The markets did some stuff today blah blah blah…
Who cares? Google earned ONE BILLION DOLLARS! Muhahaha…
Oh Google, how do we love thee, let us count your earnings:
$1,002,000,000 in earnings on $3.66B in revenues, this is up from $592M (+69%) in earnings on $2.25 (62%) in revenues last year.
That works out to $3.68 per share, significantly higher than the $3.30 projected by the 40 analysts who follow the stock for a living (3 holds, 2 sells). The highest analyst estimate was $3.52 per share and the net (of traffic acquisition costs) revenues came in at $2.53Bn, above the average estimate of $2.49Bn. This was Google's 10th earnings beat out of 11 reports since they went public in Sept. 2004.
![[Google Chart]](http://online.wsj.com/public/resources/images/OB-AJ575_IEDGGO_20070419225932.gif)
Google's only miss was caused by a higher than expected tax bill as they dealt with complex foreign tax structures but, great company that they are, they hired the best and this report cut their effective tax rate down to 25.9%, well below the 30% target rate and saving .04 per share. That's right, you have to drill down to taxes to find a flaw in this company's execution and they've fixed that too!
Far from cutting back, the company is firing on all cylinders as they push forward with $596M in infrastructure investments, up from "just" $366M in Q4. Google hired 1,600 additional staff bringing the population up to 12,238 employees who each generate over $1M in annual sales on average – this beats MSFT by 66% on the top-line per employee and embarrasses Microsoft by generating 322% more profit ($500K) per employee per year.
If this is an arms race it is more like the one between the US and Mexico than the one between the US and Russia! Microsoft (notice we now ignore Yahoo) is fighting this battle with conventional forces and studying battle plans from the War of 1812 while Google is literally taking satellite images of their offices and devising strategies for battlefields that haven't been invented yet.
Google handled 55.8% of U.S. Web search queries in February, compared with 20.7% for Yahoo and 9.6% for Microsoft, NetRatings Inc. said. Google's 40% growth rate in the number of queries handled compared with a year earlier far outpaced those rivals.
"We're ecstatic about our financial results this past quarter," CEO Eric Schmidt said. "It's the core business that is driving our success." Schmidt says Google is "still at the beginning" of its core search and text-based advertising business, even as the company is trying to increase its sales of graphical display ads, such as banners, through its planned $3.1 billion acquisition of Internet advertising-services company DoubleClick Inc., announced last week.
Keeping with our theme of playing companies with an International base, Google got 47% of their revenues overseas this quarter. "The Google-sites revenue was very strong and well above Yahoo. The leadership gap continues to widen," said Anthony Noto, an Internet analyst at Goldman Sachs.
Make no mistake about it, Google is one of our country's greatest exporters, pulling in over $100M a month in overseas revenues (imagine our trade balance without them!) and Schmidt closed the CC by saying: "We do expect that the international percentage of our global revenue will eventually be greater than 50%. International is getting close already, and that has been one of our strategic goals. It is fundamentally a function of the distribution of worldwide ad dollars, and there is only so much of a percentage in any particular market of worldwide ad spending that we can get."
If that percentage is a global 45%, they're going to be having a hell of a decade!
Also in the conference call, Schmidt talked about YouTube deals with the BBC (fully syndicated) as well as LG and Samsung, who will allow mobile video access throughout Europe. How many times would you click on a video on your phone in a month? Multiply that by 400M Europeans and imagine Google figures out how to make a penny from each viewing….
Pennies will also add up for YouTube as Google moves to an advertising model there as well. With 100M downloads per day and extra penny here or there adds up to billions very quickly!
This will all come in addition to the dollars Google will be able to charge in their deals to sell advertising on CCU's 675 radio stations as well as to DISH's 13M viewers. The US media market is $140Bn, over 20 times bigger than Google's fast growing Internet space. They've already locked up 45% of their primary market and these two deals indicate they are ready to get serious about going after that other $133Bn. The YouTube deal gives them content AND distribution leverage that can put them on an equal footing with traditional media giants but there's no need to get ahead of ourselves, Google only needs to capture 5% of the revenues to double in 3 years.
5% is already the amount of ad time Clear Channel has given Google in this initial run and Schmidt said: "One thing to clarify is that the Clear Channel deal includes a lot of premium inventory. It is not a remnant deal. That is a misperception. Maybe we did not communicate that very well. The EchoStar, similarly, those our primary spots. That is why those two deals are so important. It launches these two new initiatives right in front of the primetime viewer."
Of course Google is looking at the $500Bn GLOBAL ad market but it would sound crazy if I ran those numbers. Of course I did run those numbers way back in 2005 when I made Google my trade of the decade. At the time I said: "Google is not like anything anyone has ever seen before so valuation models that analysts have lived their lives with don’t really work. To value Google you have to think about companies who really changed the world in their time like IBM, Bell Telephone, Edison Electric, Microsoft…"
Eric Schmidt said in the CC: "Each of these strategies involves creating solutions that benefit both advertisers and users, and it is the synergy between them that we have been able to harness. Targeted, useful, effective advertising will continue to be our mantra; you all know that, of course. Technology and efficiency is the core of our technology approach, and it really does benefit end users."
Another highlight from the conference call was the fact that while Adsense revenues grew 45% over last year to $1.3Bn, revenue from Google properties was the other $2.3Bn, up 76% – that means their internal projects are firing on all cylinders! Paid clicks jumped 52% over last year and 13% over a strong Q4 (but people pay more over the holidays). You will hear naysayers gripe about TAC (traffic acquisition costs) but these are just the revenues paid to Adsense partners, who got $1Bn of the $1.1Bn total. The "problem" for Google is that making "just" 55% on this line item is actually a drag on their earnings…
Google Documents and Spreadsheets quietly marches onward with Kenya and Rwanda officially adopting it as a standard (not much but it's got to annoy Microsoft!). Another future bright spot is CheckOut, which already has partnerships with CompUSA, Blue Nile and Radio Shack and will be competing in the $2 Trillion Global credit card industry. This is another place where 5% penetration could add up to some real money.
