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WILLIAMS CAPITAL RESEARCH

Equity Research Google Inc. (GOOG)


Company Update Current Rating: OUTPERFORM

January 21, 2011 Earnings Update

Internet Analyst: Brian Bolan 773-413-0285; bolan@willcap.com

Trading Desk: NY 800-924-1511 CT 800-688-6349

GOOG Outperform Fiscal Year Calendar Year Curr. Q. 1 yr ago Next 4 Quarters
Key Data
Q
Price: $626.77 (Rev in Mar-11 Mar-10 Mar-11 Jun-11 Sep-11 Dec-11
FY09 FY10E FY11E CY09 CY10 CY11E
Price Target: $700.00 $bns) F1Q11E F1Q10 F1Q11E F2Q11E F3Q11E F4Q11E
52 Week High: $642.96 Rev prev: NA 21.59 25.65 NA 21.59 25.65 6.14 NA 6.14 6.25 6.44 $6.83
52 Week Low: $433.63 Rev 17.48 22.00 28.06 17.48 22.00 28.06 6.59 5.06 6.59 6.79 7.12 7.563
new:
NTM P/E: 18.58 EPS NA 29.09 35.79 NA 29.09 35.79 8.29 NA 8.29 8.36 9.09 $10.05
prev:
Market Cap ($B): 189.35 EPS 23.21 29.60 33.73 23.21 29.60 33.73 8.10 6.76 8.10 8.09 8.52 $9.01
new:
Ent Value ($B): 170.00 EV/S: 9.73x 7.73x 6.06x 9.73x 7.73x 6.06x
Shares Outstdg (B): 325M P/E 27.x 21.17x 18.58x 27.x 21.17x 18.58x
Avg Daily Volume (M): 1.8M
Cash/Share: 104.39

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.

Sergy Brin will work more on personal passions and other new products that will be announced in the future.
Eric Schmidt will take on more strategic external issues as opposed to the internal issues that have been the
majority of his focus. Schmidt reiterated several times on the call that Larry is ready for this new role and that he
had been preparing for it for some time.

All three did a good job of smoothing over the change at the top. Clearly this was a quarter that saw a lot of
potential deals come and go. It used to be thought that Google would have been the best buyout for any
technology company as a tax free swap of stock would give entrepreneurs liquidity and all the resources that
Google brings to the table. Lately, start ups that have explored the option of “cashing out” have opted to look at
the possibility of going public versus consummating a deal with Google. Examples like Twitter, Groupon, Yelp
to name a few were all rumored to have spoken with Google about a possible purchase. The change at the top
could streamline future discussions and allow the company to move more quickly and possibly more aggressively
if other opportunities present themselves.

We are maintaining our Outperform rating and $700 price target, based on a 20.7x multiple of our new 2011
earnings estimate of $33.73. Our increased revenue estimates are negated by higher expenses as margins contract.

PLEASE SEE THE APPENDIX TO THIS REPORT ON PAGES 8-12 FOR IMPORTANT DISCLOSURES, REG AC ANALYST
CERTIFICATION AND DISCLAIMERS
Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349
WILLIAMS CAPITAL RESEARCH PAGE 2 January 21, 2011

The Big Picture

The quarter and year were very important for Google. Although the company would not comment on any
potential M&A deals, there were rumblings that the failed acquisitions of Yelp, Groupon and Twitter forced the
company to focus on local search more than ever. We have seen some significant changes in the local search
results compared to a year ago and even 6 months ago. The maps section has become the dominant section of the
page with the organic, or “free” listings being pushed to the bottom of the page. The result of this is the increased
significance of the paid ads on the top of the page. We anticipate that this increased level of importance is the
direct result of the larger presence given to maps due to the failed acquisitions.

These failed acquisitions may likely have been the key drivers to push Schmidt to handle governments and Larry
to focus on speed when looking at future opportunities. Sergy will focus on personal project and new products.

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 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. As described
above, 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 in 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.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 3 January 21, 2011

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 effective January
1, 2011. To further increase the amount of cash that non executives get, bonus dollars are 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 revenue 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 Williams Capital Research

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 4 January 21, 2011

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 & Williams Capital Research

Our estimates for 2011 are subject to change as market participants budgets tend to fluctuate when troubling
economic times appear to be around the corner. With potential for further economic troubles in Europe
(specifically Greece) lingering, international ad spend may be adversely affected in the second half of the year.
Google also maintains a strict policy of zero forward guidance, but this most recent quarter we heard that
expenses will increase significantly.
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

Source: Company reports & Williams Capital Research

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 5 January 21, 2011

Exhibit 4

Source: Company reports & Williams Capital Research

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. Our 2011 EPS estimate is reduced from $35.79 to $33.73. 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 $33.73 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 20.7x 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 or co-founders would be viewed as a significant loss to the
company.
 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.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 6 January 21, 2011

