JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 2/1/07 Google (GOOG): Earnings

Current Price $501.50
update, maintain BUY rating
52WK HI $513.00 • Industry: Internet Services
52WK LO $331.55 • GOOG: NASDAQ; $501.50
EPS (TTM) $10.425 • 12-month price target: $560.00
Shares Outstanding 313M Buy initiated 6/26/06: $404.22 Buy 7/21/06: $387.12
Market Cap. $15B Target: $500.00 Target: $500.00
Dividend Yield NA
Price/Earnings (TTM) 63X
Price/Sales (TTM) 16X
EV/Revenue (TTM) 15X
EV/EBITDA (TTM) 34X
EBITDA (TTM) $4.05B

Buy 2/01/07 Target: $560

Brian Bolan
Director of Equity Research Company Description
Google is an internet search and technology company that has
Technology established itself as the leader in its growing market. Free downloads of
Jackson Securities, LLC applications, tools and other products have helped to fortify the brand
300 S. Wacker Dr., Suite 2450 which has come to stand for something more than just a search engine.
Chicago, IL 60606
Ph: (312) 253-0578 Valuation and Recommendation:
Fax: (312) 986-0560 As a leader in a growing market, we see many opportunities for Google to
grow revenue, earnings and market share. We continue to recommend
Skype: BBolan
bbolan@jacksonsecurities.com
investors BUY shares of Google.

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Google (GOOG)

Summary

We are certainly among the most aggressive on Wall Street in

terms of our expectations for Google. However, our top line
estimate was not met for the second quarter in a row, which will
likely keep us from raising our estimate for 1Q07. On the bottom
line, the beat was significant. However we should note that the
effective tax rate played another significant role in the beat.

Earnings

After the close, Google reported earnings of $3.18 per share

beating our earnings estimate of $3.03 and the consensus estimate
of $2.91. Net revenues of $2.229B were just below our $2.287B
estimate. We should note that our estimates were and continue to
be among the most aggressive on the Street.

YouTube and Google TV

During the third quarter, Google agreed to purchase YouTube for

$1.65B in stock. We believe that video will be a significant driver
for FY07, with YouTube leading the way. We also believe that
Google Video and the upcoming release of Google TV will only
further the resolve of the company to be the dominate player in
online video.

The streaming delivery method is one that allows the company to

run commercials before, during and after delivery of the media.
Management noted on the conference call that pre-rolls were less
effective than post-rolls and that they were experimenting with
advertisement delivery. The company also noted that they were
looking into a revenue sharing agreement with non traditional
content providers. This could be a death blow to the many
YouTube clone sites that offer a split of revenues generated from
advertisements run concurrently with certain videos.

Market Share

Once again, Google gave a slight nod to the general trends that are
coming from the third party data providers that generate market
share estimates.

JACKSON Brian Bolan 2

SECURITIES, Director of Equity Research – Technology Research
LLC
Google (GOOG)

Taxes…. Yet again a source for the out performance

The tax rate for the quarter, after certain adjustments came in at
24%, well below our estimate of 33% which we used after the
company noted that they were targeting a 30% rate for the year.
Once again, Google’s creative and effective application of tax
codes drove the out performance. While the company noted that
they expect a tax rate of 30% for 2007 we will now be taking that
guidance with a grain of salt. In the near term, we will be looking
at our model and will likely adjust our expected tax rate to a
number lower than 30% in several of the quarters in 2007.

Our aggressive estimates currently have an anticipated tax rate of

30% for 2007. As pre-tax income rises, a lower tax rate coupled
with minimal growth in shares outstanding will likely continue to
drive earnings growth. This stated, it could also end up skewing
traditional valuation metrics like P/E ratios.

Key Takeaway:

Our enthusiasm for Google might be tempered a bit as we continue

to bang our heads against the wall in terms of the tax rate. We are
not faulting the company for attempting minimize its tax pay-out,
but if we had assumed a tax rate of 28% instead of the 33%, it
would have been an earnings miss on our aggressive estimates. We
don’t believe that this is the first chink in the armor of Google, but
it is an issue we will keep a much closer eye on going forward.

CapEx … Where the millions are headed

In the quarter capital expenditures totaled $367M bringing the total

to $1.9B for 2006. Most of the capital expenditures are related to
IT infrastructure, data centers, servers and networking equipment.

TAC and the confusion on the call

On the conference call in the prepared slides, the company states

that TAC is headed the right way. The slides have TAC as about
30% of total revenues. We however prefer to look at the TAC
number only against the Network revenues as in the owned sites
Google will generally keep the vast majority of the ad revenue.

