Google, Inc. (GOOGL)

Transcription

1 Americas/United States Equity Research Consumer Internet Rating OUTPERFORM* Price (09 Jul 15, US$) Target price (US$) (from ) ¹ 52-week price range Market cap. (US$ m) 363, *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Stephen Ju Yoni Yadgaran Nick Hrynkiewicz Bo Yang Daily Jul 09, Jul 09, 2015, 7/09/14 = US$ Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Price Indexed S&P 500 INDEX On 07/09/15 the S&P 500 INDEX closed at Quarterly EPS Q1 Q2 Q3 Q4 2014A E E Google, Inc. (GOOGL) INCREASE TARGET PRICE Emerging Business Lines to Drive Margin Stabilization and Eventual Expansion Event: We recalibrate our model to reflect greater contribution from YouTube while moderating near-term Play estimates. We increase our target price to $700 (vs. $690 prior), but our adj. EPS for FY15 comes down by 200bps, to $25.88 (vs. $26.40 prior), as we modestly decrease our nearterm revenue and gross profit forecasts. Investment Case: We believe the aggregated revenue contribution from YouTube AND Google Play has risen from 4% of Gross Revenue in 2010 to 15% in 2015 and should reach 24% by 2020, given the higher trajectory of growth versus core search. And as these businesses continue to scale, they should both see gross margin expansion which should underpin near-tomedium-term operating margin stabilization and eventually to margin expansion. Following extensive checks with industry sources, we have recalibrated our model to assume a steeper gross profit dollar growth trajectory for YouTube as improved monetization via TrueView is set to drive net revenue (ex-cac) growth in excess of bandwidth costs which we believe is more tethered to the growth of consumer engagement. As for Play we believe that Google is on the cusp of significantly surpassing revenue guarantees offered to its telco distribution partners and is hence also set to show greater operating and free cash flow contribution. Changes to Estimates: We decrease our FY15 net revenue forecast by 50bps as we moderate our near-term forecast for Google Play following recent weakness as a result of exposure to regions impacted by FX. Valuation: Our DCF-derived target price, which uses a 10.5% weighted average cost of capital and 3% terminal growth rate, increases to $700. Financial and valuation metrics Year 12/14A 12/15E 12/16E 12/17E EPS - (Excl. ESO) (US$) EPS (CS adj.) (US$) Prev. EPS (CS adj.) (US$) P/E (CS adj., x) P/E rel. (CS adj., %) Revenue (US$ m) 52, , , ,506.5 EBITDA (US$ m) 21, , , ,370.7 Net debt (US$ m) -13,110-22,904-41,033-64,791 OCFPS (US$) P/OCF (x) Number of shares (m) Price/sales(x) 6.46 BV/share (Next Qtr., US$) P/BVPS (x) 3.3 Net debt (Next Qtr., US$ m) -16,006.6 Dividend (current, US$) Dividend yield (%). DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and 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 decision. CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION Client-Driven Solutions, Insights, and Access

2 Investment Thesis Emerging Businesses Lines to Drive Margin Stabilization and Eventual Expansion As we pass the midpoint of 2015 and with GOOGL shares underperforming versus the NASDAQ Composite we revisit our investment thesis for the year to see what catalysts can alter investor perception in the near to medium term. To that end we bring up some of the more oft-cited pushback points against owning GOOGL shares and offer our rebuttal on what can change: 1. Margin Compression we believe the aggregated revenue contribution from both YouTube and Google Play to rise from 4% of Gross Revenue in 2010 to 24% by 2020, and gross margin expansion via scale at these two businesses will be the catalyst for near-to-medium-term margin stabilization and eventually to margin expansion. 2. Lack of Free Cash Flow Growth Google's CapEx has risen from ~$3.3b in 2012 to ~$7.4b in 2013, and ~$10.8b in 2014 we believe the primary driver of this trend is smart phone penetration-driven increase in consumer demand for its services, but with that penetration approaching and surpassing 50% and Google likely investing to stay ahead of that demand, we submit that there is greater likelihood for CapEx stabilization and FCF growth resumption. Overall, our investment thesis for GOOGL shares remains essentially unchanged, although we add some refinements: 1. Faster-than-expected narrowing of the mobile-desktop monetization gap this will be through a combination of the continued benefits from Enhanced Campaigns as well as a plethora of other products including app install and engagement ads. 2. Moderation of increases to its capital expenditure following a multi-year investment cycle. 3. Greater-than-expected contribution from Google's larger non-search business namely YouTube and Google Play. Concurrent with this note, we have recalibrated our model on the following points: add greater granularity to the content acquisition costs for YouTube assume all of the incremental revenue comes at 50-60% revenue share with the content owner, and decrease Google Play revenue dollar assumption for 2014 from ~$5b to ~$4b although our growth trajectory projection remains essentially unchanged. Exhibit 1: Google, Inc. CS Estimate Revisions USD in millions, unless otherwise stated 2Q15 2Q15 % % % Prior Current Δ Prior Current Δ Prior Current Δ Google Web Sites % % % Google Network Sites % % % Licensing and Other % % % Gross Revenue % % % Traffic Acquisition Costs % % % Net Revenue % % % Adjusted EBITDA % % % Pro Forma EPS $6.15 $ % $26.40 $ % $32.08 $ % This does result in modest decreases to near-term estimates offset by increases to 2016 and beyond to drive an increase in our price target from $690 to $700 we maintain our Outperform rating and GOOGL shares remain one of our favorite ideas for the Internet sector. Google, Inc. (GOOGL) 2

