Google Braces For Earnings (GOOG)

Google Inc. (NASDAQ: GOOG) is on deck for earnings after the close of trading today, and like most tech and internet stocks the expectations are high.  Thomson Reuters has estimates of $6.60 EPS on $4.95 billion, up from $6.57 EPS and $4.93 billion expected earlier this week.  As with most tech and internet names now, we are more interested in the other metrics besides just the top-line data.

For a reference, this is expected to be over 25% earnings growth and over 21% revenue growth. There are three big issues here to consider that have not been a part of the mix previously.  Google’s decision to leave China will not have had much impact on the quarter, although it may act as a drag. The Android O/S phone revenues will have made it into the quarter and that will be a wild card as analysts are often way off at first during new product launches or when business models change.

The last issue is that CMPs, advertising rates per thousand pageviews, were very weak at the publisher or content owner level in February in many sectors and sub-sectors.  That did not hit everyone, but it did hit many and it left many wondering if Google’s payouts were changing or if the business was really just weak temporarily.

A last issue is that Google ended March with its share of US search barely under 70% for its market share, a level not breached since June of 2008, according to the Experian Hitwise data.

Options traders appear to be braced for a move of what looks to be more than $15.00 in either direction, although tomorrow is options expiration date.  As far as the synthetic volatility trade of buying the closest Call and Put, that is not a cheap notion.  Taking the synthetic straddle ($600 Call, $590 Put) would cost close to $22.00 today in mid-morning prices.

Here are some internal metrics calculated at the last earnings report:

• Google-owned sites generated 66% of total revenues;
• Google’s partner sites generated revenues, through AdSense programs, of $2.04 billion, or 31% of total revenues;
• International revenues, ex-U.S., was 53% of total revenues;
• TAC, Traffic Acquisition Costs as the amount of revenues shared with partners as a percentage of advertising revenues was 27% in the fourth quarter of 2009;
• Operating expenses (other than cost of revenues) were 27% of revenues;
• Stock-Based Compensation was $276 million last quarter and Google’s estimate for charges for grants to employees prior to January 1, 2010 would be about $1.2 billion for 2010;
• Cash, cash equivalents, and short-term marketable securities were $24.5 billion at the end of the 2009 period;
• Google employed 19,835 full-time employees at the end of last quarter, a gain of only 170 full-time employees the prior sequential quarter.

The $595 share price today compares to a 52-week range of $364.16 to $629.51 and compares to an average analyst price target just under $675.00.  For forward expectations, Google trades at just over 20-times 2010 expectations and under 18-times 2011 earnings expectations.

JON C. OGG