Google Inc (GOOG) Neutral First Take On Q1 Results[citbank research] $GOOG

Google Inc (GOOG)
Neutral First Take On Q1 Results

• GOOG Reported A Modest Beat Q1 — $5.06B in net revenue & $6.76 in non-GAAP EPS vs. our/Street estimates of revenue of $5.07B/$4.93B & EPS of $6.71/$6.56. 2% Q/Q net revenue growth was a tad light vs. high-end market expectations for 3% Q/Q growth.

• Improved Fundamental Trends – Organic Y/Y gross revenue growth (excluding FX & Hedging) of approximately 22% accelerated vs. Q4’s 16%. And $2.78B in non- GAAP op. income came in ahead of our $2.75B est and increased 29% Y/Y (decent measure of organic bottom-line growth). PF Op. margin of approx 54.9% (vs. our 54.2% est.) was up approximately 180 bps Y/Y and down 80 bps Q/Q.

• Biggest Revenue Upside From “Other” Revenue — Google's own Gross Website revenue came in at $4.44B – $71MM or 2% below our est. Google’s Gross Network revenue came in at $2.04B – $28MM or 1% below our estimate. Network TAC came in at 71.0%, 100 bps below Q4 and about 150 bps below our est of 72.5%. However, O&O TAC inched up 30 bps vs. Q4 to 6.0%. Other revenue came in at $300MM, vs. our $256MM estimate (possibly from NexusOne & DCLK licensing sales). The Other Revenue and Network TAC results are a positive, but O&O and Network Revenue were somewhat weaker than expected.

• Paid Click Trends A Key Positive; CPC Growth Less Than Expected — Paid click growth of 15% Y/Y compared with Q4’s growth of 13% and Q3’s growth of 14% and was ahead of our 12% Y/Y expectation. Reported CPCs were up 7% Y/Y vs. up 5% Y/Y in Q4, and below our 14% Y/Y growth estimate. U.S. Gross Revenue was up 1% Q/Q – vs. our expectation of (1%) – while reported International Gross Revenue was up 2% Q/Q – vs. our expectation of 6%. UK revenue grew 15% Y/Y, vs. our 19% Y/Y expectation. All in, International Gross Revenue (ex FX & Hedging) grew 22% Y/Y, up from Q4’s 21% Y/Y growth.

• Neutral First Pass – Tho Paid Click Trends Signal Possible Inflection Point — Q1 results beat consensus estimates, but came in shy (again) of high-end expectations. Overall results were generally in-line with our estimates. We believe GOOG shares have material valuation support here.

Neutral First Take On Q1 Results

Calendar of events to watch 04/09/10 $BAC $JJ $SPY

• Obama will speak at 1:20pmET today; will address the W VA mine explosion and Justice Stevens’ retirement, among other items.

• China –There could be some news out of China this weekend (per the NYT, China may announce a yuan revaluation as soon as Fri night; we will be getting China trade balance and import/export #s Fri night/Sat morning; China is expected to post a trade deficit this weekend for the first time in a while).

• Greece – activation of IMF-EU rescue this weekend? Reuters reported that a deal has been reached on the specific terms of a rescue but its not clear if Athens has requested the plan to be activated. In terms of the parameters of IMF debt, for loans up to three years, Greece will be charged the SDR rate plus 300 bps plus 50 bps service charge (per Reuters).

Corporate Calendar for the week of Mon Apr 12 – earnings season for Q1 will kick off w/AA coming Mon after the close. PKX (S Korean steel company) will hit overnight on Mon w/a call on Tues morning. There will be a bunch of tech results. For the semis, watch for INTC and LLTC on Tues, ASML on Wed, and AMD, FCS on Thurs. In the internets, GOOG kicks things off Thurs night. JPM is the first financial earnings of the season (Wed morning) and will be followed by PBCT (Thurs night) and BAC, FHN (Fri morning). GE reports Fri morning also. 

Financial Sector Stories In Play today $LM $BLK $HIG

Financials

·         FINANCIALS: The group is trading in-line with the market as Greece headlines dominate and credit tightens. Volumes and flows are light this Friday as the group remains range-bound ahead of earnings which kick off next Wednesday. Banks are outperforming insurers as non-life insurers continue to be used as a source of funds. Vanillas are quiet today, as HFs are our most active clients. The vanilla flows we are seeing are better for sale into strength in the group, while HFs are more balanced. We're not seeing much shorting being done today. The macro picture (mainly Greece) and earnings will be the main drivers of the group in next week's trading.

·         Brokers – GS falls into the red mid-day today (nothing all that specific out there; keep in mind the stock had a strong rally this week). 

·         Asset managers – the group is higher pretty much across the board.  LM, TROW, BLK, BEN among the best performing names. 

AAPL iPhone OS event. $AAPL #IPAD #APPLE

·         AAPL iPhone OS event.  New software for iPhone made available to developers (will be available to users in the summer).  gives color on iPad and iPhone sales.  so far seems to be non-event.

·         Apple Event update.  the co held an event @ 1pmET Thurs to unveil its next-gen iPhone OS

·         New features include Multitasking for third party apps; Folders to better organize and access apps; improved Mail with a unified inbox, fast inbox switching and threaded messages; enhanced Enterprise support with even better data protection, mobile device management, wireless app distribution and more; Apple's new iAd mobile advertising platform; and iBooks, the delightful new ebook reader and online bookstore recently debuted on the iPad.

