GOOG 3Q07

8/9/2019 GOOG 3Q07

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October 19, 2007

Brian BolanDirector of Research;

312-253-0578; [email protected] Recent price: GOOG 639.62

Review of Google’s 3Q07 earnings call

Summary

After missing the number last quarter, Google stepped it up in what is supposed to be a seasonally softquarter. Beating the Wall Street estimate is the norm for Google, but even a $0.14 beat didn’t do much tothe stock price in after hours trading. Beating our aggressive estimate by a penny is a good sign, and moreimportantly is the beat on the topline which Google needs to keep doing in order to support its lofty

valuation.

Earnings

Google came in with another solid quarter, posting revenues of $3.01B and earnings of $3.91 per share.Our topline estimate of $2.98 was higher than the $2.94 consensus. On the bottom line our estimate of $3.90 was substantially higher than the street estimate of $3.77. This quarter may be termed by some as ablow out, and without an adjustment to our model a week ago, we would have agreed. While the numbersshow this as a more or less in line quarter (from our perspective), we should remind investors that ourestimates are among the most aggressive on the Wall Street.

Valuation

Our target of $670 per share may be in jeopardy by this time next week. Analyst day is likely to providea catalyst to push shares higher, as we learn more about Google’s intentions in the mobile space. Wecontinue to rate Google shares a buy.

Important Disclosures

Jackson Securities, LLC does or seeks to do business with companies covered in itsresearch reports. As a result, investors should be aware that the firm may have a conflictof interest that could affect the objectivity of this report. Investors should consider thisreport as only a single factor in making their investment decisions. Please also refer tothe important disclosures found on pages 5 thru 7. Analyst Certification is found onpage 5.

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Google Sites Vs Network s ites and TAC

Last quarter we saw flat growth from the network sites and mild growth of 9% from the Google web sites.This coupled with increasing TAC (traffic acquisition costs) led to a mildly disappointing 2Q07. 3Q07was a much different story, and different that last quarter can only mean better.

Google websites accelerated it growth rate to 10% sequentially while Network revenues increased 8% andwere 3% ahead of our estimates. And in the idea that TAC which grew at a 6% sequential rate went downas a percentage of Network revenues and you have the makings of a sharp rebound from last quarter.TAC as a percentage of network revenues clocked in at 83.9% versus our estimate of 85.8% and theprevious quarters result of 85.1%. This means that in situations where Google shares revenue withwebsite owners (think MySpace) they are keeping more of the advertising dollars. Management said thiswas due to the partner mix. We can only hope this trend will continue but we are not holding our breathon that one.

Bullet points from t he conference cal l

∗ Summer seasonality appears to be milder than expected.

∗ Cash at $13.1B is not burning a hole in their pocket, may not bid on new spectrums

∗ Headcount increased more than many expected, something we viewed as a positive

∗ Traffic growth globally contributed to the growth in GOOG sites.

∗ Mobile ads are doing well in Japan and Korea

∗ YouTube support for iPhone is key to mobile strategy

Taxes…. 27.2% vs ou r est imat e of 26%

It seems that every quarter we are writing about how the tax rate boosted earnings. Again we are talkingabout it, but for the first time it’s because our estimate was too high, not too low. This is quite a changefor us, as we are used to seeing the tax rate fall below our estimate. We believe that our current estimateof 28% for the fourth quarter is very close to where the number will land.

Key Takeaway:

Was this call mostly a commercial for investors to stay tuned until next week for the big Analyst day? Wethink that there was very little meat on this bone of a conference call. Management typically plays it close

to the vest, but this quarter gave us very little on things to go on. We believe that the mobile questioncontinues to be the momentum wild card, and an announcement of a “GPhone” may cause the stock to jolt10% higher. If

Looki ng ahead

All we can say at this point is that we are eagerly awaiting analyst day on 10/24/07. Is it the day theyannounce the GPhone????? Your guess is as good as ours, but it will be a day to mark on the calendar.

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Mobile devices

In noting that they are doing well in serving ads to mobile devices in both Japan and Korea, managementwas sending a clear message that they want to be the partner of choice for delivering ads to mobiles. The

Asian market for mobiles is far more advanced than ours, and in stating they are doing well there impliesthey can do the same here.