Exhibit 6 4Q10 Income Statement Analysis

Source: Company reports and Williams Capital Research

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 7 January 21, 2011

Exhibit 7 Income Statement

Source: Company reports and Williams Capital Research

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 8 January 21, 2011

APPENDIX

ANALYST CERTIFICATION

I hereby certify that the views expressed in the foregoing research report accurately reflect my
personal views about the subject companies and their securities 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 subject company 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

___________________________________________________________________________

IMPORTANT DISCLOSURE INFORMATION

Analyst Compensation: The author's compensation is based upon the value directly or indirectly
attributed to the research services by Williams Capital institutional brokerage clients. The author of
this report is compensated based on the performance of the firm, and has not received any
compensation in the past 12 months from any of the subject companies mentioned in this report.
The performance of the firm is driven by its secondary trading revenues, investment banking
revenues, and asset management revenues.

WILLIAMS CAPITAL 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 will perform in line with the sector over the next
12 months.

Underperform: (SELL) In the analyst's opinion, the stock will underperform the sector by 5% over
the next 12 months.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 9 January 21, 2011

Exhibit 8 Google, Inc. - One Year Price Chart

Source: BigCharts.com

Prices as of January 20, 2011

__________________________________________________________________________________________________

Company Ratings History


Prior Current Target
Company Name Ticker Date Action Rating Rating Price Price
Google GOOG 16-Dec-10 Initiation of Coverage None Outperform $591.71 $700.00

Valuation Methodology:

On an Enterprise Value (EV) to EBITDA metric, we note that Google had been relatively stable in the
high-teens range throughout most of the year. The current multiple of 13.5 is well below the 17x
average over of past two years. We expect it will move back towards the mean over the course of
the next 12 months. On a Price to Forward Earnings (P/FE) metric, we note that Google contracted
from a high of 38x to a low of 15x in 2008. This represents a decline of about 60%, compared to a
revenue deceleration of 42% (from 52% y/y in 4Q07 to 30% y/y in E4Q08). We believe that Google
will continue to outperform the market by growing search market share, growing revenue and
expanding into new market opportunities.

Our price target is derived using a multiple of 2011 earnings of $33.73 per share. Markets are
currently seeing contractions for most multiples and using some conservative views, we believe
that 20.75x next year’s earnings will prove to be a worthy multiple. We note that 20.75x our 2011
earnings estimate produces our $700 price target for the stock. We rate the stock OUTPERFORM.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 10 January 21, 2011

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 or co-founders would be viewed as a significant loss to
the company.
 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.

ADDITIONAL DISCLOSURE INFORMATION:

The Williams Capital Group, L.P. or its Affiliates do and seek to do business with companies
mentioned in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should consider this
report as only a single factor in making their investment decision. Additional information is
available upon request.

“Investment Banking Clients” is defined as companies in respect of which The Williams Capital
Group, L.P. (the “firm”) or its affiliates have received or are entitled to receive compensation for
investment banking services in connection with transactions that were publicly announced in the
past 12 months.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 11 January 21, 2011

Distribution of Equity Research Ratings as of: January 20, 2010

Outperform Perform Underperform

All Research Coverage: 71.4% 28.6% 0%


Universe of IBC: 0% 0% 0%
Internet: 40.0% 60.0% 0%
Internet - IBC: 0% 0% 0%

Investment Banking Disclosures: Within the past 12 months, the research analyst authoring this
report has not participated in a solicitation of any subject company mentioned within this report,
with or at the request of investment bankers, for investment banking business. Within the past 12
months, the firm and its affiliates have not managed or co-managed a public offering of the
securities of any subject company mentioned within this report, nor has the firm received
compensation for investment banking products or services from those companies. The firm does
not expect to receive or intend to seek compensation for investment banking services from this
subject company during the next three months.

Firm Compensation: Within the past 12 months, the firm and its affiliates have not received
compensation for any non-investment banking products or services for subject companies
mentioned in this report, and none of these subject companies have been a client of the firm during
the past 12 months.
Stock Ownership: The firm and its affiliates do not own 1% or more of any class of equity security
discussed in this report, and do not make a market in any such securities.

DISCLAIMER

The information and opinions contained in this report were prepared by the firm and have been
derived from sources believed to be reliable, but no representation or warranty, expressed or
implied, can be made as to their accuracy. All opinions expressed herein are subject to change
without notice. This report is for information purposes only and should not be construed as an offer
to buy or sell any securities. The firm makes every effort to use valuation methodologies that it
believes to be reasonable in the derivation of price targets, but we do not guarantee that such
methodologies are accurate.

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349


WILLIAMS CAPITAL RESEARCH PAGE 12 January 21, 2011

To receive any additional information upon which this report is based, please contact the following
individuals or write to:

Williams Capital Research, Research Department


650 Fifth Ave. 11th Floor
New York, NY 10019
research@willcap.com

Suling Lew, Head of Institutional Sales or Jack Murphy, Director of Research


212-373-4243 203-659-6007

Brian Bolan Bolan@willcap.com Trading NY 800-924-1511 CT 800-688-6349