3 YouTube and Google Play These Businesses Will Account for 15% of Total Gross Revenue in 2015 As Google provides minimal disclosure around the size of its YouTube business (folded under Website revenue) as well as Google Play it remains a difficult exercise to pinpoint the current revenue run rate and growth trajectory. Little over a year ago, we elected to tackle this problem by completely rebuilding our Google model to better account for its new businesses (particularly at the time Google Play). This entailed going back nearly ten years in Google's public company history/disclosure and building forward by layering on (as well as sunsetting) contributions from various businesses over the years. Exhibit 2: Google, Inc. Increasing Contribution from YouTube and Google Play 15% of Gross in 2015, 24% by 2020 USD in millions Owned & Operated Search A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E 2019E 2020E YouTube & Google Play Network & Other We believe that both YouTube a well as Google Play will start to exert a more meaningful impact on consolidated operating margin as they transition from being loss-generating to breakeven to profitable businesses in the near-to-medium term. While this may not have mattered so much five years ago when Google Play hardly existed as a business and the combination of these two accounted for less than five per cent of Gross Revenue, we estimate these two will account for 15% in 2015 and 24% by 2020 (19% and 28% respectively of Net Revenue). Adding Greater Granularity for YouTube in Our Model Following management commentary on the 1Q15 earnings call referencing growing revenue contribution from YouTube and also in context of a broader online video advertising market that is showing signs of greater brand advertiser adoption - we decided to revisit our product-by-product revenue and gross margin forecasts. The net result of our analysis is a more detailed set of estimates driving our YouTube revenue and profitability forecasts leaving us increasingly confident that YouTube can sustain an above-market growth trajectory as in-stream video ads continue to drive incremental revenue on top of YouTube's legacy display business. Most importantly, our discussions with various industry experts and executives consistently left us with a relatively uniform underlying message: Google, Inc. (GOOGL) 3

4 1. YouTube is vastly under-monetized with ad-loads of between 10% - 20%. 2. Facebook's video ad offering is more likely to help migrate brand advertiser dollars online than serve as a competitive threat to YouTube. 3. YouTube's advertising team has been increasingly aggressive over the last year and there are a number of "low-hanging fruit" initiatives that can drive near-term monetization. While we acknowledge that Google provides little disclosure around the size of YouTube's revenue contribution, which is segmented under Websites revenue along with Owned & Operated Search, both our checks and analysis have led us to believe that YouTube will contribute ~$6 billion in gross revenue by 2015 and has been growing by ~25% to 35% annually as in-stream (pre-roll and mid-roll) video ad units (e.g. TrueView) ramp. Exhibit 3: Google, Inc. CS YouTube Gross Revenue Estimate by Product USD in millions In-Stream Display A 2014A 2015E 2016E 2017E 2018E 2019E 2020E YouTube Display After acquiring YouTube in 2006, Google continued to ramp monetization via various display formats that were for the most part specific to desktop usage these included: Standard display ads adjacent to videos In-video Overlay ads Homepage Custom Mastheads TrueView Search ads We believe standard display and in-video overlay ads accounted for the vast majority of YouTube's display revenue - likely scaling in-line with both desktop user engagement and broader display ad pricing trends. Google, Inc. (GOOGL) 4

