Google (GOOG) Strong Q3, Amazing Cash Flow

Initial Analysis: Revenue was in line with estimates, which is a modest upside surprise (Wall Street was expecting a miss). EPS was solidly ahead of estimates, so a strong upside surprise.  The upside came from better G&A expenses, which suggests Google is finally getting more disciplined about spending.

Perhaps most importantly, capital expenditures finally dropped sequentially, so free cash flow was very strong ($1.7 billion).  That’s almost a $7 billion free cash flow run-rate.  With an enterprise value of about $100 billion, the stock is trading at only 15X cash flow.  CEO Schmidt did make a nod to the weak economy–the company is “realistic” about it–but Google obviously not being walloped by it.

Stock popped nicely in aftermarket. In-line revenue should temper upside, but company is still robustly healthy, and a 15X cash flow multiple is perfectly reasonable.

Conference call starts at 4:30 PM ET.  Live notes below.  Conference call slides below that.

3:56 Henry Blodget:  Good afternoon and welcome!   Feel free to comment in the window below.   We’ll scan and publish as soon as we can.   (If we don’t approve your posts, it doesn’t mean we hate you. You’re just probably not following the rules: Please don’t swear gratuitously or impersonate other people, stay on topic, write in something resembling English, and be somewhat intelligent.)
3:56 Henry Blodget:  Press release is usually out right after 4Pm
3:57 Peter Kafka:  In the meantime, they are playing a nice selection of Muzak in the holding que for the 430 conference call
3:59 [Comment From Mike] 
Henry, what is the % chance that they beat estimates? Thanks, Mike 3:59 [Comment From Steve] 
Ad coverage has been way down this quarter, with high attrition of small and medium advertisers. Big advertisers were showing growth in July and August, but cut their budgets in September. Google has pushed an algorithm change, but it won’t likely hit until Q4. Thoughts? 3:59 Henry Blodget:  I think reasonable chance they beat EXPECTATIONS, which are below estimates.
3:59 Henry Blodget:  Could beat consensus (it’s set modestly below trend)
4:00 [Comment From Under29LiquidMillionaire] 
Did anyone else place a trade taking advantage of a blowout quarter? 4:00 [Comment From Steve] 
2 hours ago, I would’ve have said 50/50 chance they beat expectations. This late run rally strikes me as too bullish. I’d put it at 65% chance that price drops dramatically in 10 minutes. 4:00 Henry Blodget:  Agreed…at $315 looked like nice upside.   $340, scary

4:00 [Comment From Markus] 
Good evening from Berlin-Germany! I think the Costumer market weekenes pushes the add business up sharply… I am opitimistic about the results… 4:00 [Comment From aks] 
Google needs to cut back 4:00 Joe Weisenthal:  I wonder if Chief Economist Hal Varian will be on this call.
4:01 Henry Blodget:  Oh most definitely.   We all need chief economists
4:01 Henry Blodget:  Conf call starts at 4:30.   Link here:
4:01 [Comment From skas] 
Where do you folks think the share will trade at EOD? 4:02 Henry Blodget:  Huge move up in aftermarket per Yahoo, but I don’t see release yet.   Possible heds are crossing on Bberg
4:03 [Comment From Nick] 
Henry – what kind of forward-looking comments do you expect them to make? That should be the primary driver to stock performance. What do you think? 4:03 [Comment From Seb] 
what is the price expectation for google for next month 4:03 [Comment From jakef] 
I am pretty sure Hal Varian was on last time because a few of the other executives were out… I doubt he will be on the call this time. 4:03 [Comment From Mike] 
trading at 385 right now wow! 4:03 Joe Weisenthal:  here we go

4:04 Henry Blodget:  Revenue right in line
4:04 [Comment From Alias] 
Any where between $365-$370…My assumptions.. 4:04 [Comment From Ben] 
I see some articles are saying goog has no new product in the pipeline, which doesn’t help the price in the future. But I found that goog has many products are getting ready to be out and some of them are at the door gate secretly, like chrome and mobile market. 4:04 [Comment From Under29LiquidMillionaire] 
@Skas…we’ll see a jump into 500 4:04 [Comment From Jason] 
I gambled against analysts today, i want to see them beat estimates 4:05 [Comment From Tim] 
the third headling to come across DJ was “Google expects to continue to make ‘Significan Cap Expenditure'” WHY!! 4:05 [Comment From James] 
You think you gambled, I bought $70,000 in options on it 4:05 Henry Blodget:  Adjusted EPS $4.92.   That’s nicely above consensus of $4.79
4:06 [Comment From Ken G.] 
Jim Goldman “Knocking the cover off the ball”…..Is he ever tempered in his comments? 4:06 [Comment From Under29LiquidMillionaire] 
Goog will be the 1st trillion $ company. 4:06 [Comment From max] 
android will help or pull back google stock? 4:06 Henry Blodget:  Revenue was only in line. That will hold back the stock.   Upside appears to have come from margin.
4:06 [Comment From skas] 
That seems steep…there was lot of hype around chrome too but that did not kick the stock as expected 4:06 [Comment From jakef] 
@Tim Google needs to keep making cap expenditures to buy hardware etc to keep latency down 4:07 Peter Kafka:  @max: Don’t think Android can be considered material now. If you’re bullish on mobile there are many other less sexy, more practical things GOOG working on – search deals with carriers, etc

