LIVE ANALYSIS: Google Q1 Earnings

From Silicon Alley Insider:

Google (GOOG) reports Q1 today after the close. The call is at 4:30 Eastern / 1:30 Pacific (a half-hour earlier than you think). We'll be providing live analysis of the release and conference call.

Release
Webcast (1:30PM / 4:30PM)
SAI Spreadsheet: Google Financial Analysis

PREVIEW

We won't rehash the full debate, but here are the highlights. In Q1, the market has seen:

• Violent slowdown in US paid click growth, per Comscore: From 25% year-over-year in Q4 to 2% year-over-year in Q1.
  
• Some anecdotal reports of weak US spending on Google in Q1 offset by many reports of strong US spending (conflicting data points)
• Major cuts in analyst estimates for Q1 and full-year 2008
• A 30% drop in the stock, from $650 to $450.
  

We know Google is intentionally reducing "accidental clicks" to improve ROIs for advertisers. We also know that, as late as early March, Eric Schmidt said the company still hadn't seen any impact from the weakening economy. The bulls argue that the company's click- quality improvement programs will lead to higher prices-per-click for the remaining clicks, thus offsetting the loss of revenue units. The bears argue that price increases can't possibly offset the drastic slowdown and that Google will see a sharp deceleration in US revenue in Q1.

Google generates about half of its revenue from the US, so if the US slowdown is significant, international would have to be extremely strong to offset it. Consensus estimates have dropped significantly since the start of the quarter, however, so the bar is considerably lower than it was three months ago.

We have modeled the quarter in detail, and we believe the company could survive a slowdown in the US business to about 25% Y/Y versus 40% in Q4 (and reported paid-click growth in Q1 of 2%). Any more of a slowdown, and Google will probably miss the current revenue consensus. (The EPS consensus is easier: Unless Google has continued to increase spending in the face of a sharp revenue slowdown, the company should easily beat EPS consensus).

Key Metrics

• Gross Revenue: $5.2 billion consensus, up 41%
  
• Net Revenue: $3.1 billion consensus, up 42% (deceleration from 52% in Q4)
• EPS: $4.52 (Should be plenty of upside here, unless company really blows it)
• Consensus Outlook:
  • June Q: $3.8 billion Revenue / $4.64 EPS
  • 2008: $15.9 billion / $19.55
  • 2009: $20.2 billion / $24.09

SAI Spreadsheet: Google Financial Analysis