5 Exhibit 4: Google, Inc. YouTube In-Video Overlay and Standard Display Ad Creatives Source: YouTube As of 4Q11, Google disclosed that its display business was operating at a $5 billion annualized revenue run-rate, up from $2.5 billion in 3Q10 we note that Google's owned & operated display business included at the time Google Finance, Gmail and Zagat inventory, in addition to display ads served across its various other properties. We estimate that the YouTube legacy display business will reach ~$3.2 billion or about half of YouTube's total revenue in 2015 driven by International usage growth despite continued migration of engagement from desktop to mobile. As it stands to reason that YouTube's display business on mobile is less robust, we forecast growth at a 3% CAGR over the next five years. YouTube In-Stream/TrueView Video Ads: Google launched TrueView ads in November 2010, allowing advertisers to purchase instream video ads on YouTube on a cost-per-view (CPV) basis. Viewers have the option to skip these ads on YouTube after the first five seconds and advertisers are only charged for an ad if the viewer elects to continue watching the ad for more than 30 seconds (i.e. does not press the skip ad button) or the duration of the entire ad (whichever is shorter). Exhibit 5: Google, Inc. YouTube TrueView In-Stream Video Ad Creative Source: YouTube Google, Inc. (GOOGL) 5

6 In 2013, Google disclosed that on average between 15% to 45% of TrueView in-stream viewers elected not to skip a video ad and further that average click-through rates (CTR) for TrueView ads were 3% to 4%. As we noted earlier, given our expectation for a relatively slower pace of growth for the legacy display ad unit, this will by the end of this year account for a little less than half of YouTube's total revenue as it shows: 1) growing ad inventory as a result of strong mobile usage trends, 2) increased monetization via higher ad loads for TrueView, 3) growth in pricing as incremental ad dollars come online and targeting tools improve advertiser ROI. We forecast YouTube's in-stream video ad business will grow at a 35% CAGR over the next five years to reach ~$13 billion by 2020 accounting for 78% of YouTube's revenue. YouTube's Gross Margin Should Expand as Revenue Grows Faster than Bandwidth Costs We believe there are three primary cost drivers for YouTube: Bandwidth more specifically the cost associated with sending user requested content from its data centers to an ISP. Content Acquisition Costs (CAC) this includes revenue share agreements with exclusive content partners, multi-channel networks (MCNs), and individual content creators. Sales and marketing costs associated with selling YouTube inventory to advertisers and agencies. We note that Bandwidth and CAC are flowing through Google's Cost of Revenue ex-tac. As the increase in Bandwidth costs should be tethered to user engagement growth as opposed to revenue growth, as we enter a multi-year cycle of increased contribution from higher value TrueView ads, it stands to reason that Google should be realizing gross margin expansion. Our conversations with the company suggest that YouTube's user engagement continues to grow very rapidly for both the developed as well as emerging markets as smart phone screen sizes get larger which in turn augurs a better consumer experience. Google Play Likely Smaller than We Previously Thought, but Still Growing Very Quickly We have moderated our near-term estimates for Google Play as we reevaluate our assumptions given a higher indexing to those regions with the highest FX headwinds. However, as Google laps the largest of the currency impact beginning in 4Q15, we expect the business to reaccelerate. And while Google has not specifically disclosed the nature of its revenue share agreements with its telco partners, we believe that its strategy to gain distribution for this product should not have materially diverged from what it has done to expand its search franchise globally. In other words, we believe Google expanded Play by offering its telco partners large but relatively fixed economics for revenue share. As such, we believe that as Google Play's volume and revenue continue to scale it is poised to exhibit significant incremental profit dollars as it grows past the breakeven point. And as we have noted in the past, Google reports Play revenue on a net basis in other words just the 30% take from publishers. Hence the only other operating costs are the credit card fees. We estimate that Google's Play business will generate ~$5.1 billion in revenue in FY15 which we expect to grow at a ~22% CAGR over the next five years to reach $14 billion by FY20. Our updated projections for Google Play are as shown below: Google, Inc. (GOOGL) 6