4:07 [Comment From Mike] 
Henry, are you doing this for apple’s earnings as well? 4:08 [Comment From Mike] 
700k! wow! 4:08 [Comment From Jason] 
I think android will help, just not short term 4:08 [Comment From Anthony] 
The Shorts are running for cover 4:08 [Comment From cory] 
up 10% after hours 4:08 [Comment From Steve] 
I don’t think Android will hit until Q4, Q109 4:08 [Comment From Jason] 
Once it becomes mainstream, could be huge 4:08 [Comment From Under29LiquidMillionaire] 
If you’re in the Bay area & Goog touches 480 tomorrow I’m taking SAI readers for a steak dinner 4:08 Peter Kafka:  Send us your details, Millionaire – we’ll publish them
4:08 [Comment From Ken G.] 
Larry Haverty says “Up up and away”…..btw, his fund, GGT, is down 65% ytd. 4:08 [Comment From Ben] 
android is the next big thing in the industry, it will take over mobile OS in few years like back then 4:08 [Comment From Under29LiquidMillionaire] 
Nothing wrong with CapEx @ Goog…ya want them to throw off a divi instead?!?! 4:08 [Comment From Nick] 
And don’t forget currency repatriation — profits could go either way in Q4 if they don’t hedge well — significant revenues are from overseas — 4:09 Henry Blodget:  OK…one thing very important here: Free cash flow jumped a lot because Google finally is scaling back on CAPEX.
4:10 Henry Blodget:  Operating cash flow was $2 billion and CAPEX only $450 million (vs $700mm last quarter).   That’s $1.7 billion of free cash flow, or $7 billion run-rate.   Suddenly the stock looks a lot cheaper
4:11 Peter Kafka:  Where did the cuts come from? What aren’t they spending on?

4:11 Joe Weisenthal:  Given the amount of cash they’re generating, and their pitiful return from new initiatives. I don’t think a dividend would be that ridiculous. But I think Google wants to keep up the apperance of a company that still warrants I high level of internal investment
4:12 4:12 [Comment From BurdTurglar] 
It’s still overrated, in my opinion. One trick pony – just a big pony. 4:12 [Comment From kizz] 
whats FCF in the quarter? 4:12 [Comment From Spoon] 
This is very useful. Thanks. 4:12 [Comment From hamlet] 
android should be tweaked…so that outward look gets better…….. 4:12 [Comment From Guest] 
Wow 4:12 [Comment From Rob THeunssen] 
WOw! 4:12 [Comment From Guest] 
Google will be at mid 400 by mid November, & mid 600 by years end. 4:12 [Comment From WTL] 
GOOG to hit $480 tomorrow? are you serious? 4:12 Henry Blodget:  FCF = about $1.7 billion. Extremely impressive
4:12 [Comment From JL] 
youtube and google have been on “silent” hiring freeze 4:13 Peter Kafka:  Details, JL? Post or email [email protected]
4:13 Joe Weisenthal:  @hamlet I think there’s a lot of flexibility in terms of how Android ultimately looks. Agreed though, early versions aren’t quite eye-candyish

4:13 [Comment From jakef] 
@JL not true at all, Google and YouTube still hiring 4:13 [Comment From Dave] 
What was the expectation for FCF Q3? 4:13 [Comment From Under29LiquidMillionaire] 
@WTL, very serious. 4:13 [Comment From CL] 
nice to see that percentage of rev from Google websites increased 4:13 Henry Blodget:  FCF has been flat for the last several quarters because CAPEX was going through roof. It has finally scaled back
4:14 Peter Kafka:  Bernstein, among others, has pointed that hiring has decreased this year. But still moving at healthy clip. Let me find our story
4:15 Henry Blodget:  Google Sites revenue was spot on consensus. That’s the important one. Network contributes far less profit
4:15 [Comment From Db] 
Goog trading at 389 (+14.6) as we speak 4:15 [Comment From IceCoffee] 
Not only CapEx, G&A (ex SBC) was 9% of ex TAC rev vs 11% last Q, at 11% EPS would have been $4.74 4:16 Henry Blodget:  Ah, that’s good (G&A). They are finally showing some discipline.
4:17 Henry Blodget:  Paid clicks (revenue units) up 18%.   Toward high end of consensus
4:17 Peter Kafka:  Re: Hiring. Here’s our July 11 story:
The folks at


and other sites are debating whether Google (GOOG) is cutting down on new hires. But this one is pretty straightforward: Google is cutting down on new hires.How do we know? Because Google

that it’s cutting down on new hires. And Wall Street likes this, because Wall Street is constantly worried about both Google’s payroll and capex, especially as margins shrink. Here’s graphic representation of that concern, via AmTech’s Rob Sanderson…

