JACKSON SECURITIES, LLC

Research for the Prudent Investor

Date 10/20/06 Google (GOOG): Earnings

Current Price $426.06
update, maintain BUY rating
52WK HI $475.11 • Industry: Internet Services
52WK LO $301.21 • GOOG: NASDAQ; $426.06
EPS (TTM) $6.85 • 12-month price target: $500.00
Shares Outstanding 310M Buy initiated 6/26/06: $404.22 Buy 7/21/06: $387.12
Market Cap. $129B Target: $500.00 Target: $500.00
Dividend Yield NA
Price/Earnings (TTM) 62X
Price/Sales (TTM) 15X
EV/Revenue (TTM) 14X
EV/EBITDA (TTM) 33.2X
EBITDA (TTM) $3.5B

Brian Bolan
Research Analyst
Technology
Jackson Securities, LLC
300 S. Wacker Dr., Suite 2450
Company Description
Chicago, IL 60606
Google is an internet search and technology company that has
Ph: (312) 253-0578 established itself as the leader in its growing market. Free downloads of
Fax: (312) 986-0560 applications, tools and other products have helped to fortify the brand
Skype: BBolan which has come to stand for something more than just a search engine.
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 7.
Google (GOOG)

Summary

After what was a very impressive quarter, the Google conference

call was only lightly sprinkled with other tidbits of information that
investors could use. We picked up on a few key ideas and
subsequently updated our model to reflect those ideas (using cash
and not stock for acquisitions in the future and the tax rate) but
little else of value was divulged on the call.

Earnings

After the close, Google reported earnings of $2.62 per share

beating our earnings estimate of $2.57 and the consensus estimate
of $2.41. Net revenues of $1.86B just below our $1.88B estimate.
We should note that our estimates were among the most aggressive
on the Street.

The first big acquisition, YouTube.

During the quarter, Google agreed to purchase YouTube for

$1.65B in stock. This was the first large scale acquisition that the
company has attempted and comes with stock as opposed to cash
even as the company is sitting on a war chest of nearly $10B in
cash. On the conference call, management noted that this deal
done as a stock transaction is to be considered a one time instance
and future deals would be done in cash.

YouTube is the number one video site on the web and it has
experienced tremendous growth over the past few quarters. When
questioned when YouTube would be profitable, management
responded with the customary “we don’t give guidance.”

Market Share

Google gave us a little more insight into the market share questions
that have been around for the last few months. Independent third
parties have shown over the summer months that Yahoo had
gained share on the search leader Google. On the conference call
yesterday it was noted that Google has a high amount of academic
searches, which was the reason for the lower search numbers in the
summer and the quick rebound of late.

JACKSON Brian Bolan 2

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

Taxes….and death

The tax rate for the quarter came in at 29.5%, in line with our
estimate. The company also noted that they would be at or below
the 30% rate for the year. This holds true from the previous
quarter and gives us an idea that the effective tax rate for the fourth
quarter will be in the same ball park.

We have moved our effective tax rate for the fourth quarter up to
33% as a result of the tax rates in the previous quarters. That
would bring the average effective tax rate up to 29.2% for the year,
and could also serve to dampen what could be a strong 4th quarter.

Key Takeaway:

One of the main takeaways from the conference call has to be that
Google consistently answered questions with the idea that they are
building on prior improvements. Another term that came up a few
times was a cascading effect that they are witnessing. Clearly
these are two very positive attributes for any company to exhibit,
but for a company that is closely guarded as Google, its even more
impressive.

CapEx … Where the millions are headed

Little in the way of information was given on where the CapEx

dollars are being spent, but we did find out that the company plans
to continue its aggressive hiring patterns. Outside of the
conference call, the company noted that it plans to install solar
panels to help offset the huge power demand the company possess
due to the large number of computers and other devices its runs.

TAC and the confusion on the call

On the conference call in the prepared slides, the company states

that TAC is headed the right way. The slides have TAC as about
30% of total revenues. We however prefer to look at the TAC
number only against the Network revenues as in the owned sites
Google will generally keep the vast majority of the ad revenue.

