Sunday, 22 January 2012 19:00

Once Again, Market Action Group Think Fails To Comprehend Google's Valuation Featured

My overview of Google's (GOOG) Q4 2011 Earnings Call January 19, 2012 4:30 PM ET. While reading through this, keep in mind my admonitions regarding the shortfalls of Wall Street GroupThhink and the American education system (see How Inferior American Education Caused T…and The Biggest Threat To The 2012 Economy I… and Reggie Middleton Illustrates Pitfalls of…). A dearth of foresight and creative imagination is apparent in the drop in Google's shares. This quarter was simply not that bad, and Google is positioning itself quite well for the medium to long term. So let's jump in to a few choice excerpts from the conference call...

...there are over 90 million Google+ users, well over double what I announced just a quarter ago on our earnings call. Engagement on + is also growing tremendously. I have some amazing data to share there for the first time. + users are very engaged with our products. Over 60% of them engage daily and over 80% weekly.

This is easily a multi-billion dollar emerging business and is one of the only two likely competitors to Facebook, with Twitter coming in a distant second. The embedded value of Google + is not recognized. At 2/3rds the valuation attributed to Facebook, Google+ is...

We've now included personal results in Search. So you can easily find information like photos and + posts that are super relevant to you, as well as the people you care about or are interested in. You can even restrict all personal results or easily view Google in the world mode just as you would have before.

The hegemony of search is further solidified by Google synergistically leveraging its other properties into its cash cow search business. I believed Bing to have been a technically superior seach engine, but the recent changes to Google's search algorithms combined with synergistic aspects of Gmail, Google+, legacy searches, various cloud apps and the 750k android devices activated every day allows Google to offer advantages that are out of the reach for even technology behemoths such as Microsoft. It's the network effect to the nth degree.

Since we last spoke, we've announced that we're closing 12 of our products, including Buzz, Knol and Friend Connect, integrating a whole bunch of others into features of existing products. This means that we can double down on the really big bets we had made like Android, Chrome, Gmail, Display and YouTube. And I'm pleased to say this big bets are really paying off.

For those that claim Google has a scattershot, nilly willy attitude toward shareholder capital investment, I say they have not been paying attention.. Google’s yield on investment (both strategically and financially) has been phenomenal, and has outstripped that of even the best venture capital and private equity firms. Subscribers should reference BoomBustBlog proprietary research for more on this: 63 pg Google Forensic Valuation,  - page 49 in particular.

Android is, quite simply, mind-boggling. 700,000 phones are lit up every day. And I'm pleased to announce 250 million Android devices in total, up 50 million since our last announcement just in November. In just 2 days over the holiday weekend, 3.7 million Androids were activated. And today, we're announcing over 11 billion downloads from Android markets.

Although it’s difficult to know for sure with anecdotal evidence, it appears as if Android is still enlarging the market share gap between itself and all of its competitors, including Apple.

… a winner with consumers, businesses and education. From an internal beta project 8 years ago, I'm proud to tell you today that Google Gmail now has more than 350 million active users, and it's growing rapidly.

… our merging high-use project -- products can generate huge new businesses for Google in the long run, just like Search, and we have a ton of experience monetizing those old [ph] products over time. Take Display. We brought the science of search to the art of the Display, creating a business that our latest figures show has now reached an annualized run rate of over $5 billion.

…  DoubleClick Ad Exchange, spending is up over 130% year-on-year, and the number of buyers and sellers have both more than doubled over the same period.

… advertising on YouTube. TrueView gives users much more choice over what they watch, and advertisers only pay when someone watches their ad.

It's not just in advertising that we're doing well. Enterprise is doing great with over 5,000 new customers signing up every day. In fact, last week, we signed our biggest ever deal, about 110,000 users at BBDA, one of the world's leading banks.

 The actual results...

... gross revenue grew 25% year-over-year to $10.6 billion, 9% quarter-over-quarter growth. By the way, it's worth noting that although currency rates had an immaterial impact year-over-year, they, in fact, had a negative impact on revenue quarter-over-quarter. In fact, if we applied last quarter's exchange rates to our Q4 revenue, these would have been roughly $240 million higher. So FX is a key component here.