4:17 [Comment From mb] 
Check out operating expenses — down 200 bp from last quarter. Headcount growth is flat. Looks like Google’s exerting discipline on the cost side and in capex. 4:17 [Comment From DaveMN] 
I continue to look for GOOG to break out what of IT, and specifically servers, its throwing all that money into 4:17 Henry Blodget:  IT’s a good point, Dave. They’d do themselves a lot of favours if they did. Street worried they’re just peeing it all away.
4:17 [Comment From JL] 
Mahaney and other analysts too concerned about f/x and macro-trends. 3 quick bullets on google: 4:19 [Comment From Dustin M] 
Server count and type is definitely going to be a trade secret of the highest order. It is much easier to guess what they might be able to do in the future based on what extra capacity they appear to have now. 4:19 [Comment From JL] 
1. Mobile Advertising: location target ads (far more valuable than trad. search). Huge driver. chinamobile/google exclusive. first user experience of most chinese will be google experience 4:19 [Comment From Under29LiquidMillionaire] 
JL is spot on 4:19 [Comment From Under29LiquidMillionaire] 
DAveMN, they won’t do that for a very long time if ever. it would reveal much of their strategic advantage 4:20 Henry Blodget:  OK, here’s my initial take: Revenue was in line with estimates, which is a modest upside surprise (Wall Street was expecting a miss). EPS was solidly ahead of estimates, so a strong upside surprise.   (The upside came from better G&A expenses, which suggests Google is finally getting more disciplined about spending.)Perhaps most importantly, capital expenditures finally dropped sequentially, so free cash flow was very strong ($1.7 billion).   That’s a $6 billion free cash flow run-rate.

Stock popped nicely in aftermarket. In-line revenue should temper upside, but company is still robustly healthy.

4:21 [Comment From JL] 
2. Youtube Revenue: Potential to use android as remote control to tie up to flat screen tv. google may or may not be working on this application. variable scroll ads. vs. trad. tv commercials. revenue driver and better than trad. tv pause/break commercials. also allow user to use android to click on ad that goes to cell phone while youtube video still runs on tv. 4:21 [Comment From JL] 
2b: look for additional media relationships to provide youtube with rev split model instead of lawsuits. 4:22 Henry Blodget:  Here’s Schmidt’s nod to the tanking economy: “While we are realistic about the poor state of the global economy.”   Suggests they are feeling it, but clearly not much.
4:22 [Comment From Guest] 
6b free cash flow in this economy is more than “robust”. 4:22 Henry Blodget:  The company’s cash generation is not to be believed…especially now that they’re reining in CAPEX.
4:24 [Comment From Db] 
Henry, how do you feel the economic slowdown is going to impact goog’s revenue and margins? Do you have any guidance on that? 4:24 [Comment From Under29LiquidMillionaire] 
Can anyone name that tune on the conf call?? (No, we won’t make fun of you) 4:25 Peter Kafka:  now they’re Cycling through . 2nd time I’ve heard Beatles’ “something”

4:25 [Comment From Rob] 
Finally CAPEX! ;-) They should continue doing that! 4:25 [Comment From JL] 
we need to hear more about mobile on the call…let’s be honest in 5 years ahead maybe google make 35-40% of revenue from mobile. am i being too agressive on this call? 4:25 [Comment From CL] 
what do you mean “not to be believed”; is that sarcasm in a good way? 4:25 [Comment From Ken G.] 
So, Henry, you expect capex to rise again next quarter? 4:25 Peter Kafka:  CL, 99% per cent sure he means it’s really, really good.

4:25 [Comment From Guest] 
why not? goog does not break down one time vs. recurring. clearly they have the ability to generate enormous amount of cash. 4:26 Henry Blodget:  No.   I’ll bet CAPEX will settle in around $500mm/q
4:26 Henry Blodget:  But we’ll see.
4:26 Henry Blodget:  OK…re-ran the numbers.   $1.7 billion free cash flow is nearly $7 billion run-rate.   At enterprise value of about $100 billion, that’s 15X cash flow.   Perfectly reasonable.
4:27 [Comment From JL] 
no, capex wont rise next quarter. no way. 4:27 [Comment From JL] 
capex may even be down next quarter. dont you know google is cutting dinners and childcare…guess gotta grab a big lunch! 4:27 [Comment From BenB] 
anyone see any headcount #s? 4:27 [Comment From Under29LiquidMillionaire] 
So Henry, where does that price the stock in your opinion? 4:28 [Comment From Dave] 
so henry, what is your price target? 4:28 [Comment From Guest] 
15x cash is reasonable but this is the safest bet in this space. 4:28 [Comment From JWun] 
At 15X cash-flow, would you qualify GOOG as a good value at this price, especially relative to all other investing options now? 4:28 [Comment From Ken G.] 
sequential network rev. growth only 1% but 15% y/y…..quite a slowdown there. 4:28 Joe Weisenthal:  Other good news: With falling oil prices, not as much pressure for Google to try savinig the world with a new energy initiative.
4:28 [Comment From Dave] 
between now and Thanksgiving, do you see any catalysts for the stock or do you think it will move in line with the markets? 4:29 Peter Kafka:  The energy stuff is a red herring, isn’t it Joe? Most of it is through the charity, and the other is just Google trying to find practical ways to cut their own utility bills, no?
4:29 [Comment From Rob] 
Revenue will be hurt in Q4… Might be reasonable to think. Economy is in a bad shape 4:29 [Comment From Under29LiquidMillionaire] 
@Dave, I see Goog becoming a safe haven after proving their ability to swim against the declining advertising trend 4:29 [Comment From JL] 
Google will have a major run after elections. the stock will be greater than 500 by year end. Bush played with Oil boys, Obama is holding hands with Google and Alt. Energy. 4:29 Henry Blodget:  All right, jumping on conference call.   Here’s the link:
4:30 Joe Weisenthal:  You’re right, red herring. I’m not so much concerned about the cost as much as the top management’s mental cycles.
4:30 [Comment From BurdTurglar] 
I think GOOG is an exciting company, but it’s going to struggle as the economy hasn’t started biting yet. Wall St. won;t be convinced until they see the Q4 and Q1 2009 numbers. In this market, you gotta do more than meet expectations and control expenses. 4:30 [Comment From Guest] 
btw – long term rnd expenses will be much bigger worry than CAPEX. 4:33 [Comment From Rob] 
Henry, can you tell me a little about revenue (growth) on Google Apps? 4:33 Joe Weisenthal:  Hmm, wasn’t call supposed to start at 4:30?
4:34 Henry Blodget:  No real detail yet on Apps.   Licensing revenue was slightly light. Up slightly sequentially, but not much.
4:34 Joe Weisenthal:  I think some of the Googlers are in London — perhaps they got messed up on the timezone.
4:34 [Comment From Ken G.] 
seems to me it managed earnings beat by scaling back G&A and capex…..the old game of beat the number. 4:34 Joe Weisenthal:  Ah, here we go
4:34 [Comment From Jon] 
We run google apps at our company and everyone I know likes it more than MS. I’m very interested in growth numbers in this area. 4:34 Henry Blodget:  Chief Economist!
4:35 Joe Weisenthal:  Hal!
4:35 [Comment From Stanley Steamer] 
he was on last quarters call 4:35 Henry Blodget:  Yes. Where would we be without him.
4:35 [Comment From Under29LiquidMillionaire] 
Hal’s a good guy. Why the knocks? 4:35 Joe Weisenthal:  @Henry Why doesn’t our Chief Economist ever come into the office?
4:35 [Comment From Ben Fremer] 
Uh oh. Chieft Economist meant economy excuses/explanations last time. 4:35 Henry Blodget:  Hal Varian’s great…not poking fun at him. Just whole thing about having Chief Economst on call
4:36 [Comment From NKT] 
any comments regarding joint ventures with Yahoo 4:36 Henry Blodget:  Nothing yet.   Still safe harbor
4:36 Peter Kafka:  Think this is one Q where I would very much like to hear from Chief Economist

