JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 7/21/06 Google (GOOG): Earnings

Current Price $387.12 update, maintain BUY rating
52WK HI $475.11 • Industry: Internet Services
52WK LO $273.35 • GOOG: NASDAQ; $387.12
EPS (TTM) $5.70 • 12-month price target: $500.00
Shares Outstanding 310M Buy initiated 6/25/06: $387.12 Buy 7/21/06: $387.12
Market Cap. $117B Target: $500.00 Target: $500.00
Dividend Yield NA
Price/Earnings (TTM) 67.2X
Price/Sales (TTM) 16.9X
EV/Revenue (TTM) 15.9X
EV/EBITDA (TTM) 36.8X
EBITDA (TTM) $3B

Brian Bolan
Research Analyst Company Description
Technology Google is an internet search and technology company that has
Jackson Securities, LLC
established itself as the leader in its growing market. Free downloads of
300 S. Wacker Dr., Suite 2450 applications, tools and other products have helped to fortify the brand
Chicago, IL 60606 which has come to stand for something more than just a search engine.
Ph: (312) 253-0578 Valuation and Recommendation:
Fax: (312) 986-0560
As a leader in a growing market, we see many opportunities for Google to
Skype: BBolan grow revenue, earnings and market share. We continue to recommend
bbolan@jacksonsecurities.com investors BUY shares of Google.
Jackson Securities, LLC seeks to do business with companies covered in its
research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decisions.
Please also refer to the important disclosures found on page numbers 19 and 20.
Analyst Certification is found on page number 19.
Google (GOOG)

Earnings release

After the close, Google reported earnings of $2.49 per share

beating our earnings estimate of $2.24 and the consensus estimate
of $2.22. Net revenues of $1.67B were ahead of our $1.61B
estimate.

Management noted that they saw a strong quarter in a seasonally

weak period, with traffic growth coming from Asia and Latin
America. Results were also buoyed by better monetization and
more effective advertisements.

Partnerships… one of the best kind of ships.

Partnerships were alluded to several times throughout the

conference call, and not just the recent one with Dell and Adobe,
but the high probability of several more being announced soon.
The company noted that building a strong ecosystem is something
that will help Google as well as the individual user. Google Pack,
a free software download that includes several Google applications
and applications from companies such as Symantec and Adobe, is
an example of the type of partnerships that were alluded to on the
call.

We expect Google to announce several partnerships in 2H06, and

many of them to involve Checkout. Management noted that the
value proposition for advertisers using Checkout is all about higher
clickthroughs, more conversions and higher ROI’s. Even though
the product is very new, Google has seen it accepted by BlueFly,
Buy.com and Starbucks.

Going Mobile

We were pleased to hear more about mobile search and the

company’s efforts in that space. As we noted in our initiating
coverage piece on 6/26/06 we believe that mobile search will be a
key piece to the puzzle in the coming years.

On the call, management noted they are bringing more product to

mobile phones. Larry Page further noted that there are at least

JACKSON Brian Bolan 2

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

twice as many mobile phones than PCs in use globally and mobile
usage is growing faster than PCs.

Key highlights from the conference call concerning mobile search:

∗ The company wants to make the Google experience device

independent.

∗ Maps for Mobile launched in several countries in the

quarter and there were positive results coming from Japan
where the product has been available since April of this
year.

∗ KDDI in Japan was singled out a few times on the call as

an example of mobile delivery of advertisements.

∗ Search on a mobile is much different than browsing, as

users are looking for specific information, which
exacerbates the need for highly targeted ad placement.

Market Share

Google maintained its position that it generally agrees with the

directional trends that third party firms are distributing but will not
confirm what they believe their market share to be. They did not
that they are doing well in the US and Europe, and the challenges
they face in those markets can be solved with staffing.

In other markets there are greater challenges. Countries such as

China, Russia and Korea have local companies that own the top
search position. Management point to the connectivity problems
they face in China and the intricacies of the Russian language as
contributors to their problems. Again, staffing was pointed to as a
possible solution to this problem.

Taxes….and death

The tax rate for the quarter came in at 26.1%, well below our
estimate of 31%. Should we have been a little more clairvoyant
and estimated the tax rate at 26.1% we would have boosted our
EPS estimate to $2.37 instead of the $2.24, an increase of $0.13
per share.

JACKSON Brian Bolan 3

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

The company noted on the conference call that the tax rate for the
year is likely to be 30% or below. After posting a tax rate of
26.9% in the first quarter, the average for the first half comes to
26.5%. We note that the company has already had its tax rate
gaffe back in 4Q05, where confusion over the tax rate led to a sell
off in the stock.

This 30% or below estimate is one that causes us a bit of concern

and as we noted above, it could be a material difference. We plan
to discuss this topic with the company when we speak with them
next but also understand the topic is one that is very fluid. After
all, taxes are more of a necessary evil than a key component of
valuation of a stock.

Other highlights:

In innovating the search product, the company is serving more ads

to “commercial” words than they
are to non-commercial words.
Flowers is a great example of
this, as three sponsored ads will
appear on the Google search at
the top (there are 4 on Yahoo!).
Non commercial words will
receive fewer advertisements,
and thus improve the user
experience.

Google has mentioned a movie

studio in each of its last two
conference calls. Last quarter,
Paramount was singled out and this quarter it was Lions Gate. It
should be noted that a popular blog, GigaOm, posted about
whether Google should look into buying such a company. This
will certainly be fodder for the conspiracy theorists, but rest
assured, there isn’t much chance of that deal happening.

