GOOG's 3rd quarter earnings... the Bull and the Bear

GOOG is one of the least transparent companies on the face of the earth. When we try to take a look at earnings, we get wildly varying statements. I believe that it is a mistake to trade through the earnings with a company like Google. Here are a couple of scenarios from the bull and the bear perspective. In this post we will look at just revenue and assume that everything else is held constant. Analysts surveyed by Thomson First Call are expecting GOOG to have a Q3/Q2 revenue growth of 9%.

The bull: Google always beats every time with the exception of Q4(05) which was due to taxes. They have been increasing their market share at the expense of YHOO and MSFT. Last quarter they grew quarter over quarter by 15%. This will be no exception this time.

The bear: What part of slowing growth don't you understand? Google is saying that this is the slowest part of the season. Last year in the third quarter was due to the hurricanes. Many people where searching for loved ones. It was a total anomaly.

The bull: You would short your own company give me a break. While I do think that Google will be slightly less than 15%, I don't expect it to be by much. By the way why don't you keep events like the hurricane out of this argument. It has nothing to do with anything. While there is a little slowing in the overall growth, take a look at all the market share that Google is taking from Yahoo and Micrososft. Didn't you see that Yahoo warned....This was due to a loss of market share to yes you guessed it GOOG. You are going to be sorry for shorting GOOG through earnings. I expect GOOG to have revenue growth of 14% this quarter.

The bear: Give me a break.......Yahoo's warning is bad for the whole sector. Google should have announced revenue growth of around 5% last year. I don't expect GOOG to grow at all this quarter over last quarter. If you hold through earnings, you'll be left holding the bag.

Let's run this through the equations and see what we come up with.
Assumptions: Tax rate=30%, TAC=32% of Revenue, quarter/quarter non-TAC costs will increase 8.6% which is the same as Q2/Q1, stock option expense will be $109 million, interest from cash=$100 million, and total dilutive shares =311 million (1 million in addition to 31o million).

Q2(06) revenue=$2.456 billion
Total cost and expenses less TAC=$856 million @ 8.6% increase=$930 million
Non GAAP expectations=2.42

The bull case:
Q3(06) revenue=1.14 x $2.456 billion =$2.8 billion
TAC=32% of revenue $896 million
Total cost and expenses: $930 million+$896 million=$1.826 billion
Operating income: Revenue-total cost=$974 million
Operating income + interest: $1.074 billion
Taxes @ 30%: $322 million
Non GAAP as applicable to the common shares: Operating income +Option expense (this is added because it is backed out for non GAAP calculation) +interest-taxes=$883 million
Non GAAP EPS: $861m/311m (shares)=$2.77

The bear case:
Q3(06) revenue=$2.456 billion
TAC: $786 million
Total cost and expenses: $903 million+ $786 million=$1.689 billion
Operating income: $2.456 billion-$1.689 billion=$767 million
Operating income + interest: $867 million
Taxes @ 30%: $260 million
Non GAAP income applicable to shares: $716 million
Non GAAP EPS: $716m/311m=$2.30

This bull and bear case will get a little wilder when we look at cost and throw that into the mix in the next post. The lesson to this story is that it will be tough to figure out exactly what the announcement will be for GOOG. You will hear both sides.

Good luck investors