4:36 [Comment From Under29LiquidMillionaire] 
Maybe Yahoo should hire Nouriel? ;) 4:36 [Comment From Google Short] 
microsoft is eventually going to buy yhoo. Can’t survive without it 4:37 [Comment From Rob] 
Henry, what do you think about my opinion? Between now and 2 years MSFT should slash App-prices to compete with Goog apps? MSFT will be hit hard by GOOG apps with a few years? 4:38 Joe Weisenthal:  Schmidt: Economic situation today is globally worse than what people were predicting just a month ago. But: economic issues help Google on both advertiser and consumer side.
4:38 Henry Blodget:  ECONOMY:   Well handled, I think.
4:38 [Comment From Rob] 
No real words about Google hit by recession…. 4:39 Henry Blodget:  He’s handling well, I think. Acknowledging economy. Explaining why Google still in good shape without seeming arrogant.
4:39 [Comment From JL] 
in line. college students even using google to look for discounts and compare prices… 4:40 Henry Blodget:  Geo-located advertising… still all theoretical.   Need to hear details before take mobile to bank. Have been listening to mobile theory for decade.
4:40 [Comment From wood83] 
Very balanced and mature approach so far. Great to hear them recognise severity of economy 4:40 Joe Weisenthal:  “going to keep a close eye on costs”
4:40 Henry Blodget:  Agreed, Wood
4:41 Henry Blodget:  “Another solid quarter.”   Nicely downplayed! No hyperbole here.
4:41 Henry Blodget:  “Reasonably good”.   Love it.
4:42 Joe Weisenthal:  Global aggregate paid click growth also “reasonably good” up 18%
4:42 Henry Blodget:  UK soft…but up 17%, flat seq
4:42 Henry Blodget:  Tougher performance in home, auto, real estate.
4:43 Joe Weisenthal:  Weird. I’m seeing Henry’s comments before I hear them on the call. I must be getting some lag.
4:43 Henry Blodget:  The great news here is that you can imagine what quarter would have been if firing on all cylinders.
4:43 [Comment From Under29LiquidMillionaire] 
I picture him delivering the financial with a giddy smile and about to break out laughing “we’re printing it over here. cha-ching!” 4:43 [Comment From Alex2] 
no mention on Financial Services advertising? 4:44 Henry Blodget:  Yes… implied weak
4:44 Henry Blodget:  500 new employees…big slowdown in hiring.
4:44 Henry Blodget:  Smart.   Showing real discipline.
4:44 [Comment From Under29LiquidMillionaire] 
A discerning eye needs only a hint, and understatement leaves the imagination free to build its own elaborations. 4:44 [Comment From wood83] 
I agree Henry…Google showing tonight they are still long term behemoth 4:45 Henry Blodget:  Focus on operational efficiency…   they have needed to show they can do this. And they certainly have this quarter.
4:45 [Comment From paul] 
it means they don’t expect much revenue growth 4:45 Peter Kafka:  $14.4 B cash