JACKSON Brian Bolan 4

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

CapEx … Where the millions are headed

There was a lot of time spent on CapEx and how a substantial

portion of the nearly $700M in the quarter was spent on real estate.
Approximately $319M was spent on real estate in the quarter, with
the company moving to the buy and not lease real estate in an
effort to reduce overall cost of operations. Other areas that saw
and will see more spending include staffing in Sales and marketing
and continued increases in research and development. On the
international side of the equation, we expect more hiring in India
and Ireland as Google moves to maintain its position in those
markets.

The company noted its strategy for data centers was more of a
build vs lease proposition, with the company preferring the build
side of the equation. We note that it is no secret that Google builds
most of its own computers and servers and that it is the largest
non-PC making consumer of semiconductors. As far as real estate
is concerned, the company also prefers buying to leasing, as it
hopes to reduce overall costs over time.

Traffic Jam???

We note that TAC, as a percentage of Network revenue jumped to

78.8%, up from 77.9% the previous quarter but still lower than the
79.1% it was at a year ago. While this is a step in the wrong
direction, we don’t believe it to be something that we would lose
sleep over. When we publish our estimates for the remainder of
the year, we will be curbing our aggressive reduction of TAC to
reflect this quarter’s results.

Valuation

We are encouraged by the results Google posted, and will be

updating our model next week. We anticipate that our estimates
will move higher due to the strength of this quarter, although the
tax issue and higher TAC remain as secondary concerns. We
maintain our BUY recommendation and target price of $500.

JACKSON Brian Bolan 5

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

Google
income statement
($ in mil, except per share)
Q2 05 Q1 06 Q2 06 E Q2 06 A YOY QOQ % from Estimate
Google Web Sites 737.0 1,300.0 1375.4 1432.4 94% 10% 4%
Network Sites 630.0 928.0 956.8 996.5 58% 7% 4%
Total Advertising 1,367.0 2,228.0 2,332.2 2,428.9 78% 9% 4%
Licensing and Other 17.5 25.8 28.0 27.0 54% 5% -4%
Gross Revenues $1,384.5 $2,253.8 $2,360.2 $2,455.9 77% 9% 4%
Less:TAC (494.0) (723.0) (743.9) (785.0) 59% 9% 6%
Net Revenues $890.5 $ 1,530.8 $ 1,616.3 $ 1,670.9 88% 9% 3%

Cost of Sales 103.1 178.8 189.0 201.71 96% 13% 7%

as a percent of Net Revs 11.6% 11.7% 11.7% 12.1%
Gross Profit 787.4 1,352.0 1,427.3 1,469.2 87% 9% 3%

Operation Expenses
Research and Development 95.8 173.5 205.0 212.0 121% 22% 3%
Sales and Mktg 97.0 175.0 205.0 182.1 88% 4% -11%
G&A 71.6 146.0 165.0 150.7 110% 3% -9%
Stock Based Comp. 47.3 114.7 130.0 109.1 131% -5% -16%
One-Time Charges and Other
Total Op Expenses 311.7 609.2 705 653.9 110% 7% -7%

Operating Income 475.7 742.7 722.3 815.3 71% 10% 13%

Contribution to Google Fondation

Interest and Other 19.7 67.9 75.0 160.8 716% 137% 114%

Pre-Tax Income 495.4 810.7 797.3 976.1 97% 20% 22%

Taxes 152.6 218.3 247.2 255.1 67% 17% 3%

Tax Rate 30.8% 26.9% 31.0% 26.1%
Net Income 342.8 592.3 550.1 721.0 110% 22% 31%

Pro-forma Net Income 400.1 722.3 694.5 772.0 93% 7% 11%

EBITDA 590.0 1,034.9 1,067.3 1,136.4 93% 10% 6%

GAAP EPS $1.19 $1.95 $1.77 $2.33 95% 19% 31%

PF EPS (Ex-Stock Comp, Non-Rec) $1.39 $2.37 $2.24 $2.49 79% 5% 11%
EBITDA Per Share $2.05 $3.40 $3.44 $3.67 79% 8% 7%

JACKSON Brian Bolan 6

SECURITIES, Research Analyst – Technology
LLC
Analyst Certification
I, Brian Bolan, hereby certify that the views expressed in this research report accurately reflect my personal views
about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views expressed in this research report. I may be
compensated in part based on the overall profitability of Jackson Securities, LLC, which includes earnings from
investment banking and all other aspects of the firm’s business.

Important Disclosures
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Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the
securities described herein.

Compensation:
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subject company in the last 12 months.
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received compensation for investment banking services from the subject company or any compensation for
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• Jackson Securities does not expect to receive or intend to seek investment banking compensation from the
subject company in the next 3 months.

Position as Officer or Director:

Neither the research analyst nor a member of his/her immediate household is an officer or director with the
company/companies mentioned in this report.

Market Making:
Jackson Securities does not make a market in this stock
Explanation of Ratings:
Buy - Expected 12-month absolute performance of +10% or higher
than the market price at which time the rating was issued.
Hold - Expected 12-month absolute performance of +5% to –5% from
the price at the time the rating was issued.
Sell - Expected 12-month absolute performance of –10% or lower than
the market price at which time the rating was issued.

Distribution of Ratings:
Jackson Securities, LLC has a distribution of ratings among its coverage universe as follows:
Buys – 65.52% (38 of 58 active recommendations)
Holds – 31.03% (18 of 58 active recommendations)
Sells – 3.45% (2 of 58 active recommendations)

Jackson Securities has provided investment banking services within the previous 12 months with the following
percentage of the companies they have rated:

Buys – 2.64% (1 of 38 active recommendations)

Holds – 0% (0 of 17 active recommendations)
Sells – 0% (0 of 2 active recommendations)

Risks: General economic conditions, economic slowdown/recession, adverse industry news.

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Brian Bolan
Research Analyst – Technology