GOOG 1Q11 Earnings Review

8/7/2019 GOOG 1Q11 Earnings Review

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BRIAN BOLAN RESEARCH

PLEASE SEE THE APPENDIX TO THIS REPORT FOR IMPORTANT DISCLOSURES, REG AC ANALYST CERTIFICATION

AND DISCLAIMERS

B r i a n B o l a n B Bo l a n 1 @G m a i l . c o m

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 quartero Mobile Traffic is up 500%o AdMob served 150M mobile requests per month

Equity Research Google Inc. (NASDAQ:GOOG)

Company Update Current Rating: OUTPERFORM

pril 18, 2011 Earnings Update

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


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B r i a n B o l a n B Bo l a n 1 @Gm a i l . c o m

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Display

Display was highlighted on the call with YouTube and rich media ads being pointed to as the coming source of

growth. Video inside of display ads, especially in the entertainment industry is not something we havent seen

before, 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 $700B

range as internet begins to truly compete with broadcast and cable television. With the capabilities of better

targeting, its easy to see where CPMs will increase for display, but the likelihood that I see is more of some

increase of CPMs on display and a lowering at the same time of traditional rates. So not a replacement until a

cost per action model is more widely adapted which is unlikely in the near future.

Looking ahead

This call, more than I can remember in the recent past had a lot more information on display. The idea that

YouTube is being compared vs TV bodes well for the company as the CPM rates for TV vs Display ads is very

significant. We believe that the revenue from UK will begin to outpace the revenue in US as more marketing

spend 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 that

Chrome 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 as

they would other search engines that have made equity investments in them.

Margins

Operating margins took a significant blow in the quarter as the higher operating expenses were not offset enough

by increased revenue. The company believes that the investment in the near term will pay off in the future, but I

am lowering my operating margin expectations for the remainder of the year. The contraction in margins is the

main reason for the contraction in the price target multiple.

41.5%40.3%

43.5% 43.9%45.8%

42.3% 41.5%

48.9%

45.3%

37.0%

46.3% 46.1%

38.6%

41.8% 41.5%

39.0%

35.0%

40.0%

45.0%

50.0%

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11E

Operating Margin


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Recommendation and Valuation

In 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 order

to move faster when opportunities present themselves. We have increased our revenue and expense estimates and

the end result is lower expected EPS. This is the second consecutive quarter that these increases are seen, the

exception 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 and

third party location integrations make the business model one of low cost, but still in its nascent stages. There is

still a ways to go before Twitter is on the scale of Google, but its clear that people are sharing information and its

importance is growing.

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,00030,000,000

35,000,000

40,000,000

3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11

Cash and Marketable Securities


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Investment Risks

If the company experiences any or all of the following risk factors, as well as others, the companys stock pricemay 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 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 thefuture 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 / co-founders would be viewed as a significant loss to thecompany. 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 sellpositions in stocks, being a higher priced stock may make Google a likely candidate to be a source of

funds.


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1Q11 Income Statement Analysis

Exhibit 6


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ANALY ST CERTIFICATION

I hereby certify that the views expressed in the foregoing research report accurately reflect my

personal any of the subject companies mentioned in this report. I further certify that no part of

my compensation was, is, or will be directly, or indirectly, related to the specific

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 household is an officer, director, or advisory board member of the issuer or has another

significant affiliation 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

BRIAN BOLAN RESEARCH STOCK RATING KEY:Outperform: (BUY) In the analyst's opinion, the stock will outperform the sector by 5%

over the next 12 months.

Perform: (HOLD) In the analyst's opinion, the stock or sector will be in line with the sector

over the next 12 months.

Underperform: (SELL) In the analyst's opinion, the stock or sector will underperform the

sector by 5% over the next 12 months.

DISCLAIMER

The opinions, forecasts, and recommendations contained in this report are those of the analyst

preparing the report and are based upon the information available to them as of the date of the

report. The analysts are basing their opinions upon information they have received from

sources they believe to be accurate and reliable and the completeness and/or accuracy is

neither implied nor guaranteed. The opinions and recommendations are subject to change

without notice.

BRIAN BOLAN Research has no obligation to continue to provide this institutional

research product and no such obligation is implied or guaranteed. The report is provided to

the Institutional clients ofBRIAN BOLAN Research for informational purposes only and is

not an offer or a solicitation for the purchase or sale of any financial instrument. The firm does

not make a market in the security of the subject company(ies) or affiliated securities. The firm

or its employees may buy or sell the subject companys(ies) securities or derivatives that is/are

the subject(s) of this report. And the firm from time to time may buy or sell the subject


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companys fixed income securities from customers on a principal basis. Past performance is

not an indication of future results. Calculations of price targets are based on a combination of

one or more methodologies generally accepted among financial analysts, including but not

limited to, analysis of multiples and/or discounted cash flows (whether whole or in part), or

any other method which may be applied.

Although the statements of fact in this report have been obtained from and are based upon

outside sources that the firm believes to be reliable, the firm does not guarantee the accuracy or

completeness of material contained in this report. Any such estimates or forecasts contained in

this report may not be met. Past performance is not an indication of future results. Calculations

of price targets are based on a combination of one or more methodologies generally accepted

among financial analysts, including but not limited to, analysis of multiples and/or discounted

cash 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 upon

request.

Company Ratings History

Company Name Ticker Date Action

Prior

Rating

Current

Rating Price

Target

Price

Google GOOG Init iat ion of Coverage None Outperform $591.71 $700.00

GOOG 1Q11 Earnings Review

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