JACKSON Brian Bolan 3

SECURITIES, Director of Equity Research – Technology Research
LLC
Google (GOOG)

During the call, management noted that TAC is likely to increase

especially in the video space.

Our calculation shows TAC, and its relationship to network

revenues, climbing once again. This quarter the TAC rate reached
81.5%, up from 79.6% in the previous quarter and 78.7% in the
year ago period. We will be taking a closer look at TAC in the
coming days as we fine tune our earnings model for 2007. We
fully expect out TAC estimates to be higher than the 80% that is
currently modeled in.

Valuation

Our estimate of $3.03 was well above the $2.91 consensus and
below the reported earnings per share of $3.18. That said, we
believe that if our tax rate was 28% as opposed to the 33% we
modeled in it would have been an earnings miss. We believe that
this was the reason for the sell off in the stock following the
earnings call.

At the current time, we are adjusting our price target on the stock
up to $560, which represents a multiple of 35x 2007 earnings.
This is a conservative multiple for a technology company that is
exhibiting extraordinary growth (even off of a very large base),
with the beats continuing to come from the tax effects, we cannot
justify a significantly higher multiple.

JACKSON Brian Bolan 4

SECURITIES, Director of Equity Research – Technology Research
LLC
Google (GOOG)

Google
income statement
($ in mil, except per share)
Q405 A 3Q06 A Q406E Q406A YOY QOQ % from Estimate
Google Web Sites 1,098.0 1625.977 2008.5 1977.042 80% 22% -2%
Network Sites 799.0 1037.022 1226.2 1197.867 50% 16% -2%
Total Advertising 1,897.0 2,663.0 3,234.7 3,174.9 67% 19% -2%
Licensing and Other 22.0 26.674 34.0 30.589 39% 15% -10%
Gross Revenues $1,919.0 $2,689.7 $3,268.7 $3,205.5 67% 19% -2%
Less:TAC (629.0) (825.0) (981.0) (976.0) 55% 18% -1%
Net Revenues $ 1,290.0 $ 1,864.7 $ 2,287.7 $ 2,229.5 73% 20% -3%

Cost of Sales 146.3 223 275.0 307 110% 38% 12%

Gross Profit 1,143.7 1,641.7 2,012.7 1,922.5 68% 17% -4%

Operation Expenses
Research and Development 157.1 250.918 300 284.7 81% 13% -5%
Sales and Mktg 154.7 192.299 235 240.7 56% 25% 2%
G&A 114 168.686 205 192.8 69% 14% -6%
Stock Based Comp. 58.1 99.86 135 134.0 131% 34% -1%
One-Time Charges and Other
Total Op Expenses 483.9 711.763 875 852.2 76% 20% -3%

Operating Income 659.8 929.9 1,137.7 1,060.6 61% 14% -7%

Contribution to Google Fondation -90

Interest and Other 70.1 108.18 115.0 124.139 77% 15% 8%

Pre-Tax Income 639.9 1,038.1 1,252.7 1,184.7 85% 14% -5%

Taxes 267.6 306.15 413.4 287.186 7% -6% -31%

41.8% 29.5% 33.0% 24.0%
Net Income 372.28 731.9 839.3 897.5 141% 23% 7%

Pro-forma Net Income 439.38 812.3 952.9 997.3 127% 23% 5%

GAAP EPS $ 1.22 $ 2.36 $ 2.66 $ 2.86 134% 21% 7%

PF EPS (Ex-Stock Comp, Non-Rec) $ 1.45 $ 2.62 $ 3.03 $ 3.18 120% 22% 5%

JACKSON Brian Bolan 5

SECURITIES, Director of Equity Research – Technology Research
LLC
Disclosures:

Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views about
the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly,
related to the specific recommendations or views expressed in this research report. I may be compensated in part based
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Conflicts of interest:
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securities described herein.

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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 time
the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from the price at the time the rating was
issued.
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 – 54.6% (18 of 33 active recommendations)

Holds – 42.4% (14 of 33 active recommendations)
Sells – 3.0% (1 of 33 active recommendations)

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

Buys – 3.0% (1 of 33 active recommendations)

Holds – 0% (0 of 33 active recommendations)

Brian Bolan
Research Analyst – Technology
Sells – 0% (0 of 33 active recommendations)

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

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Brian Bolan
Research Analyst – Technology