7 Exhibit 6: Google, Inc. CS Google Play Revenue Estimate by Region USD in millions ROW UK US A 2014A 2015E 2016E 2017E 2018E 2019E 2020E 2Q15 Channel Checks Suggest Paid Search Budgets Continue to Grow on Mobile Volume Heading into the 2Q15 results, our checks suggest continued net advertising revenue growth, increasing low-to-mid single percentage points quarter on quarter and increasing ~15% year over year, driven by the following factors: 1) healthy budget allocations to paid search across verticals, with strength in the travel vertical as a result of increased marketing efforts by hotel chains across regions, offset by seasonally weak retail search budgets; 2) continued strength in paid click volume as a result of incremental traffic from mobile; 3) relatively stable CPCs despite FX movements and seasonality; 4) an industry backdrop where both engagement and advertiser ROI continues to grow with little indication that still evolving channels such as programmatic and social display are cannibalizing paid search budget allocations. Strong Volume from Mobile Driving Growth Our conversations with advertisers continued to suggest increases to their paid search budgets at a healthy rate in 2Q15, despite FX fluctuation, with large multi-national advertisers stepping in to take advantage of depressed keyword pricing in USD terms. Overall, our checks show continued directional uptick in budgets due to strong paid click volume growth and relatively stable CPCs, although we continue to view the reported Paid Click/CPC metrics provided by the company as ultimately ambiguous, as factors such as the continuing mix shift between desktop and mobile volume hinder visibility into the metric. We however acknowledge that optics on this metric drives sentiment for GOOG shares. And our quarterly estimates for Google's disclosed revenue lines are as shown below: Google, Inc. (GOOGL) 7

8 Exhibit 7: Google, Inc. Quarterly Website Revenue and Year Over Year Growth US $ in billions % 18% 18% 18% 22% 22% 21% 23% 20% 18% 14% Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13A 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 9% 2Q15E 25% 20% 15% 10% 5% 0% Exhibit 8: Google, Inc. Quarterly Network Revenue and Year Over Year Growth US $ in billions % 19% 12% 7% 3% 0% Q12A 4Q12A 1Q13A 2Q13A 3Q13A 4Q13A 4% 1Q14A 7% 2Q14A 9% 3Q14A 6% 5% 4% 4Q14A 1Q15A 2Q15E 25% 20% 15% 10% 5% 0% Our Google Website revenue at $11.9 billion for 2Q15 is contemplating a modest acceleration for the US O&O search to 14.5% growth (vs. our estimate of 13.3% for 1Q15), UK O&O search to 10% growth on an FX-neutral basis (vs. our estimate of 11.8% in 1Q15), and 22% on an FX-neutral basis for ROW O&O search (vs. our estimate of 23.9% in 1Q15). As for Network, we continue to assume modest deceleration, with UK to grow ~3% YOY on an FX-neutral basis. Exhibit 9: Google, Inc. Quarterly Licensing and Other Revenue and Year Over Year Growth US$ in billions % 102% 150% 138% 85% 99% 160% 140% 120% 100% 80% Exhibit 10: Google, Inc. Quarterly Gross Revenue and Year Over Year Growth US$ in billions % 22% 22% 22% 20% 19% 20% 19% 19% 15% 12% 25% 20% 15% % 48% 53% 50% 13% 7% % 40% 20% 0% % % 5% 0% 2Q15E 1Q15A 4Q14A 3Q14A 2Q14A 1Q14A 4Q13A 3Q13A 2Q13A 1Q13A 4Q12A 3Q12A 2Q15E 1Q15A 4Q14A 3Q14A 2Q14A 1Q14A 4Q13A 3Q13A 2Q13A 1Q13A 4Q12A 3Q12A As for Google's L&O line, we believe Google Play grew ~38% in 1Q15 on an FX-neutral basis and our estimate for 2Q15 conservatively reflects that rate to be at ~37%. All of the above adds up to Gross Revenue of $17.2 billion for 2Q15. Google, Inc. (GOOGL) 8