4:45 Henry Blodget:  Yes, that is true.   But revenue growth still impressive in this environment.
4:45 [Comment From yanghooooo] 
msft really needs yahoo now ehh henripper 4:45 Joe Weisenthal:  $80 million of hedging costs in Q3
4:46 Henry Blodget:  Microsoft left behind so long ago can’t see them in rearview mirror
4:46 [Comment From Twoshooters] 
What is fair value of stock after credit bubble blow-up and four Horsemen Mania dies? 4:46 Henry Blodget:  “Fair value” very subjective.   Stock now down from 40X-50X cash flow, which created huge risk, to 15X.   Much less risk.
4:47 [Comment From JL] 
hiring freeze was mid sept maybe up to now. that’s what my friend was told who interviewed at youtube. 4:47 [Comment From Steve] 
The auto-scrolling to the bottom whenever a new message appears makes it very difficult to read older messages that I missed. 4:47 Henry Blodget:  Yes, Steve…thanks for that comment. We will try to fix that.
4:47 [Comment From tobre] 
free cash flow $1.73 billion. so i think next year free cash flow $ 8 billion is possible. and tody $14,4 billion cash . Over $20 billion end of 2009 possible. so analysts can do the maths. 4:47 Joe Weisenthal:  I’m pretty sure, Google’s never spent so much time talking hedging, accounting rules, straight-line depreciation, mark-to-market. Wonder why.
4:48 Henry Blodget:  This FX stuff is silly.   Lost in esoteric detail.
4:48 Joe Weisenthal:  Yes, and pretty trivial.
4:48 Henry Blodget:  Should just say “net of FX” and leave at that
4:48 Henry Blodget:  Majority of CAPEX IT infra and data centre, servers, networking
4:49 Henry Blodget:  Suggests CAPEX has finally peaked and will see economies of scale, greater efficiency. Excellent news.
4:49 [Comment From wood83] 
Currency hedging NOT trivial…with $USD strength, majority of techs are going to get hammered on top line reported results. Important distinction for GOOG that they hedge. 4:50 Henry Blodget:  Yes, that’s fair Wood. I just don’t think need that much detail on call.
4:50 [Comment From syzygy] 
Au contraire – the fx detail is vital given that last q miss was largely from fx and interest income 4:50 [Comment From Guest] 
Steve – there’s a button at the bottom to turn off auto-scrolling 4:50 [Comment From JL] 
responding to analysts concern on goog revenue due to flunctuation in f/x 4:50 [Comment From Db] 
maybe they are just proud about their edging system : ) 4:50 [Comment From John] 
Steve, you can turn autoscrolling off by clicking on the 2nd of the 5 icons below and to the right of the message box. 4:50 [Comment From Rob] 
They might be told that US DOLLAR be again going down in next 4 months against the EURO. In my opinion EURO will be rally in coming months. 4:50 [Comment From Guest] 
goog capex slowdown is not good for their vendors. 4:51 Joe Weisenthal:  Brin talking about increasing the size of the index. Good time to grab a snack.
4:51 Henry Blodget:  Pause for irrelevent details about product
4:51 [Comment From SFBay] 
What kind of metric is “the entire Library of Congress”? 4:53 Henry Blodget:  1 million people now searching for “Michael Phelps”
4:53 [Comment From jakef] 
I don’t get why all of you guys check out when the product discussions start. Product is how GOOG got to where it is today, and what will determine where it will be 2 yrs from now… 4:53 [Comment From Guest] 
60 mio books x 300 pages x 200 characters = a lot 4:53 [Comment From wood83] 
UGH…this is the boring part of the call. Let’s get right to YouTube and Android please 4:53 [Comment From Dustin M] 
The metric attempts to reflect a combination of word count, oak furniture and obnoxious librarians that it takes to manage said word count. 4:54 Joe Weisenthal:  @jakef we talk about Google products all the time. In this context, it’s typically not that useful/interesting.
4:55 [Comment From Guest] 
will street consensus still need to decline? 4:55 Henry Blodget:  Yes, I think so
4:55 [Comment From Rob] 
By the way, nothing to do with GOOG, but IBM earnings topped analyst expectations too 4:55 Henry Blodget:  Say making progress on display…would be good to have more details on that.
4:55 Henry Blodget:  YOUTUBE:
4:56 Peter Kafka:  Recap of this month’s annoncements

4:56 [Comment From wood83] 
I would think consensus 09 needs to come down, but probably not as severely as recent round of cuts and, equally, cost assumptions should come down more aggressively than we would’ve modelled before tonight’s print I would think 4:56 Henry Blodget:  Agreed, Wood
4:56 Joe Weisenthal:  Click-to-buy:
4:56 Henry Blodget:  Company’s performance really is extraordinary given world economy
4:56 [Comment From Guest] 
Interesting that TechCrunch said Goog struggled in q3. Seems like a different tone that what I’ve heard here. 4:57 Henry Blodget:  “Struggled” is absurd
4:57 Peter Kafka:  More things we’ve already announced: Full-length videos

4:57 [Comment From Under29LiquidMillionaire] 
SAI crew, do Goog’s results help/hurt Yahoo next week? 4:57 Joe Weisenthal:  It looks like they might’ve changed their headline already (techcrunch, that is)
4:57 Henry Blodget:  I think display is getting hit a lot harder than search, so expect weak vs. this performance
4:58 [Comment From MikeS] 
Any metric on how efforts at monetizing YouTube? Any real metrics? 4:58 Henry Blodget:  No, of course not. (Details on YouTube).   Nothing good to report.
4:58 [Comment From Ken G.] 
Henry, world economy didn’t really start cratering until mid September. Their rev.’s could have fallen off a cliff in Sept, relatively speaking, for all we know. 4:58 Peter Kafka:  No real #s, info on YouTube