·         The iPhone OS 4 beta software and SDK are available immediately for iPhone Developer Program members at  developer.apple.com. iPhone OS 4 will be available as a software update to iPhone and iPod touch users this summer

Announcement Raises More Questions $GOOG

• Redirect to Google.com.hk appears to be a compromise Google today began redirecting users visiting Google.cn to Google.com.hk where it offers uncensored search results in simple Chinese (designed for mainland China users). Though we think it’s likely that results would be censored by Chinese authorities for users within mainland China soon, we view this move as a positive for Google as it can maintain a search and advertising presence in mainland China (vs. a complete withdrawl), though we think market share declines are likely
•  Looking back pre-2006 provides a precedent for Google.com.hk GOOG’s rationale for launching Google.cn in Jan 2006 offers some clues to how Google.com.hk might appear to users in mainland China. Prior to 2006, users in mainland China accessed search results via Google.com and according to GOOG, the site was down 10% of the time or was slow. Clicking on results would stall a user’s browser. Google News was unavailable while Images worked only about half the time. We believe these issues could re-occur if authorities begin restricting results, which could lead to market share losses vs. search engines operating in China.
• Ball in China’s court; Some unknowns remain The largest unknown is the extent to which authorities restrict Google.com.hk to users in mainland China. Best case: Only controversial queries are censored; Worst case: Google.com.hk is completely blocked, like YouTube. Google will provide performance data for its China sites, raising visibility on the filtering issue.
• Valuation Our $700 price target is based on our DCF analysis.

Afternoon Review

· Equity Levels: SP500 up 13.86pts to 1089.37 at 12:05PM. The Nasdaq is also up 23 pts to 2206.50. The Russell is up over 5 pts to 616 this morning.

· Equities out of the gate on a strong note today; Catalysts for the move higher: 1) M&A activity (SPG/General Growth and TRA/Yara were the big notable deals); 2) earnings received well (inc. Barclays, which had strong #s this morning in London, esp. from its BarCap division, but also out of MRK, GPC and Q in the US; DRI also had an upside preannouncement); 3) eco #s coming in better (the ZEW in Germany this morning and the Empire Survey from the US); 4) the Euro is finally bouncing, giving a strong bid to all things commodity-related today. On a technical basis, we traded north of 1081 on the sp500 (cash) and now people are watching to see if we can close north of 1090 (which is the 20day MA; we haven’t closed north of this level since Jan 20). Above 1090 looms the 50day MA at 1108. Stocks are drifting towards their highs of the day (so far) as Europe closes, a pattern we have seen over the last ~1-2 weeks (when Europe closes and the headlines around Greece and other sovereigns pass, US stocks seem to feel more comfortable rallying).

· Color from the desk – the tone to trading continues to be better; the heavy vanilla selling of earlier in Feb abated last week and that is carrying over into today. Buyers, which started to nibble late last week, present again today, esp. in some of the higher-beta groups. Still a lack of sellers (both shorts and vanillas) that is helping most although buyers def. more comfortable adding to long exposure. Note that while stocks have a nice bid today, corp credit is weaker (IG is slightly wider and HY is flattish).

· Equity Sectors – across the board rally today. Financials, tech, industrials, discretionary, energy, utilities, materials, and telecoms are all up >1%. Commodity-linked stocks among the best performing in the market (esp. steel stocks, which are higher on back of the weaker dollar and an AKS price hike). Tech is seeing buyers again ahead of a big Wed night of earnings (we get HPQ, AMAT, ADI, NTAP, and NVDA all Wed night); SOX is leading tech higher (SOX is up close to 2%). Financials trading inline w/the tape, led higher by asset managers, money center banks, and credit cards (COF master-trust came in better than expected). Health care and staples, both relative “safe havens”, are underperforming, although each of up 0.8% (within staples, KFT is off 2% post earnings, and WLP is leading HC lower after the co canceled its analyst meeting).

ALSO

Financials Update 02.16.10

Financials

· Financials: Trading in-line with the broader tape, financials are rallying on a series of headlines including Barclay's earnings, a cancelled strike from Greece's tax collectors, better-than-expected master trust data from the card companies and a NYTimes story stating that the EU is cooling to the Volcker Rules. Volumes are lighter, as are flows this morning. However, we maintain a bias to the buyside which we shifted towards mid-last week. Vanillas remain skewed to the buyside following two weeks of aggressive selling, while HFs remain better to buy as well following two weeks of a more balanced approach. For both vanillas and HFs, we're seeing them play a more positive directional bias after a more market-neutral approach over the past two weeks. In banks, we're seeing vanillas adding to positions in the money centers, and value buyers continuing to show a bid at a slight discount to the current market in the larger regionals. Small cap banks are better to buy as well, as we're seeing HFs cover shorts in these names. In the credit cards, we're seeing institutional buyers of the group as master trust continues to roll out. In insurance, we're seeing a buy-side bias from HFs.

· Asset managers – strength across the board in the group. JNS is leading the traditional names, up ~4%. AB, EB, CLMS, FII, IVZ, and WDR are all up ~2%+. The alternative managers also have a bid – BX, GLG, OZM, FIG are all up ~2%+.

· Banks – trading higher across the board. BAC and C are up ~2-3% and outperforming. Regionals are more mixed but also have a bid – FITB, MTB, MI, TCB, USB are some of the better performing regionals.

· Credit cards – COF is up more than 3% and outperforming after this morning’s master trust #s came in better-than-expected. AXP and DFS also have a bid to them.

· MI/financial guarantors – PMI is off 6% after earnings this morning came in below the St although the rest of the group is trading higher.

· Best Performing SP500 financials (from Bloomberg): JNS, COF, AIV, HCP, BAC, CBG, IVZ, C, ICE, ALL

· Weakest performing sp500 financials (from Bloomberg): BRK’b, LNC, TMK, AOC, ZION, NYX, FHN, CMA, MCO, BBT

HERE