9 Exhibit 11: Google, Inc. Quarterly Net Revenue and Year Over Year Growth US $ in billions % 40% 35% 60% 50% 40% Exhibit 12: Google, Inc. Quarterly Adjusted EBITDA and Margin US $ in billions % 46% 47% 45% 45% 43% 50% 49% 50% 47% 49% 46% 60% 50% 40% 8 30% 4 30% % 15% 14% 14% 11% 11% 9% 7% 5% % 10% 0% % 10% 0% 2Q15E 1Q15A 4Q14A 3Q14A 2Q14A 1Q14A 4Q13A 3Q13A 2Q13A 1Q13A 4Q12A 3Q12A 2Q15E 1Q15A 4Q14A 3Q14A 2Q14A 1Q14A 4Q13A 3Q13A 2Q13A 1Q13A 4Q12A 3Q12A And lastly our estimate for Net Revenue given sequentially in-line TAC rate projection stands at $13.8 billion and Adjusted EBITDA is $6.4 billion. CS estimates versus consensus for revenue, adjusted EBITDA, and adjusted EPS are as shown below for 2Q15, FY15, FY16. Exhibit 13: Google Inc. - Credit Suisse vs. Consensus Estimates US$ in millions, unless otherwise stated 2Q15 FY15 FY16 CS Consensus % Diff CS Consensus % Diff CS Consensus % Diff Revenue % % % Adjusted EBITDA % % % Adjusted EPS $6.05 $ % $25.88 $ % $32.14 $ %, Bloomberg Valuation As we have made modest changes to our longer-term advertising estimates, our DCFderived price target, which uses a 10.5% weighted average cost of capital and 3% terminal growth rate increases to $700 from $690 prior. Google, Inc. (GOOGL) 9

10 Exhibit 14: Google, Inc. - Discounted Cash Flow Analysis CAGR 2015E 2016E 2017E 2018E 2019E 2020E '15-'20 EBITDA % Net Income % Depreciation & Amortization % Other Non-Cash Charges (Benefits) % Interest Expense (Income) (775.8) (1448.3) (2419.9) (3699.2) (5287.6) (7201.3) Changes in Operating Assets & Liabilities (499.3) (473.2) (504.3) (546.0) (544.3) Unlevered Cash Flows % Capital Expenditures % Unlevered Free Cash Flows % Y/Y % Change 32.1% 18.5% 27.9% 22.4% 18.8% 16.2% Weighted Average Cost of Capital 10.5% Perpetual UFCF Growth Rate ("G") 3.0% 2015E NPV of Unlevered Free Cash Flows Present Value of Terminal Value Enterprise Value Off-Balance Sheet Assets 0 Adjusted Enterprise Value Year End Net Debt (Cash) (73266) Equity Value Diluted Shares Outstanding Equity Value Per Share $698 Google, Inc. (GOOGL) 10

