JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 7/27/06 Google (GOOG): Updating

Current Price $385.50
estimates, maintain BUY rating
52WK HI $475.11 • Industry: Internet Services
52WK LO $273.35 • GOOG: NASDAQ; $385.50
EPS (TTM) $6.85 • 12-month price target: $500.00
Shares Outstanding 310M Buy initiated 6/25/06: $387.12 Buy 7/21/06: $387.12
Market Cap. $116B Target: $500.00 Target: $500.00
Dividend Yield NA
Price/Earnings (TTM) 56.3X
Price/Sales (TTM) 14.2X
EV/Revenue (TTM) 13.0X
EV/EBITDA (TTM) 30.5X
EBITDA (TTM) $3.5B

Brian Bolan
Research Analyst
Buy 7/27/06: $385.50
Technology Target: $500.00

Jackson Securities, LLC

300 S. Wacker Dr., Suite 2450 Company Description
Chicago, IL 60606 Google is an internet search and technology company that has
established itself as the leader in its growing market. Free downloads of
Ph: (312) 253-0578
applications, tools and other products have helped to fortify the brand
Fax: (312) 986-0560
which has come to stand for something more than just a search engine.
Skype: BBolan
bbolan@jacksonsecurities.com Valuation and Recommendation:
As a leader in a growing market, we see many opportunities for Google to
grow revenue, earnings and market share. We continue to recommend
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 7 and 8.
Analyst Certification is found on page number 8.
Google (GOOG)

Earnings release

Recently, 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, sale of
Baidu.com stock and a lower than expected tax rate.

Earnings Outlook for 2H06 and CY07

Our model is calling for top line growth of 14% in 3Q06 and 23%
in 4Q06, up from previous assumptions of 6% and 21%. We feel
these increases are justified due to increasing monetization rates, a
stronger competitive position and continued market expansion.

We are also rolling out our estimates for CY07, with a forecast of
$14.52 per share in earnings growth in the calendar year. This
street high estimate exemplifies our conviction in the company and
the stock as our top choice in the Internet space.

Taxes….and death

The tax rate for the second 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.

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.

JACKSON Brian Bolan 2

SECURITIES, Research Analyst – Technology
LLC
 Google (GOOG)

We have assigned a tax rate of 29% for 2H06, which will make the
effective tax rate for the year come in at 27.8%. This is
significantly lower than we previously estimated and is the result
of the “guidance” that
PE Ratio 12 months forward PE Ratio Year End 2007 Back End Difference was given on the last
25 $310 25 $363 $53 conference call. For
30 $372 30 $436 $64 CY07, we have
35 $434 35 $508 $75
40 $495 40 $581 $85
assigned a tax rate of
45 $557 45 $654 $96 30% in each quarter.
50 $619 50 $726 $107
55 $681 55 $799 $118
We know there are
60 $743 60 $871 $128 many moving parts that
65 $805 65 $944 $139 affect the tax rate, but
we are confident that
the management team will do whatever it can to minimize the bite
Uncle Sam takes out of net income.

Traffic Jam???

We note that TAC, as a percentage of Network revenue increased

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. We have moved our TAC estimates higher to reflect
this, however, we feel that over the next several quarters, small
decreases will return.

Valuation

As we pointed out in our last two reports on Google, the 4th

Quarterly Performance of Google quarter is a very important one, and the source of 25.6% of
Date Price Volume % Change all earnings in 2005. Our estimates call for the quarter to be
Jun-06 419.33 503 7.5% responsible for 28.9% of all earnings in 2006 and 29.2% of
Mar-06 390 905 -6.0% all earnings in 2007. In looking at a multiple for Google, we
Dec-05 414.86 604 31.1% wanted to present a chart that shows the power of earnings
Sep-05 316.46 521 7.6% in the second half of the year. If the company meets our
Jun-05 294.15 874 63.0% aggressive targets through the end of this calendar year, our
Mar-05 180.51 704 -6.4% target price will move up by more than 20%.
Dec-04 192.79 681 48.8%
Sep-04 129.6 503 NA When looking at the valuation for Google, we believe that
Source: Bloomberg earnings are the key. We have estimates of $10.46 for FY06
and $14.52 for FY07, or earnings growth of 84% in FY06 and
38.9% in FY07. We note that there is only one other stock that has

JACKSON Brian Bolan 3

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

a market capitalization in excess of $100B that have earnings

growth projections of 25% or more. Intel is expected to see
earnings growth of 28% in calendar year 2007.

Forward multiple after backing out Interest and Other Income

PE Ratio 12 months forward PE Ratio Year End 2007
Cash Add In Cash Add In
25 $282 14.26 $297 25 $334 15.95 $350
30 $339 14.26 $353 30 $401 15.95 $417
35 $395 14.26 $410 35 $468 15.95 $484
40 $452 14.26 $466 40 $535 15.95 $551
45 $508 14.26 $523 45 $602 15.95 $618
50 $565 14.26 $579 50 $669 15.95 $685
55 $621 14.26 $635 55 $735 15.95 $751
60 $678 14.26 $692 60 $802 15.95 $818
65 $734 14.26 $748 65 $869 15.95 $885

Since the release of earnings many have pointed out that Interest
and Other Income was a large portion of the out-performance and
shouldn’t be factored into the overall price target. We disagree
with this notion, as the company should be rewarded for interest
that its cash earns and it should be included. A simple exercise
would likely help to clarify this, so we took the same chart as
above, but backed out the Interest and Other Income.

We then looked to the balance sheet, and then took the total
amount of cash, and added on our projection for Interest and Other
Income and added it to the price targets for each ending period.
This method has an innate flaw, in assuming that all interest and
other income is put directly back into cash and that no other cash is
added to the balance sheet. That is to say, that all the free cash
flow that is added in the quarter is not accounted for on this quick
and dirty example.

We are maintaining our 12 month target price of $500 per share,

but expect that number to increase by the end of next quarter.

JACKSON Brian Bolan 4

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

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
Disclosure of Conflicts of interest:
Neither Jackson Securities nor any of its publishing analysts or their immediate family members has a position in the
securities described herein.

Compensation:
• The research analyst has not received compensation based upon investment banking revenues or from the
subject company in the last 12 months.
• Jackson Securities has not in the last 12 months managed or co-managed a public offering of securities,
received compensation for investment banking services from the subject company or any compensation for
products or services.
• 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.

Disclaimer: This communication is neither an offer to sell nor a solicitation of an offer to buy any securities
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securities mentioned herein in any jurisdiction where such an offer or solicitation would be illegal. We are not
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recommendation or take into consideration the particular investment objectives, financial condition or financial needs
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Brian Bolan
Research Analyst – Technology