Preview of GOOG

Thursday, April 17, 2008

Google Earnings Preview (452.31 -2.77)

Google (GOOG) is set to report earnings this afternoon in what has become one of the most highly anticipated earnings report of the season. After posting quarter after quarter of blowout numbers, the parade came to a crashing halt in 4Q07 when the Wall Street darling actually missed bottom line expectations. The report caused share price to drop from $560 to $420. As it is shares are down 35% ytd compared to the S&P which has declined 9.5% over the same period. Forward P/E has fallen to 18.9x from 29.1x. Analysts are currently expecting EPS of $4.52 and revenues of $3.607 bln. The problem the co faces is that most thought they were relatively recession-proof given their business model. This theory was severely dented with their Q4 numbers and now the co faces their first major dilemma. The worries have only grown as ComScore data has continued to cast a shadow over the co's paid clicks figures which are right now tracking at approx +3% y/y for Q1, compared to +30% y/y in Q4. The whisper number we have seen for this figure has been 5-7%. It is this figure that will be key to the Q1 report. Remember a lot of poor expectations have been priced into the report so if the co does beat the paid click figures and provides a handy beat on top and bottom line shares could have a nice run in after hours. Expectations have been mixed as the bull argument goes that the price per paid click growth is expected to rise and offset some of the decline in the paid clicks, as a quality control program the co implemented in this quarter is the main reason for the recent downfall. Areas of interest on the call- 1) Paid Clicks- As mentioned above this is the primary area of focus this time around; 2) Yahoo JV- There has been discussion that YHOO would outsource its search advertising to GOOG so we would expect this to be a popular question during Q&A (of note the co has approx $14 bln of cash and cash equivalents on hand); 3) Guidance- Or lack of we should say. Co does not provide guidance, but we would expect analysts to try and get the company to commit to their outlook on prices paid; 4) Economic Outlook/effects- Another popular question, the co will certainly be asked what their outlook is for the U.S. economy and how they expect it to affect their numbers; 5) International Sales- A nice wild card for the co as International revs represented 48% of total revs in Q4. Co should still see some strength from this area and they will certainly pick up some favorable numbers in terms of currency conversion; 6) China- Co has stated that they will aggressively expand into China, so positive commentary here could help the co in after hours trading.