11 Exhibit 15: Google, Inc. - Quarterly Income Statement 2014A 2015E 2016E 1Q14A 2Q14A 3Q14A 4Q14A 1Q15A 2Q15E 3Q15E 4Q15E 1Q16E 2Q16E 3Q16E 4Q16E Gross Revenue TAC Net Revenue Other Cost of Revenue Research and Development Sales and Marketing General and Administrative Other Total Operating Expenses Operating Income Interest Income and Other, Net Pretax Income Income Tax Expense (Benefit) Net Income Basic EPS to Common $5.43 $5.17 $4.43 $5.58 $5.27 $4.62 $4.69 $5.58 $6.44 $5.82 $6.07 $7.30 Basic Shares Outstanding Diluted EPS $5.33 $5.08 $4.36 $5.50 $5.20 $4.56 $4.63 $5.52 $6.36 $5.74 $6.00 $7.21 Shares Outstanding EBITDA Reconciliation Operating Income Nonrecurring Items Stock-Based Compensation Pro Forma Operating Income Depreciation and Amortization Adjusted EBITDA Pro forma Net Income Reconciliation Pro Forma Operating Income Other Income, Net Pretax Income GAAP Income Tax Expense (Benefit) Total Taxes Pro Forma Net Income Adjusted EPS - Diluted $6.27 $6.08 $6.35 $6.88 $6.57 $6.05 $6.13 $7.13 $7.93 $7.44 $7.70 $9.07 Y/Y % Change Gross Revenue 19.1% 21.7% 20.1% 15.3% 11.9% 7.6% 8.1% 10.6% 13.1% 14.7% 14.8% 15.7% Net Revenue 10.7% 14.2% 10.5% 6.9% 14.1% 8.8% 9.4% 11.8% 14.9% 16.9% 17.0% 18.1% TAC 9.0% 9.3% 12.7% 9.3% 3.6% 2.9% 3.1% 5.8% 5.7% 5.7% 5.5% 5.6% COGS 25.6% 29.3% 37.3% 12.2% 10.3% 14.7% 7.4% 24.1% 22.3% 19.5% 15.9% 16.5% Research and Development 15.7% 12.6% 31.6% 33.3% 29.5% 28.8% 12.9% 15.0% 13.5% 13.7% 13.4% 13.5% Sales and Marketing 9.0% 11.9% 15.4% 11.8% 19.4% 16.5% 13.5% 8.4% 6.2% 12.0% 11.9% 12.8% General and Administrative 32.4% 17.3% 12.5% 26.3% 9.9% 16.2% 21.2% 9.5% 6.4% 8.9% 8.8% 9.3% Operating Income 18.3% 36.3% 8.1% 12.2% 8.1% -11.4% 2.1% 3.1% 17.8% 23.6% 27.5% 29.3% Net Income 9.8% 36.6% 1.5% 12.1% -1.8% -9.7% 6.9% 0.9% 23.3% 26.9% 30.5% 31.8% Adjusted EBITDA 17.9% 23.8% 22.8% 16.9% 13.0% 2.3% -0.9% 7.6% 18.2% 20.6% 22.7% 24.2% Pro Forma Net Income 10.3% 29.1% 20.0% 15.6% 5.4% 0.2% -3.0% 4.4% 21.6% 23.9% 26.7% 28.2% Adjusted EPS - Diluted 8.3% 27.3% 18.3% 14.5% 4.8% -0.5% -3.6% 3.7% 20.6% 22.9% 25.7% 27.1% Margins (on Net Revenue) Gross Margin 77.6% 77.7% 74.6% 77.2% 78.4% 76.5% 75.1% 74.7% 77.0% 76.0% 75.3% 75.1% GAAP Operating Margin 33.8% 33.6% 28.3% 30.4% 32.0% 27.4% 26.4% 28.0% 32.8% 28.9% 28.8% 30.7% Pro Forma Operating Margin 40.6% 40.6% 40.7% 38.7% 40.6% 36.7% 35.4% 36.7% 41.3% 38.1% 37.6% 39.2% Adjusted EBITDA Margin 49.5% 49.1% 49.5% 47.4% 49.1% 46.2% 44.9% 45.7% 50.5% 47.6% 47.1% 48.0% Net Income Margin 29.9% 27.6% 22.8% 26.2% 25.8% 22.9% 22.2% 23.6% 27.7% 24.8% 24.8% 26.4% Adjusted Net Income Margin 35.3% 33.0% 33.2% 32.7% 32.6% 30.3% 29.4% 30.6% 34.5% 32.2% 31.9% 33.2% Google, Inc. (GOOGL) 11

12 Exhibit 16: Google, Inc. - Annual Income Statement 2014A 2015E 2016E 2017E 2018E 2019E 2020E Gross Revenue TAC Net Revenue Other Cost of Revenue Research and Development Sales and Marketing General and Administrative Other Total Operating Expenses Operating Income Interest Income and Other, Net Pretax Income Income Tax Expense (Benefit) Net Income Basic EPS to Common $20.61 $20.16 $25.64 $31.48 $37.97 $44.70 $52.42 Basic Shares Outstanding Diluted EPS $20.27 $19.91 $25.32 $31.09 $37.50 $44.15 $51.76 Shares Outstanding EBITDA Reconciliation Operating Income Nonrecurring Items Stock-Based Compensation Pro Forma Operating Income Depreciation and Amortization Adjusted EBITDA Pro forma Net Income Reconciliation Pro Forma Operating Income Other Income, Net Pretax Income GAAP Income Tax Expense (Benefit) Total Taxes Pro Forma Net Income Adjusted EPS - Diluted $25.59 $25.88 $32.14 $38.76 $46.01 $53.47 $61.83 Y/Y % Change Gross Revenue 18.9% 9.6% 14.6% 13.4% 11.9% 10.4% 8.8% Net Revenue 10.4% 11.0% 16.8% 15.3% 13.6% 11.7% 9.9% TAC 10.1% 3.9% 5.6% 4.3% 3.6% 2.9% 2.2% COGS 25.3% 14.2% 18.3% 17.1% 13.8% 11.7% 6.1% Research and Development 23.6% 20.7% 13.5% 12.3% 11.5% 10.0% 8.9% Sales and Marketing 12.1% 14.0% 10.9% 10.4% 9.4% 8.3% 7.1% General and Administrative 22.0% 13.9% 8.4% 8.5% 7.2% 6.6% 5.3% Operating Income 18.1% 0.4% 24.5% 20.7% 18.5% 15.6% 15.4% Net Income 14.0% -1.2% 28.2% 23.8% 21.6% 18.7% 18.2% Adjusted EBITDA 20.2% 5.5% 21.5% 19.0% 16.9% 14.5% 12.7% Pro Forma Net Income 18.2% 1.8% 25.2% 21.6% 19.7% 17.1% 16.6% Adjusted EPS - Diluted 16.6% 1.1% 24.2% 20.6% 18.7% 16.2% 15.6% Margins Gross Margin 76.8% 76.1% 75.8% 75.4% 75.4% 75.4% 76.2% GAAP Operating Margin 31.4% 28.4% 30.3% 31.7% 33.1% 34.2% 36.0% Pro Forma Operating Margin 40.1% 37.3% 39.0% 40.3% 41.6% 42.6% 44.2% Adjusted EBITDA Margin 48.8% 46.4% 48.3% 49.8% 51.3% 52.6% 53.9% Net Income Margin 26.5% 23.6% 25.9% 27.8% 29.8% 31.6% 34.0% Adjusted Net Income Margin 33.5% 30.7% 32.9% 34.7% 36.6% 38.3% 40.7% Google, Inc. (GOOGL) 12