I very much liked what Eric Schmidt said when asked by GS if he was worried that hiring so many people would reduce revenue per headcount: "With respect to the revenue per headcount, again we are not very focused on that. We are much more focused in total growth of the platform, total growth of the number of advertisers, total growth of the monetization. It is easy enough for us to dial any particular metric like employees per gross revenue up or down as we see fit. It is more important to focus on end user happiness. A lot of the people we are talking about are, for example, coming in for customer service globally. We are also way, way investing in engineering because we believe this is a time where our model is scaling that products that we are going to bring out in a year or two are going to have huge impacts to the investments we're making in data centers, and we need the engineers to build the great products to do so."
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This wrap-up is keeping in with the theme of the day where Google dominated the conversation on the member site as we loaded up with Google options based the article Happy Trading and I put up last weekend, when Google closed at an iffy $466.
We added 2 new plays on Google in comments as things developed and, as usual, we couldn't have a better group for quick analysis of a fluid stock. Here's a quick look at the comments that got us there:
Biodieselchris Posted April 19, 2007 at 4:03 pm Permalink: "Goog’s up a solid 20 already, I’m sure glad philsworld talked me into selling all my puts. 
"
Safe(ish):
A) Buy the stock for $466 and sell the outrageously expensive May $470s for $16.35. This reduces your basis to $450. You can roll the calls if the stock trades down, or take advantage of dips to buy out the caller and resell as it moves up (this is what the big boys are doing to you!).
Well congratulations, you made $20.35! We said safe, not exciting but you may want to consider rolling your guy forward to a June or July contract as we top here depending on whether it suits you to make $10-15 a month selling options when you are deeply in the money. It's a nice annual return!
B) Play for the comeback of volatility ($40) by taking a spread of the May $510s for $2.30 and the May $410 puts for $2.18. Either one should be at least $8 if we get a $40 move within 30 days. If we get a fizzle, they should be 50% recoverable and we can also flip and sell Apr calls against them (risky but fun).
I doubt you'll care much but you will either get your best price for selling puts right at the open or on the first big pullback. We didn't expect to make money on this both ways so don't be greedy and set sensible stops as Goog may have trouble breaking $500 and may erode your premium.
C) Make a tighter collar of the May $480s for $11.85 and the May $450 puts for $9.70. With absolutely no movement, the Apr $480s are $5.15 and the Apr $450 puts are $4.50 so this is probably your worst-case scenario post earnings bearing in mind a $14 move would be 1/2 the lowest move of any earnings month on our above chart.
Again, these were safe plays and safe means taking the profits you get on a big move. You will get a huge premium on this initial run-up that you may never see again if Google flatlines from this point. If I were playing it safe I would get what I could for my $450 puts but not less than $2 as you never know, and then I would count my profits and make sure I don't lose more than 25% of them.
Middle Play:
A) Assume they will have trouble breaking $500 and take the Sept $510s for $21.50 and sell the May $510s for $6. Again you can roll, or buy out on dips – Sept $540s are $10.85 so you lose $3 per $10 and you have July earnings in between to keep volatility up.
This play went off on Wednesday and now we have to hope Google doesn't go totally nuts but, if it does, we can always roll our caller and we have plenty of cushion on the longer contract.
B) Take the Sept $520s for $18.50 and cover with the May $440 puts for $4.50. Sept $500s are $23.20 so a $20 move does it for you, leaving you with a very nice income producer for 4 months.
Also triggered Wednesday and this is the joy of taking a risk. We stand ready to sell some May calls on the peak but no hurry here and, rather than selling the May puts, I will consider selling other puts against them as momentum plays.
C) Split the June $500s for $11.50 with the June $440 puts at $7.50. You have 3 months in which a $40 move either way will put you in the money…
In a play like this, if I go in the money early, I like to reduce my holdings so I have just the profits remaining so either way I win.
Riskier:
I think Google may break up on earnings excitement , especially if we have a strong market next week, so I’m going to make a short-term play, even though I am likely to lose both ends of this bet. Keep in mind my wish would be for GOOG to tank tomorrow so I can bracket all these $10 or more closer:
A) Take the Apr $500s for $1.75 and the May $510s for $4.50 with the hope of selling the Aprils ASAP to reduce my basis on the Mays.
Can be covered with May $420 puts for $2.40 until you are comfortable with direction.
The Apr $500s made a quick .75 and that was applied to the basis of the May $510s to bring us down to our $3.75 goal entry. We never took the put side of this but they swung from $2 to $2.90 yesterday and, of course, we got very comfortable with the yesterday's direction!
B) Take a 1/10 (of what you are willing to risk) position on the Apr $500s for $1.75. If that doesn’t work, by expiration, take a 2/10 position on the Mays that are $30 out of the money, followed by a 4/10 position in the Junes that are $30 out of the money at the close of May contracts. If the stock is still flat on June 15th, be glad you still have your 30% left and go get drunk!
This is absolutely a sell into the initial excitement play. Following our regular entry strategy we already had a near double at $3 on Thursday ($2.70 on Weds too) and a nice reentry at $1.50 yesterday for a free ride into earnings. Either way, don't be greedy – take at least half off while people are acting silly, you'll be amazed how fast these premiums can deteriorate on you.
We would like to thank Google for saving the Global stock markets and giving us an amazing finish to this options expiration period. It's going to be an exciting day tomorrow but, as I said this morning: "As long as we hold our "break up" levels I will be a happy camper but it certainly looks like we’ll be having an interesting day."