4:58 Henry Blodget:  That’s a good point, Ken.
4:58 Joe Weisenthal:  ANDROID
4:58 Henry Blodget:  Anecdotally, it was Sept where retailers got slammed and search spending dropped
4:59 [Comment From Guest] 
interesting that they still dont provide much (has there been any?) comments about the licence and other revenue line considering that it is now over $500mn/year 4:59 Peter Kafka:  This why we check out during product talk. Nothing new
4:59 Peter Kafka:  Infomercial
4:59 Henry Blodget:  Agreed re licence revenue…would be good to get more detail
4:59 [Comment From wood83] 
Talking about enterprise 4:59 Henry Blodget:  1 million businesses using Google Apps
4:59 Joe Weisenthal:  “I encourage   you to try iot out and if it suits your need then get an Android phone” infomercial indeed.
5:00 Henry Blodget:  Video for Apps?   Example, please.   Internal talks
5:00 [Comment From Ryan] 
sequential growth in licensing quite disappointing 5:00 Henry Blodget:  Agree, Ryan. Surprised by that.
5:00 [Comment From Ken G.] 
would be nice if they gave monthly pacings the way broadcasters traditionally have done. 5:00 [Comment From Guest] 
the size of licence & other is nearly as big as – perhaps that explains the reality of the two being able to work together 5:00 [Comment From SFBay] 5:00 [Comment From Guest] 
wasn’t it 500k businesses using google apps last quarter? 5:01 [Comment From GuestX] 
Display was hit hard in Q3 and getting worse in Q4, so I guess that “progress” in display means bad. 5:01 Joe Weisenthal:  What a waste of time this part is. RIdiculous.
5:01 Henry Blodget:  It is ridiculous.
5:01 [Comment From Under29LiquidMillionaire] 
Henry, video in Google Apps 5:01 Henry Blodget:  [Thanks]
5:01 Henry Blodget:  SUCH A WASTE OF TIME
5:02 Joe Weisenthal:  I mean, come on. Brin is talking about the wonders of “tabbed browsing”… on a quarterly conference call.
5:02 [Comment From JL] 
Chrome? browser? great but please delete storage data after 12 months. 5:02 Henry Blodget:  Go ahead, fire away with questions. We won’t answer the important ones.
5:03 Henry Blodget:  Imran: Economy horrible, weakening last 4 weeks.   How is now vs. Sept.   Good Q!
5:03 [Comment From Guest] 
Henry, I think they already answered “the hard one” by showing they can reduce expenses and commenting that they will continue to keep expenses in check so long as they dont forgo long term growth. Do you not agre? 5:04 Henry Blodget:  Schmidt on last 4 weeks:   Obviously it will change, varies by country and region.   Hands off to chief economist
5:04 Henry Blodget:  Hal Varian: Search Insights, can take pulse of consumer. Obsession with financial markets, etc.   YAWN.   ANSWER QUESTION PLEASE
5:04 Joe Weisenthal:  Hal: “yeah, I think I can, give you a little colour on some of the things that are going on… we don’t give internal guidance… huge increases in queries on financial markets “buy gold”, “libor”, “home safes”
5:05 Peter Kafka:  “hard to tell”!

5:05 Joe Weisenthal:  Spike in queries for “home safes” should freak us all out. But seriously, total non-answer.
5:05 [Comment From Under29LiquidMillionaire] 
Oh man, what a punt. Hal’s getting 70+ yards on this one. 5:05 [Comment From Db] 
was that a joke answer of some kind? 5:05 Joe Weisenthal:  Why did they need Hal Varian to tell us that tid bit? No idea. You could get that from the Hitwise blog.
5:06 Peter Kafka:  Mahaney teeing up a YouTube Q, I bet
5:06 Henry Blodget:  Mahaney: Costs., Display
5:06 [Comment From dannyd] 
Obviously things have dropped off a cliff in last few weeks – advertising budgets first to get slashed 5:06 [Comment From Under29LiquidMillionaire] 
Ooh, you know Mark is going to use this answer on the Yahoo call! 5:07 [Comment From JL] 
alot of investments for android apps 5:07 [Comment From MikeS] 
Model, however, “pays for play” Why would you cut that budget. Don’t agree with Danny. 5:07 [Comment From wood83] 
They are doing a great job of continuing to emphasise that economy sucks and they’re battening down the hatches responsibly to handle that 5:07 Henry Blodget:  Costs: non answer.   “Discipline”
5:08 Henry Blodget:  Display: Be patient, took us years in search.   Translation: Display immaterial
5:09 [Comment From GuestX] 
On display they really sound like amateurs 5:09 Peter Kafka:  Obvious but worth reminding that the genius of AdWords doesn’t apply to Display

