes only and should not be construed as an offer

to buy or sell any securities. The firm makes every effort to use valuation methodologies that itbelieves to be reasonable in the derivation of price targets, but we do not guarantee that suchmethodologies are accurate.


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To receive any additional information upon which this report is based, please contact the following individuals or write to:

Williams Capital Research, Research Department650 Fifth Ave. 11 th FloorNew York, NY [email protected]

Suling Lew, Head of Institutional Sales or Jack Murphy, Director of Research212-373-4243 203-659-6007
mailto:[email protected]:[email protected]:[email protected]

GOOG 4Q 2010 Earnings Bolan 1-21-11 Final

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