JACKSON Brian Bolan 3

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

Our calculation shows TAC climbing once again. This quarter the
TAC rate reached 79.6%, up from 78..8% in the previous quarter
and 77.9% in the first quarter. We have adjust our estimates to
reflect this trend and have an 80% rate on the network side for
4Q06 and CY07.

Valuation

We were well above the street estimate of $2.42, a full $0.17 ahead
and Google still was able to beat our bottom line estimate. The
topline however came in just shy, but again, we were very
aggressive with our estimate. We note that we are still very
aggressive with our estimates, especially considering all the
changes we have made to CY07’s numbers. We have tinkered
quite a bit with next quarters estimate, but it is still holding at
$3.03 on the bottom line and much of the tinkering is adjustments
to the model and not the thesis of the investment in the stock.

We are maintaining our current target price of $500 per share even
as the stock moved as higher than $458 in the after hours market.
We expect to give another Google update in Mid November, at
which time we will likely be raising our target price due to the
estimates we have for CY07.

JACKSON Brian Bolan 4

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

Google
income statement
($ in mil, except per share)
Q3 Q2 Q3E 3Q06 A YOY QOQ % from Estimate
Google Web Sites 885.0 1432.4 1632.9 1625.977 84% 14% 0%
Network Sites 675.0 996.5 1066.3 1037.022 54% 4% -3%
Total Advertising 1,560.0 2428.9 2,699.2 2,663.0 71% 10% -1%
Licensing and Other 18.5 27.0 30.0 26.674 44% -1% -11%
Gross Revenues $1,578.5 $2,455.9 $2,729.2 $2,689.7 70% 10% -1%
Less:TAC (530.0) (785.0) (842.3) (825.0) 56% 5% -2%
Net Revenues $1,048.5 $ 1,670.9 $ 1,886.8 $ 1,864.7 78% 12% -1%

Cost of Sales 123.8 201.7 240.0 223 80% 11% -7%

Gross Profit 924.6 1,469.2 1,646.8 1,641.7 78% 12% 0%

Operation Expenses
Research and Development 151.7 212.0 240 250.918 65% 18% 5%
Sales and Mktg 105.0 182.1 235 192.299 83% 6% -18%
G&A 92.4 150.7 195 168.686 83% 12% -13%
Stock Based Comp. 46.3 109.1 130 99.86 116% -9% -23%
One-Time Charges and Other
Total Op Expenses 395.4 653.9 800 711.763 80% 9% -11%

Operating Income 529.2 815.3 846.8 929.9 76% 14% 10%

Contribution to Google Fondation

Interest and Other 20.8 160.8 100.0 108.18 420% -33% 8%

Pre-Tax Income 550.0 976.1 946.8 1,038.1 89% 6% 10%

Taxes 168.8 255.1 293.5 306.15 81% 20% 4%

29.5%
Net Income 381.2 721.0 653.3 731.9 92% 2% 12%

PF Net Income Reconciliation

Pro-forma Net Income 435.8 772.0 795.4 812.3 86% 5% 2%
EBITDA 672.4 1,136.4 1,228.8 1,292.7 92% 14% 5%

GAAP EPS $1.32 $ 2.33 $ 2.11 $ 2.36 79% 1% 12%

PF EPS (Ex-Stock Comp, Non-Rec) $1.50 $ 2.49 $ 2.57 $ 2.62 74% 5% 2%
EBITDA Per Share $2.32 $ 3.67 $ 3.96 $ 4.16 79% 14% 5%

Shares 289.7 310.0 310.0 310.6 7% 0% 0%

Source: Company reports, Jackson Securities

estimates

JACKSON Brian Bolan 5

SECURITIES, Research Analyst – Technology
LLC
Google (GOOG)

Source: Company reports, Jackson Securities

estimates

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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securities described herein.

Compensation:
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subject company in the last 12 months.
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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