Google Update

I’m now advocating taking the money and running on our Google calls as I see a lot of things that will really hurt it as it becomes overbought and the naysayers come out. If you take earnings at face value Google beat estimates by 15% so you would expect it to move up at least $60 tomorrow but I’m looking a little closer than face value. Here are some of the things I see so far, check comments for any additional stuff: Most of the numbers we are hearing are “Non-GAAP” in other words, not according to Generally Accepted Accounting Principles! This means all the numbers that are currently being bandied about may not be the numbers that end up on the bottom line: http://biz.yahoo.com/e/060420/goog8-k.html Now I can’t imagine that they would purposely mislead people to the extent they are obviously being led so far this evening but the conference call was less than forthcoming so I started digging… Here’s the full filed results: http://yahoo.brand.edgar-online.com/fetchFilingFrameset.aspx?dcn=0001193125-06-084583&Type=HTML Maybe I’m too much of a lawyer but I don’t like the statement: “Google had an exceptional quarter” leading off the legally filed report as exceptional means “unusual, not typical” and perhaps “don’t expect us to do this again.” There were $39M worth of “tax benefits” included in earnings (7%) from 4th quarter charities and losses associated with paying out on the “click-fraud” lawsuit. “Stock-Based Compensation — In accordance with a new accounting rule, FASB Staff Accounting Bulletin No. 107, stock-based compensation is no longer presented as a separate line on our income statement. The stock-based compensation is now presented in the same lines as cash compensation paid to the same individuals. Stock-based compensation recognized in prior periods has been reclassed to conform with the presentation in the current period. In the first quarter, the charge related to stock-based compensation was $115 million as compared to $58 million in the fourth quarter. The increase in stock-based compensation was primarily related to the adoption of FAS 123R related to stock-based options expensing. For the full year, we expect stock-based compensation charges for grants to employees prior to April 1, 2006 to be $370 million. This does not include expenses to be recognized over the remainder of the year related to employee stock awards that are granted after April 1, 2006 or non-employee stock awards that have been or may be granted. We currently anticipate that dilution related to all equity grants to employees will be approximately 1% to 1.5% per year.” They expensed $115M this quarter and called it a “one-time” expense (.33 per share) but they are saying that there is another $255M left, just from grants prior to 4/1. I don’t like this or the fact that they anticipate about $200M per year which would seem to include another $140M or so between April 1 and Dec 31 of new grants. In short, with $395M worth of anticipated compensation for the remainder of the year, we can assume $134M every quarter! It remains to be seen how forgiving people will be of this. One could argue that it’s always been there and doesn’t change anything (last year it was $49M but accounting rules let them bury it) but that’s the point of the law – now the playing field is even and we can properly evaluate this BS form of hidden compensation. Another issue I see is the tax rate went from 40% last quarter to 27% this quarter. If you normalize the rate at 30% that would take about 9 cents off earnings. Q1 revenues were $2,254M vs. $1,919M (+ $335M) but net income shot up to $592M from $372M (+ $220M). That is incredible to the point of not being credible… Don’t forget that TAC (traffic acquisition costs) eat up 32% of those revenues so out of $227M in additional Gross Profit, Google made $220M! How they kept these expenses so low with a 20% increase in employees (since 12/31) to 6,790 is so far beyond me that I feel like I have to go back to school! It’s really really amazing when you consider that Operating Expenses went from $572M to $607M and last quarter included a $90M lawsuit payout. Of course not much of this really matters when you have $10.5Bn in the bank (ask GM). Checking down on the Income Statement I wish they had compared to last quarter but still, with income up “only” 76%: R&D is up 150% Sales and Marketing is up 110% G&A is up 150% While this is not a problem at the moment, something will have to give in a big way if things slow down! Speaking of slowing down, if the projected growth rate drops all the way to 35% and the p/e of the company drops all the way to 35%, this should still be a $900 stock by next year so don’t go betting against this thing!!! Last (so far) look way down at the bottom where it talks about “Shares used in per share calculation.” What happened to the 5M shares they just sold? I think they haven’t officially been doled out yet so they are cleverly not including them but that’s a 1.5% drop in all calculations next quarter. Unfortunately they will be hitting this reality into what is certain to be raised guidance…