Google’s ‘09 Numbers, Rating Cut at ThinkPanmure

It appears not even might Google (GOOG-NASDAQ) is immune to the spreading economic woes; even Mountain View is not immune to the spreading malaise.

ThinkPanmure is taking their numbers and rating down in one of the harsher moves in the wake of their earnings report:

We are lowering our rating on GOOG shares from Buy to Accumulate and reducing our price target from $650 to $550 due to concerns over the impact of a slowing economy on Google’s business. While Q2 was essentially in line and we remain bullish on Google’s long-term prospects, we are incrementally more cautious on GOOG shares due to 1) management’s acknowledgement of isolated pockets of weakness in its core search business, 2) our belief that Google is unlikely to be completely immune to macroeconomic weakness, and 3) our view that sell-side estimates are too aggressive for FY08 and FY09.

Google reported 2Q results that beat our below-consensus forecasts, but were largely in line with Street consensus. Revenue ex-TAC of $3.89 billion (up 38.6% Y/Y) beat our forecast of $3.80 billion and was slightly above Thomson First Call consensus of $3.87 billion. Google sites revenue grew 42% Y/Y to $3.53 billion, while network revenue grew 22.4% Y/Y to $1.66 billion. TAC as a percentage of gross revenue declined 80 bps Q/Q to 28.4%. U.S. revenue grew 28% Y/Y, while international revenue (which now totals 52% of total) grew 50.2% Y/Y. Aggregate paid clicks increased 19% Y/Y, while we estimate revenue per click grew 13.5%. Adjusted EBITDA of $2.24 billion (41.8% margin versus gross revenue of $5.37 billion, with 57.6% incremental margin) beat our
estimate of $2.09 billion and was slightly ahead of consensus of $2.22 billion, despite an 18% sequential increase in G&A related primarily to legal and professional services. Pro forma EPS of $4.63 beat our estimate of $4.43, but came in below consensus of $4.74 due to lower-than-expected interest income ($58 million, down $109 million versus 1Q). Interest income during the quarter was impacted by lower yields, lower average cash balance due to the acquisition of DoubleClick, lower net gains on sale of marketable securities, and higher expenses due to increased activity in the company’s FX hedging programs.

Apparently Google has a chief economist, which I did not know, and Eric Schmidt might want to send him to Spin Class to learn how handle IR:

The company, for the first time, acknowledged that the weakening economy is having some impact on search advertising trends. Specifically, while Google continues to see positive query growth across business verticals and geographies, Google’s Chief Economist Hal Varian reported that the company has seen U.S. revenue decline (albeit slightly) in the real estate sector and in the auto finance subsector. Continental Europe has seen positive revenue growth across sectors, while the UK has seen a decline in real estate sector revenue. Overall, compared to the rest of our coverage universe, we view.

Google as the most resilient business model with the best chance to gain market share during a recession. ThinkPanmure Research Note

And to be sure, they think Street estimates remain too aggressive, in part due to managements color:
.....we believe that the consensus outlook will remain too aggressive in light of current macroeconomic conditions and uncertainty. Prior to the 2Q earnings report, Thomson First Call consensus for revenue ex-TAC was $16.21 billion for FY08 and $20.62 billion for FY09, versus our revised estimates for revenue ex-TAC of $16.14 billion for FY08 and $19.04 billion for FY09. We note that our FY09 revenue estimates are based on our forecasts for Y/Y paid click growth of 16.7% and Y/Y revenue per click growth of 1.2%, which we believe are reasonable in light of current and foreseeable economic conditions. Furthermore, due to the high margin on incremental revenue, we expect an even more significant disconnect between our forecasts and consensus estimates for adjusted EBITDA and EPS. We might be less concerned about the possibility of future missed expectations (especially a narrow revenue miss that could result in a significant EBITDA or EPS miss) in coming quarters if anagement’s attitude toward satisfying (or exceeding) expectations were somewhat less philosophical. During the earnings call, management tacitly admitted that revenue could have been higher for Q2, as “there was some evidence internally that perhaps we were a little overly aggressive in decreasing (ad) coverage.”

We have made a number of adjustments to our model in light of Google’s 2Q08 performance and management commentary. We are increasing our FY08 estimates for revenue, adjusted EBITDA, and EPS by 1.5%, 4.2%, and 1.3%, respectively. For FY09, we are lowering our revenue and EPS estimates significantly, while our adjusted EBITDA estimate increases.

Bulls might find more to like in the note from Kaufman Brothers; they are leaving their price target in place and are a bit more constructive:

Bottom Line. Google fundamentals remain strong and we continue to like the stock. Paid clicks were up 19% Y/Y versus 20% Y/Y last quarter. Google web sites, the primary economic driver reported 4% Q/Q growth and the largest Q/Q growth rate differential versus network partner’s in four quarters (indicating continued share gains). The miss to adjusted EPS was a function of lower interest income, compared to Street estimates, interest missed by nearly $100 million; when taxing that at the company’s tax rate, adjusted EPS would have beaten Street consensus modestly, the same as net revenue and EBITDA, both of which were above Street consensus. While we concede there are few near-term catalysts, we continue to believe over the long term GOOG will benefit from new advertisers both domestically and internationally (i.e., the local market and its $95 billion domestic advertising opportunity), product expansion into display and video advertising and continued share gains. Kaufman Brothers Note

With the stock taking a breather, it appears the salad days, at least for Google employees, could be over. The grapevine has always spun with news of departures, but perhaps the less patient will decamp to greener pastures, if they can find any.

We could use a little help from Ex-Googler’s, hopefully they leave to for new start-ups, which might turn into something big. We need all they help we can get right now.
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