Add in the idea that YouTube for iPhone was going well and you have a few big hints laid down for apossible announcement about a GPhone on 10/24/07.

Target Price and Model

Our target price of $670 is based on our expected earnings per share of $15.55 for 2007. This means a 43xmultiple is being used in this instance.

We expect to update our estimates for 4Q07 in the coming weeks and will also roll out our highlyanticipated estimates for 2008. Having been highly ranked by those who track earnings estimate accuracywe will not be publishing our estimates for non clients until the day before earnings.

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Source: Jackson Securities, company reports

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Disclosures:

Analyst CertificationI, Brian Bolan, hereby certify that the views expressed in this research report accurately reflectmy personal views about the subject securities and issuers. I also certify that no part of mycompensation was, is, or will be, directly or indirectly, related to the specific recommendations orviews expressed in this research report. I may be compensated in part based on the overallprofitability of Jackson Securities, LLC, which includes earnings from investment banking and allother aspects of the firm’s business.

Conflicts of interest:Neither Jackson Securities nor any of its publishing analysts or their immediate family membershas a position in the securities described herein.

Compensation:

• The research analyst has not received compensation based upon investment bankingrevenues or from the subject company in the last 12 months.

• Jackson Securities has not in the last 12 months managed or co-managed a publicoffering of securities, received compensation for investment banking services from the

Buy initiated 6/26/06: $404.22Target: $500.00

Buy 7/21/06: $387.12Target: $500.00

Buy 2/01/07: 481.75 Target:$560

Buy 10/10/07: 615.18 Target:$670

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subject company or any compensation for products or services other than investmentbanking

• Jackson Securities will seek investment banking compensation from the subject companyin the next 3 months.

Position as Officer or Director:Neither the research analysts nor members of their immediate households occupy positions as

an officer or director with the company/companies mentioned in this report.

Market Making:Jackson Securities does not make a market in this stock

Explanation of Ratings:

Buy - Expected 12-month absolute performance of +10% or higher than the market price at which timethe rating was issued.

Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating wasissued.

Sell - Expected 12-month absolute performance of –10% or lower than the market price at which time the

rating was issued.

Distribution of Ratings:

Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:

Buys – 50.0% (19 of 38 active recommendations)Holds – 44.7% (17 of 38 active recommendations)Sells – 5.3% (2 of 38 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with thefollowing percentage of the companies they have rated:

Buys – 0.0% (0 of 38 active recommendations)Holds – 0.0% (0 of 38 active recommendations)Sells – 0.0% (0 of 38 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

Other Important Disclosures and Disclaimers

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy anysecurities mentioned herein. This material should not be construed as an offer to sell or the solicitation of

an offer to buy any securities mentioned herein in any jurisdiction where such an offer or solicitationwould be illegal. We are not soliciting any action based on this material. This document is for generalinformation only, and it does not constitute a personal recommendation or take into consideration theparticular investment objectives, financial condition or financial needs of any clients. Before acting on anyadvise or recommendation in this research report, clients should consider seek professional advice. Pastperformance is not a guide to future performance. Future returns are not guaranteed, and a loss of originalcapital may occur.

The information contained herein has been obtained from sources that we believe to be reliable, but we donot guarantee its accuracy or completeness. Any opinions expressed herein are statements of our

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judgment on the date appearing on this material only and are subject to change without notice. Weendeavor to provide updates on a reasonable basis of the information discussed in research reports, butthere may be reasons which prevent us from doing so.

Additional Information: Any additional information, if applicable, supporting this recommendation maybe furnished upon request. This report is not directed to, or intended for distribution to or use by, anyperson or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction

where such distribution, publication, availability or use would be contrary to law or regulation or whichwould subject Jackson Securities or its affiliates to any registration or licensing requirement within such jurisdiction. This report is prepared for the use of Jackson Securities clients and may not be redistributed,retransmitted or disclosed, in whole or in part, or in any form or manner, without the express writtenconsent of Jackson Securities.

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GOOG 3Q07