5:09 [Comment From JL] 
target ads. turn on yoru g1 and based on location you get target ads based on keyword interests from prior user search. if you enroll in this application you can get deduction on your mobile bill… 5:09 [Comment From Under29LiquidMillionaire] 
This is a display gamechanger: Sergey needs to pump it. 5:09 [Comment From modelportfolio2003] 
Seems to me that Patrick was making commitment on cost control going forward: “nimble, adapting, agile, will continue to be”….this is a big deal IMO 5:10 Henry Blodget:  Yes, agree re Patrick emphasising cost control going forward. And clearly showed he can do it.
5:11 Joe Weisenthal:  Yahoo deal question
5:12 Henry Blodget:  Yahoo deal….   surprised by advertisers infuriated?
5:12 Peter Kafka:  Thanks for the softball!
5:12 Joe Weisenthal:  “When we did the deal, we understood it would be controversial… anticipated a 4 month delay.”
5:12 Henry Blodget:  We knew deal controversial and competitors would oppose.   We anticipated 4 month delay. We are hopefully nearing end of that period.
5:13 Henry Blodget:  The problem: The deal is getting neutered. If compromises are adopted, wrecks most of the value for Yahoo
5:13 [Comment From Under29LiquidMillionaire] 
Someone needs to ask how they won’t use the Doubleclick search data in the Yahoo deal. They know how much advertisers are bidding and paying via Doubleclick. 5:14 Peter Kafka:  Haven’t you read our blog posts explaining how this isn’t a problem? You should read those. Here’s Hal to repeat what he just wrote.
5:17 [Comment From Under29LiquidMillionaire] 
Whenever Omid walks into a room of googlers they all chant “O, O, O…” for about 5 minutes. 5:21 Joe Weisenthal:  I don’t recall the last conf. call being filled with so many seemingly picayune details.
5:21 Henry Blodget:  They all are
5:22 Henry Blodget:  Company won’t answer the important questions, so always devolves to this
5:22 Joe Weisenthal:  yeah, perhaps it’s my own bias: In light of the macro issues, all this stuff feels more trivial than normal.
5:22 Peter Kafka:  Analysts not bothering to ask big qs, either. Bad feedback loop
5:22 [Comment From wood83] 
Agreed. The key to these calls is always tone and opening comments 5:22 [Comment From Guest] 
Ask them a question Henry 5:23 [Comment From Under29LiquidMillionaire] 
Mobile…expectations in this area are beat so far down it’s still overlooked by most. Mobile will be material towards the end of 09/middle of 2010 5:23 [Comment From Ben Fremer] 
Why isn’t there some tie-in to how their new products will create more long-term revenue or earnings? (ie “We hope to increase mobile-search share by 20% to add $500m in profit from this initiative within 5 years”?) I know they don’t give quarterly guidance…does Google just give absolutely no guidance as their policy? 5:23 Henry Blodget:  Because the new products are still immaterial and probably will be for a while. Not embarrassing–this is a $20 billion company.   But also won’t help drive growth for a while.
5:24 [Comment From Guest] 
Absolutely mobile this the next frontier – how long before we see signficant pushes to other carriers? 5:24 Henry Blodget:  Hal: Here comes another non-answer.
5:25 [Comment From Guest] 
the business is going well, there are too many people who just keep waiting around for sh*t to hit the fan, but it doesn’t. Google is far from perfect, but since their business is outperforming, why not give them some credit as Henry did in his opening of this blog post? I sure am giving Google credit for great performance this Q 5:25 [Comment From wood83] 
Hal the economist keeps alluding to the bad economy being good for search queries…seems odd to put him on that message 5:26 [Comment From GuestX] 
People will make a lot of searches, clicking everywhere without buying (converting)… 5:26 Henry Blodget:  Agree, GuestX!   Very good point.   And then advertisers will stop spending because conversion drops.   Hal’s logic just doesn’t make sense.
5:26 [Comment From wood83] 
As Henry noted…when GOOG was at 747, any chink in the armour was a risk, but stock off 50% from highs, lots of waiting for Gadot it seems 5:27 [Comment From Frank] 
GuestX I agree 5:27 [Comment From Ben Fremer] 
Something Google isn’t mentioning which is also true, and which I in the SEO industry often see — tighter budgets are also shifting ad budgets from PPC to less expensive SEO services where the price is often 1/6 – 1/30 as much for the same traffic. 5:27 [Comment From Guest] 
Henry, but volume would be up. 5:28 Henry Blodget:  For a while… but as spending drops, advertisers have to spend less
5:28 [Comment From modelportfolio2003] 
Bottom line: Net revs ahead of many estimates (slightly) or at worst in line. But big boost to eps has been beaten handily by significantly lower TAC, esp related to Adsesnse, contributing to beat in net revs for many analysts. Huge beat in cost of revs and hence gross profit. Beat in gross margins impressive. Saved big on sales and marketing and gen and admin (lower legal costs?). Impressive and more than ok in this environment. Comments? 5:28 Peter Kafka:  All heavy liiting done w/Cap ex? Normalizing?
5:28 Henry Blodget:  CAPEX: Lumpy…
5:28 Henry Blodget:  This is important: Continue to invest heavily, no plans to slow down.
5:28 Henry Blodget:  That is bad news.
5:28 [Comment From Ken G.] 
bad news for capex 5:28 [Comment From ? for Henry] 
do you think explosive query volume growth with offset economic impact to rates? 5:29 Peter Kafka:  “Getting better at it”

