Friday, July 20, 2007

Google (NASDAQ:GOOG): Color on quarter

Several firms comment on Google (NASDAQ:GOOG) after the co reported its Q2 results last night:

- RBC Capital has one of the best notes out there this AM saying GOOG's solid revenue growth was overshadowed by higher operating expenditures from aggressive hiring and a change in accounting for employee bonuses. However, management's decision to surprise investors with the accounting change drove the stock's negative reaction. It served as a reminder that Google remains an unconventional company with chronic investor communications miscues and unorthodox decision processes. RBC's revenue estimate for 2008 increases marginally, while our EBITDA and FCF estimates fall 2% and 5% respectively. On the bright side, international growth remained robust, capex was down modestly, and market share gains continue. Firm's price target remains $560.

Google apparently now accrues its bonus payments evenly throughout the year, instead of allowing the percentage accrual to ramp towards 4Q. That change was enough to shift an incremental $60mm to 2Q07 costs, mostly in the R&D and sales and marketing lines. Unfortunately, the management team did not endeavor to inform investors of this change until the 2Q07 report.

Maintains Outperform rating but expects shares to fall back to the 200-day MA of around $480 while investors debate the long-term implications of the earnings miss.

- Citigroup notes a very significant opex ramp as THE key issue - Core Opex (excluding a 1-timeish $60 bonus accrual adjustment) grew 16% Q/Q vs. the 7% net revenue growth. GOOG mngmt said they exceeded headcount plans, but the company is clearly investing aggressively. All opex lines were up big, but especially R&D.

Why NOT a Thesis Changer? - 1) Because GOOG's rev. results were intrinsically positive; 2) Because GOOG appears committed to greater opex discipline going forward; 3) Because GOOG is clearly increasing its Search dominance; 4) Because the markets GOOG is investing against (display advertising, Net apps, etc...) are large; & 5) Because valuation (32X '08 GAAP P/E) is reasonable.

Firm reits Buy and $600 tgt saying they are incrementally less positive as GOOG involves more opex Beta than expected. They expect GOOG to trade sideways near-term from $500 level. But GOOG remains Citi's #2 Large Cap Net stock Long idea.

- Jefferies notes that in typical fashion, management declined to give much visibility into margins going forward. Nevertheless, the firm believes that 2Q levels are a low water-mark for FY07 and beyond, since: 1) the change in bonus accrual yields a smoother distribution of payroll costs throughout the year, implying lower levels of operating expenses in 4Q vs. last year, 2) 2Q opex included a non-recurring catch-up of bonus accrual costs associated with 1Q07, and 3) CEO Eric
Schmidt uncharacteristically stated that the company will "keep an eye" on hiring going forward, implying a more balanced growth in hires and in revenues.

Reits Buy but cuts tgt to $595 from $610. Would buy on pullback.

Notablecalls: Looks like wage inflation is catching up with GOOG. The stock took a 40-50 pt haircut in after hours action, yet we have almost all firms defending it this morning.

I think this is the type of stuff the buy side has feared for some time already. While in s-t I think GOOG may get a bounce and retrace upto half of yesterday's decline, the 200 day MA will come in play over the next couple of weeks.

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