For some obscene reason, many observers seem to have overlooked the the effect of adverse FX movement on European revenue. This has zilch to do with the company's fundamentals and outlook, and when normalized show healthy growth.\We expensed $134M related to our FX cash flow hedging program.

•Excluding gains related to our FX cash flow hedging program, had foreign exchange rates remained constant from Q3 2011 through Q4 2011, our revenue in Q4 2011 would have been $239M higher. Excluding gains related to our FX cash flow hedging program, had foreign exchange rates remained constant from Q4 2010 through Q4 2011, our revenue in Q4 2011 would have been $39M lower.
•In addition, our FX cash flow hedging program allowed us to recognize a benefit of approximately $25M to international revenue this quarter.


Google website revenue was up, in fact just shy of 30% year-over-year to $7.3 billion and 8% quarter-over-quarter with strength across most major geographies and verticals. Our Google Network revenue was up 15% year-over-year to $2.9 billion and 11% quarter-over-quarter. It's important to note here that the Network revenue was again negatively impacted by the search quality improvements we made early last year, and also that the momentum in our Display business continues, something that Susan will talk about in a few minutes. Our other revenue was up 50% year-over-year to $410 million and 6% quarter-over-quarter. Our global aggregate paid click growth was very strong, up 34% year-over-year and 17% quarter-over-quarter. Our aggregate cost of click growth was down 8% year-over-year and quarter-over-quarter. Remember, too, that this is an aggregate number, which includes both and our AdSense properties. On this, it's important to look at CPCs and clicks together. There are numbers of factors that affect each, again something that Susan will address in the next few minutes.

If we turn to our geographic performance, the U.S., U.K. and rest of worlds all were growing at strong pace, reflecting in our result. In our earnings slides, which you can find in our Investor website -- Relations website, you'll see we've broken down our revenue by U.S., U.K. and rest of world to show the impact of FX and the benefits from our hedging programs. So please refer to those slides for the exact calculations.

Revenue from the U.S. was up 22% year-over-year to $5 billion. Our non-U.S. revenue accounted for 53% of our total revenue, or $5.6 billion, up 28% year-over-year, which includes a modest $25 million benefit from our hedgings program. The U.K. was up 21% year-over-year to $1.1 billion.

Of note, TAC blipped higher last quarter. This is not enough to be considered a trend, but should be watched in the upcoming quarters as it is a potential sign that increased competition causing higher marketing expenses.

Traffic acquisition costs were $2.5 billion or 24.1% of total advertising revenue. Other cost of revenue was $1.2 billion, excluding stock-based compensation of $77 million. And finally, operating expenses, which excludes stock-based compensation, totaled $2.9 billion. Our stock-based compensation totaled $459 million, and the increase year-over-year in OpEx was primarily due to payroll, increased advertising and promotional spend and legal and professional services. As a result of all this, our non-GAAP operating profit was $4 billion in Q4, resulting in a non-GAAP operating margin of 38.2%, a strong margin performance that gives us the confidence to continue to fully fund our strategic growth areas in Search, Display, Mobile and apps.


And as a reminder, I wish to continue to make -- we'll continue to make significant CapEx investments, and these have shown to be lumpy from quarter to quarter depending on when we're able to make these investments.

I'm pleased that the company is not afraid to invest in its future, with both headcount and capex, not to mention M&A healthily higher.

Display has now reached an annualized run rate of over $5 billion as we engage with multiple advertisers....

Many pundits have apparently harped on the decrease in CPC (cost per click) in Google's results - totally ignoring the fact that overall revenues still rose at a healthy clip.

 paid click growth was very strong this quarter and that CPC has declined. It's important to look at clicks and CPC metrics together since more clicks can often lead to decreases in average CPC and vice versa. When we make ads quality or format changes, CPC and paid clicks may be impacted differently. For example, when we introduced sitelinks, we saw an increase in clicks. But the additional clicks were on lower-CPC ads, which reduced the average CPC. Many of the ads quality changes in Q3 increased paid clicks at lower CPCs, and they were revenue positive with good user and good advertiser metrics. These ad quality changes from Q3 had a cumulative effect on Q4 metrics. Another important and key driver of the change in CPC growth was foreign exchange. And lastly, there are mix effects with Mobile and emerging markets.