13 Exhibit 17: Google, Inc. - Cash Flow Statement 2014A 2015E 2016E 2017E 2018E 2019E 2020E Operating Activities Net Income Depreciation and Amortization of Property and Equipment Amortization of Intangible and Other Assets Stock-based Compensation Expense Excess Tax Benefits from Stock-based Award Activities (648.0) (105.0) Deferred Income Taxes (104.0) Other (938.0) Accounts Receivable (1641.0) (617.0) (1555.1) (1582.0) (1600.2) (1560.8) (1451.8) Income Taxes, Net Inventories Prepaid Revenue Share, Expenses and Other Assets (436.0) (467.2) (456.8) (413.1) (360.8) Accounts Payable Accrued Expenses and Other Liabilities Accrued Revenue Share Deferred Revenue (175.0) (59.0) Net Cash from Operating Activities Investing Activities Purchases of Property and Equipment ( ) ( ) ( ) ( ) ( ) ( ) ( ) Purchases of Marketable Securities ( ) ( ) Maturities and Sales of Marketable Securities Investments in Non-Marketable Equity Securities (1227.0) (1074.0) Cash Collateral Received from Securities Lending (1120.0) Investments in Reverse Repurchase Agreements (775.0) Acquisitions, Net of Cash Acquired (4888.0) (64.0) Other Net Cash Used in Investing Activities ( ) ( ) ( ) ( ) ( ) ( ) ( ) Financing Activities Net Proceeds (Payments) from Stock-Based Award Activities (2069.0) (493.0) Excess Tax Benefits From Stock-Based Award Activities Repurchase of Common Stock in Connection With Acquisitions Proceeds from Issuance of Short-Term Debt (999.0) Repayment of Short-Term Debt ( ) (3308.0) Other Net Cash Used in Financing Activities (1439.0) (1622.0) (999.0) Effect of Exchange rate (433.0) (293.0) Net Increase (Decrease) in Cash and Equivalents (551.0) Cash and Equivalents, Beginning of Period Cash and Equivalents, End of Period Google, Inc. (GOOGL) 13

14 Exhibit 18: Google, Inc. - Balance Sheet 2014A 2015E 2016E 2017E 2018E 2019E 2020E Assets: Cash and Cash Equivalents Marketable Securities Accounts Receivable, Net of Allowance Inventories Receivable Under Reverse Repurchase Agreements Deferred Income Taxes, Net Income Taxes Receivable, Net Prepaid Revenue Share, Expenses and Other Total Current Assets Prepaid Revenue Share, Expenses, and Other Deferred Income Taxes, Net Non-Marketable Equity Securities Property and Equipment, net Intangible Assets, Net Goodwill Total Assets Liabilities: Accounts Payable Short-Term Debt Accrued Compensation and Benefits Accrued Expenses and Other Current Liabilities Accrued Revenue Share Securities Lending Payable Deferred Revenue Income Taxes Payable, Net Other Total Current Liabilities Long-Term Debt Deferred Revenue, Non-Current Income Taxes Payable, Non-Current Deferred Income Taxes, Non-Current Other Long-Term Liabilities Total Liabilities Shareholder's Equity: Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss 27.0 (371.0) (371.0) (371.0) (371.0) (371.0) (371.0) Retained Earnings Other Total Shareholder's Equity Total Liabilities and Shareholder's Equity Google, Inc. (GOOGL) 14

