Goog 1 q11_earnings_review

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

April 18, 2011 Earnings Update

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

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 BBolan1@Gmail.com

BRIAN BOLAN RESEARCH PAGE 2

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 haven’t 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 CPM’s will increase for display, but the likelihood that I see is more of some
increase of CPM’s 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.

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 3Q11E



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 1,900 and stood at approximately 26,300 at the end
of 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 1Q11

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.



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 1Q11

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.



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



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_review

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