In addition, this is the first year that online ad spending will eclipse that of print. The pie is getting larger, one should expect Google to recieve less of the proportionate pie. If this is not the case, and Google maintians share, this is extremely bullish. Google is definitely putting the investment in, and I see it as paying off..

We continue to activate the Display ecosystem of agencies, advertisers and other publishers. Advertisers like Ford, GM, Electronic Arts, L'Oreal and their agencies continue to see the efficiency of online branding and move more and more of their marketing spend towards our products, to Google Display Network and YouTube. For example, at L'Oreal, we demonstrated that online advertising is far more efficient than television as our new formats in YouTube, which include TrueView in-stream, in-slate and in-search have provided significant reach for their branding campaigns with millions of impressions, great click-through and efficiency gains.

Has the potential for YouuTube to rival or surpass the advertising potency of TV been taking into consideration in the valuation of Google? Susbscribers, seefile icon Google TV Analysis 09/16/2010

We had another record quarter for mobile advertising as mobile search continues to surge across all platforms. The number of our clients who are using mobile within their campaigns continues to grow rapidly. For example, Mali [ph] Hotels of Spain with 350 hotels in 35 countries, they use mobile search campaigns to support their mobile e-commerce activities. As a result, Mali [ph] has experienced a 60% increase in visitors for mobile devices, and their mobile-driven bookings have multiplied by 12 in 2011. We also worked hard to develop the Mobile ecosystem. This quarter, we kicked out -- kicked off the go mobile campaign in the city of Mobile, Alabama, where we helped hundreds of customers build their mobile sites for free, starting a program that will inspire, educate and empower businesses to continue to go mobile.

Is it really that difficult to ascertain whether Android can be monetized. Quite frankly, Page would be foolish to discuss Android monetization at this early stage in its development. Those that cannot see where Google is going with this probably wouldn't be worth walking through the process. In a nutshell, Google will be very lax and lenient with Android as it soaks up market share like a sponge. If you remember, this is how MSFT handled Windows. At the point where market saturation is imminent and domination is evident, they will lock Android down, either technically, economically, or both - and like MSFT extract rich, thick margins on the vast majority of personal computing.

Subscribers, review An Analysis and Valuation of Google's Android and AdMob and Mobile Operating System Market Share Model 08/30/2010 

 Let's move to Enterprise. As Larry mentioned, we are seeing great traction in our Enterprise business, both with large partners, who tend to be early adopters and future looking, and in many small businesses who see Google Apps as a comprehensive and quick solution. We now have more than 5,000 customers signing up to Google Apps every day. As Larry mentioned, BBDA was the first major bank to go Google with Apps. Costco, one of the world's largest retailers, has also gone Google. In addition, in Q4, we signed government deals with the states of Maryland, Utah and 5 top universities, including Berkeley, Harvard and Michigan.

Again, has Google's rapidly growing and competitive enterprise cloud computing truly been valued into the stock. Subscribers, review file icon Google Cloud Based Services 09/18/2010

Finding the Google content behind the BoomBustBlog paywall.

First, go to the subscription content link in the user menu in the left hand margin of the site. Then click the "Search Document" link in the middle/top of the page. Enter Google as the search term.

Below are the results of that particular search. You can also choose to browse all of the reports in the technology (or whatever sector you have an interest in) section. The first selection is the Google Q3 review, which demonstrated that out analysis was right on point. Review our research, compare it to the "Street's" research and expectations, then review Google's actual performance. See Google’s 3rd Quarter Operating Results: The Foregone Conclusion That Was Amazingly Unanticipated by the Street!!! Monday, November 8th, 2010 for more on marking the research to market.

This is pretty much verbatim as we predicted it, and the stock and option prices are performing accordingly…


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.


Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

In conclusion, if you are a paying subscriber and you have a problem, wish or request - feel free to contact us. Don't let the problem or issue go unresolved. I value  your business and patronage and I feel that we offer some of the best research available.

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