5:29 [Comment From wood83] 
Good capex answer. Reminded people its lumpy, but acknowledged that efficiencies mean better use per marginal capex $ 5:29 Henry Blodget:  I don’t know, Wood. What I heard was “this quarter an anomaly”
5:29 [Comment From Brian] 
substantial revs from geo Local????? maybe break that out? 5:30 Peter Kafka:  Geo/local: Going to take a long time. There’s your mobile answer: “This is an investment that we’re going to have to keep investing for some time, until we get a *really* big payoff”
5:30 Henry Blodget:  Would be great, won’t happen.   “Good chunk of business?”   BE SPECIFIC
5:30 [Comment From wood83] 
I didn’t hear that at all, go back to CFO comments to open, that was intentional 5:30 [Comment From Ken G.] 
Henry, how would quarter’s FCF look if they had done an average amount of capex in the quarter? (take LTM capex divided by four instead of the actual)…. 5:30 Henry Blodget:  FCF still strong…  
5:30 Peter Kafka:  Geo/local: “This is an area where we’re winning”
5:31 Henry Blodget:  But makes big difference to FCF if steady-state capex is $2B a year vs. $3B
5:31 [Comment From Guest] 
regarding capex concerns you are expressing…if Google is smart enough to watch op ex, wouldn’t you think they would also be expecting long-term returns from the still big capex spend levels? It sure seems that the capex investment over time has served them well, so what makes people want to get concerned about Google not taking the pedal off yet? 5:31 [Comment From modelportfolio2003] 
I do not think anyone seriously thought cap ex could slow down so not really bad news as Henry said……not anomaly. Lots of investment in people already made and this is big up front that allows them to continue to be agile. 5:31 [Comment From wood83] 
FCF was $1.73B, would’ve been about $1.5B in the Q on a smoothed trailing 4Q rate 5:31 [Comment From Under29LiquidMillionaire] 
So, when does Google buy ReachLocal? I’ll say late 2009 for 650million. 5:31 [Comment From Under29LiquidMillionaire] 
@Brian, if you can define local more power to you. 5:31 Peter Kafka:  All the cool maps stuff we’re doing will one day pay off with real revenue
5:31 Henry Blodget:  One day
5:32 [Comment From SwissFool] 
yea…Switzerland. :-) 5:32 [Comment From Under29LiquidMillionaire] 
uh oh, someone’s train website is about to crash 5:32 [Comment From Guest] 
Yahoo is officially toast. Goog with 37% margins in an “economic crisi” – unreal! 5:33 Henry Blodget:  Don’t know about toast, but Yahoo MUST cut costs
5:33 [Comment From Guest] 
FWIW, the stock peaked in AH at $394, dropped to $370 and has moved back to 386 5:33 [Comment From wood83] 
OK, have a good night folks 5:33 Henry Blodget:  You, too.   Thanks for joining
5:33 Henry Blodget:  Thanks, all!  
5:34 [Comment From dLSR Dad] 
Actually, this quarter was just a “slowing economy” It is the current quarter that is an economic crisis in which Ad spending is slowing down across the board. 5:34 [Comment From Mark] 
Henry, I missed all the fun. Will this thread be posted somewhere so people can read it? 5:34 Henry Blodget:  Yes, we’ll post it in a few
5:34 Joe Weisenthal:  “Awful lot of stuff going on in the world”

5:34 [Comment From Under29LiquidMillionaire] 
Thank YOU SAI crew! 5:34 [Comment From Ken G.] 
good interactive format. 5:34 [Comment From GuestX] 
Thank you! 5:34 [Comment From modelportfolio2003] 
thanks Henry. 5:34 Henry Blodget:  Have good evening…
5:34 Joe Weisenthal:  Later




Press Release: Expected around 4:05 PM ET / 1:05 PM PT
Webcast: 4:30 PM / 1:30 PM
Earnings Preview: See Below



Google Earnings Q3Free Legal Forms PREVIEW

The good news: Google has a better chance of surprising on the upside this quarter than last quarter, because expectations are so low. In fact, Wall Street analysts are openly calling for a miss. With Google’s stock down to $315, this could lead to a nice short-term trade.

That said, even if the company clears a low bar, any hint that the tanking global economy is starting to bite the company (and how can it not?) will likely keep a lid on the stock over the next few months. Also, Street estimates for 2009 are still too high, in our opinion, and need to come down.  It’s hard to see how the stock rallies sustainably in the face of that.

Join us this afternoon for LIVE ANALYSIS of Google’s results and conference call. We’ll be using a new live-blog feature that will allow all of you to participate as well (more fun, saves you from having to refresh the page a hundred times, and allows everyone to benefit from everyone else’s questions and insights).  Hope to see you then!


Mark Mahaney of Citigroup offers the following excellent “Cheat Sheet” for Google’s Q3. Citi’s net revenue expectations are in line with the Street’s ($4.05 Billion). Note that Mark thinks that a “neutral” performance would be below the consensus estimate.  The Street’s adjusted EPS estimate, meanwhile, is $4.79.  Mark thinks traders are actually looking for EPS in the range of $4.70-$4.79.

As it has been over the last year, the big story for Google is revenue deceleration and margin compression. These have led the stock’s multiple to compress from 40X-50X free cash flow to a far more reasonable 20X. The latter multiple is sustainable. We don’t expect a sustained rally in the stock, however until revenue growth stabilizes (i.e., stops decelerating). Anyone’s guess when that will be, especially with Google having no new products in the pipeline.

Mark Mahaney’s revenue analysis and Street earnings estimate analysis are below. Note that Mark’s 2009 revenue estimate is far below the Street’s. We agree with him that consensus estimates need to come down.

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