15 Companies Mentioned (Price as of 09-Jul-2015) Facebook Inc. (FB.OQ, $85.88) Google, Inc. (GOOGL.OQ, $544.65, OUTPERFORM, TP $700.0) Important Global Disclosures Disclosure Appendix I, Stephen Ju, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Facebook Inc. (FB.OQ) FB.OQ Closing Price Target Price Date (US$) (US$) Rating 27-Jul N 30-Jul R 31-Aug N 10-Oct * 26-Oct R 31-Dec N 29-Jan Jul Oct Oct Dec R 20-Dec N 30-Jan Apr O 24-Apr Jul Oct Oct Jan Jan Apr * Asterisk signifies initiation or assumption of coverage. N EU T RA L REST RICT ED O U T PERFO RM Google, Inc. (GOOGL) 15

16 3-Year Price and Rating History for Google, Inc. (GOOGL.OQ) GOOGL.OQ Closing Price Target Price Date (US$) (US$) Rating 12-Jul O 10-Oct * 19-Oct Mar Jul Oct Jan Apr Apr Jul Jul Oct Nov Jan Apr Apr * Asterisk signifies initiation or assumption of coverage. O U T PERFO RM The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities As of December 10, 2012 Analysts stock rating are defined as follows: Outperform (O) : The stock s total return is expected to outperform the relevant benchmark*over the next 12 months. Neutral (N) : The stock s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-japan Asia stocks, ratings are based on a stock s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock s absolute total return potential to its current share price and (2) the relative attractiveness of a stock s total return potential within an analyst s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward. Analysts sector weightings are distinct from analysts stock ratings and are based on the analyst s expectations for the fundamentals and/or valuation of the sector* relative to the group s historic fundamentals and/or valuation: Overweight : The analyst s expectation for the sector s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst s expectation for the sector s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst s expectation for the sector s fundamentals and/or valuation is cautious over the next 12 months. *An analyst s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors. Google, Inc. (GOOGL) 16

17 Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 49% (27% banking clients) Neutral/Hold* 36% (44% banking clients) Underperform/Sell* 13% (38% banking clients) Restricted 2% *For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors. Credit Suisse s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. Price Target: (12 months) for Google, Inc. (GOOGL.OQ) Method: We use the discounted cash flow (DCF) method to calculate our $700 target price for Google. Our five-year DCF uses a 3% terminal growth rate and a market-implied discount rate derived by discounting our unlevered FCF (free cash flow) estimates from 2015 through 2020 to arrive at the stock's current trading price. We then applied this discount rate to our unlevered free cash flow estimates for GOOG. Risk: Risks to our $700 target price for GOOG are a deteriorating global economy, lower-than-expected penetration in mobile, volatility in operating margins, and unpredictable investment spending. Please refer to the firm's disclosure website at for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names The subject company (GOOGL.OQ, FB.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (GOOGL.OQ, FB.OQ) within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (GOOGL.OQ, FB.OQ) within the past 12 months Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (GOOGL.OQ, FB.OQ) within the next 3 months. As of the date of this report, Credit Suisse makes a market in the following subject companies (GOOGL.OQ, FB.OQ). Credit Suisse has a material conflict of interest with the subject company (FB.OQ). Credit Suisse has been named as a defendant in various putative shareholder class-action lawsuits relating to Facebook, Inc. s May 2012 initial public offering. Credit Suisse s practice is not to comment in research reports on pending litigations to which it is a party. Nothing in this report should be construed as an opinion on the merits or potential outcome of the lawsuits. Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GOOGL.OQ, FB.OQ) within the past 12 months Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit Google, Inc. (GOOGL) 17

18 Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (GOOGL.OQ, FB.OQ) within the past 3 years. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report. Principal is not guaranteed in the case of equities because equity prices are variable. Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at or call +1 (877) Google, Inc. (GOOGL) 18

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