Goog 1 q11_earnings_preview

BRIAN BOLAN RESEARCH
Equity Research Google Inc. (NASDAQ:GOOG)
Company Update Current Rating: OUTPERFORM

April 11, 2011 Earnings Update

Internet Analyst: Brian Bolan 773 413 0285; BBolan1@Gmail.com

GOOG Outperform
Price: $578.16
Price Target: $700.00
52 Week High: $642.96
52 Week Low: $433.63
NTM P/E: 22.00
Market Cap ($B): 185.00
Ent Value ($B): 170.00

Earning Preview for 1Q11

Google will report earnings for 1Q11 on April 14 after the close. Brian Bolan Research has tweaked our
estimates which can be found on page 7. As per usual, my estimates are well above Wall Street consensus, but
given the solid results of 4Q10, another dose of eye popping results should help push GOOG shares higher by 5%
or more. I recommend aggressive investors consider purchasing shares of GOOG before the release.

Earning Review for 4Q10

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

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

PLEASE SEE THE APPENDIX TO THIS REPORT FOR IMPORTANT DISCLOSURES, REG AC ANALYST CERTIFICATION
AND DISCLAIMERS
Brian Bolan BBolan1@Gmail.com

BRIAN BOLAN RESEARCH PAGE 2

Turning the Page, the new CEO
As of April 1, 2011, Larry Page has taken over as CEO of Google and he immediately moved to focus the
company on the Social front. By moving key team members to new and higher positions, Page insulated himself
to a degree from the rank and file.

Page also quickly moved to incentivize the company to focus on social by realigning the bonus plan to reflect an
increase or decrease depending on a measure of success of the social aspect. Page also urged Googlers to get their
friends and family members to participate in any new venture on the social front.

Looking ahead

Over the next few quarters, we believe that the increased importance of Google Maps will make the local market
focus on paid search. The top 3 ad slots are thus poised to see tremendous growth as free listings and SEO efforts
for the organic listings become less important to local advertisers. To say that 100% cost per click growth is the
likely result could be on the conservative side.

Ad coverage, or the number of advertisements is likely to increase as well. The increase of space dedicated to
maps pushes out the organic listings, but that does not mean that the top section could increase to four, five or
even six ads. We have already seen an increase of advertisements in search on the right frame of the search
results page, and more ads on the bottom of the page could be next.

Mobile, Local and Social
The 4Q10 call focused on the three areas that we believe will dominate the conversation in 2011. Mobile, Local
and Social (MLS) have been focus for some time, but we see renewed emphasis on these segments. The focus on
local will come out of more ads and higher CPC’s on Google owned properties. Other Local Stats given on the
call include:

o 5 million+ users of Google Places (a primary component of being featured in the maps section)
o 1 in 5 searches are local in nature
o Customer acquisition is the biggest hurdle for Google in the local market

In the Mobile area the company gave these data points:

o Android activations are running at 300,000 per day,
o Higher level of android sales expected to result in 10x increase in mobile searches
o Mobile search grew 4x in the last year

Not as many data points for Social were given on the call, but the importance of Facebook et al was not lost on
management. Search results that included Twitter feeds were new this year. We note that YouTube saw its
revenue double in the year and the display business has more than 2 million publisher partners.



Questions

During the quarter we learned of the JC Penny example of back link fraud, how can you prevent this from
happening / will you report cases where entities have broken the rules? Is this a bigger issue than Click Fraud was
in the recent past?

Local efforts like Boost seem to be getting some traction, is there anything in place to subsidize this or get more
smaller advertisers on that platform? Plans to add transparency behind boost? Increase the capabilities (long tail
keywords)?

Googles Acquisition of Travel information provider ITA gets approval? Deal to close when? What does the
EXPE spin off of TripAdvisor say about the ITA and Google’s plans?

Google catches Bing copying search results – what measures are being taken to prevent this? Is this an ongoing
problem in areas outside of just search? Are Google Places being copied as well?

Jonathan Rosenberg announces that he is leaving, Mayer has a new boss in local, is the company done re-org?

Google TV – have heard little positive news there, update?

Mobile still growing at 300K subs per day on Android?

HotPot 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 Northeast
noticeably being left out. Some would say a slow a methodical launch allows the company to learn from early
mistakes, 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 base
is certainly bigger than that of Foursquare and other geo-tagging companies, and being built into all Android
phones gives it a lasting and solid advantage.

Head Count

The full-time employee headcount has significantly increased over the last 2 years, growing from 13,786 at June
30, 2007 to 19,604 at June 30, 2008, including approximately 1,500 new employees as a result of the acquisition
of DoubleClick. Total headcount increased by approximately 1,000 and stood at approximately 24,400 at the end
of the year.

In an attempt to maintain or increase the morale of employees, everyone was given a 10% raise affective January
1, 2011. To further increase the amount of cash that non executives get, bonus dollars and being shifted into the
base salary. This will increase salary expense by at least 12% from where it was the expected to be.



Display Business
Google’s purchase of DoublClick is bearing more fruit as the company mentioned that there are now more than
2M publishing partners. Those partners are seeing the number of ads placed against their content triple and are
seeing commensurate financial gains.

Interestingly, management noted that while most of the industry thinks of display as a means of branding for an
advertiser 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 up
for some increases that management announced that will hit payroll and could make up for the increases we
expect to see in sales and marketing. We are raising our revenues estimates for the next year, but our increases in
expenses will eclipse all of the gains. The end result of higher revenue expectations and higher expenses just
means that margins are contracting. We do not believe that Wall Street will punish Google as the revenue growth
will more than blind most market participants.

Exhibit 1

Source: Company Reports and Brian Bolan Research

Paid Clicks

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

Exhibit 2



Source: Company reports & Brian Bolan Research

Balance Sheet

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

Exhibit 3


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 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. That said, we believe the potential revenue increases will grab the headlines and distract
those that believe that margin increase should be then end goal of Google’s efforts.

Our price target is derived using a multiple of 2011 earnings of $33.95 per share. Markets are currently seeing
contractions for most multiples and using some conservative views, we believe that 20.7x next year’s earnings
will prove to be a worthy multiple. We note that 20.6x our 2011 earnings estimate produces our $700 price target
for 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 company’s stock price
may 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.



1Q11 Income Statement Analysis

Exhibit 6

Source: Company reports and Brian Bolan Research



4Q10 Income Statement Analysis

Exhibit 7




Exhibit 8




ANALYST 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 of BRIAN 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 company’s(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



company’s 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
Prior Current Target
Company Name Ticker Date Action Rating Rating Price Price
Google GOOG Initiation of Coverage None Outperform $591.71 $700.00


Goog 1 q11_earnings_preview

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