Google Inc. (GOOGL) September 16, 2014 Internet Software and Services Stock Rating BUY Investment Thesis Target Price $ Henry Fund DCF $664

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1 The Henry Fund Henry B. Tippie School of Management Adam Conzemius [Adam Google Inc. (GOOGL) September 16, 2014 Internet Software and Services Stock Rating BUY Investment Thesis Target Price $ Henry Fund DCF $664 Henry Fund DDM N/A Relative P/E Multiple $899 Price Data Current Price $589 52wk Range $ Consensus 1yr Target $673 Key Statistics Market Cap (B) $392.5 Shares Outstanding (M) 672 Institutional Ownership 80.5% Five Year Beta 0.94 Est. 5yr Growth 16.1% Price/Earnings (TTM) 22.1 Price/Earnings (FY1) 20.5 Price/Sales (TTM) 6.4 Worldwide, digital advertising is expected to grow at a 10.7% CAGR through 2018 and reach a market size similar to that of TV, $194.5 billion. We project Google increasing its share of this market to 11.3% in Google Sites growth at 16.9% five year CAGR and Google Play growth at 27.3% five year CAGR position it as one of a few large companies with such high growth prospects. While Google is in the midst of CPC price declines due to current lower value mobile advertising, we believe this represents a favorable opportunity for the company to grow in other markets and creates an opportunity for more value added advertising techniques, which could result in increased revenues. Drivers of Thesis Over 1.4 billion new internet users are expected to come online through 2018, which provides Google a strong opportunity to grow its mobile advertising business and an opportunity to entertainment media to them Worldwide, online video is expected to increase by 23.8% CAGR through 2018 and almost every viewer of online video views YouTube at least once per month Worldwide, mobile internet advertising revenues are expected to grow at 21.5% CAGR through 2018 and Google s 46.8% share of mobile advertising ensures it will capitalize on this Low P/E value relative to peers makes Google an attractive investment Risks to Thesis Operating margin compression has been occurring in recent quarters and could continue as a trend due to declining CPC (cost per click) prices Consumer privacy regulations imposed in the United States and European Union could significantly threaten Google s business. The EU is currently conducting an antitrust lawsuit against Google Google s international revenue mix creates a moving effective tax rate, and tax advantages are under pressure to be closed in the EU Earnings Estimates Year E 2015E 2016E EPS $15.09 $16.41 $19.41 $26.62 $31.68 $36.83 growth 13.03% 8.75% 18.32% 37.16% 19.02% 16.24% 35% 30% 25% 20% 15% 10% 5% 0% Important disclosures appear on the last page of this report. Price/Sales (FY1) Price/Book (MRQ) Profitability Operating Margin 23.3% Profit Margin 20.5% Return on Assets (TTM) 11.9% Return on Equity (TTM) 15.4% P/E P/S P/CF Source: FactSet Month Performance Company Description GOOGL S&P 500 5% S O N D J F M A M J J A Source: FactSet GOOGL Industry Sector Google Inc., headquartered in Mountain View, CA, United States, is the leading internet search engine in the world with a mission to organize the world s information and make it universally accessible and useful. The core business focus is to provide advertising solutions on its websites and on outside websites, which accounts for 91.0% of its revenues in Other operations, 9.0% of revenue, include Android, Google Fiber, Google Play, and hardware. Key drivers of growth are video over the internet and first time internet users. Google has 47,756 full time employees

2 EXECUTIVE SUMMARY We recommend a buy rating on Google non voting stock due to our belief that the company will continue to increase its share of digital advertisement spending and the overall digital advertising market will continue to grow at a 10.7% CAGR over the next four years. Google is well positioned to capture much of the growth in the even online video and mobile internet segments, which are growing at 23.8% and 21.5% CAGR through Google Play will be a growth driver for Google as Android takes the bulk of market share, 84.6%, and is positioned to capture the low income consumers in high growth markets. The growth in developing economies will position Google to benefit greatly from increased company advertisement spending in those areas. Google s dominance in internet search advertising will not be seriously challenged and will provide Google with large top line growth as the market continues to expand in number of users and revenue shifting toward digital advertising. Henry Fund discounted cash flow and economic profit models suggest a fair valuation in the range of $ per share due to revenue growth expectations of 16.1% on a five year CAGR. We believe that Google has 12.9% upside in its stock price over the next year. Relative P/E valuation of 22x shows that Google offers a good value for exposure to the internet software and services industry, which trades at 32x, and reasonable value for exposure to the technology sector. COMPANY DESCRIPTION Revenue has grown at a 20.5% CAGR for Google over the past five years as internet advertising dollars have seen strong growth due to digital advertising techniques maturing and a tremendous number of new internet users. Google s strategy is to drive internet growth through innovation in other areas (e.g., Google Fiber), which ultimately will drive its advertising revenue. However, the company has also been attempting to diversify its revenues away from advertising dollars, 91.0% of revenues, as advertising spending drastically decreases when business cycles take a downturn and is seasonally linked to retail advertising. 1 Google maintains a large cash holding, currently $75.5 billion, as the industry widely views cash as a strategic tool to snatch up small potentially disruptive companies. The reasoning behind this is based on the ever changing landscape of the technology sector, information asymmetry between tech companies and sources of capital, and revenue volatility or lack of revenue in potential acquisitions. We forecast a 16.1% five year CAGR in revenues for Google based on projected internet advertising spending growth, mobile spending and consumption growth, and overall internet user growth. Google operates around the world, and is well positioned to take advantage of those three trends. Business Model 2013 Geographic Presence Rest of the world 45.0% United Kingdom 10.0% United States 45.0% Source: Google Inc K 1 Google generates 91.0% of its 2013 revenue, excluding Motorola Mobility, through advertising, and the remainder of its revenue through other sources. Google advertising is sold through two platforms: 1) AdWords sells advertising space on Google websites 2) AdSense sells advertising space on other parties websites. Other revenues consist of licensing fees, hardware sales, and digital content sales Operating Groups Other revenues 9% Google Network Members' websites 24% Google Websites 67% Source: Google K 1 (excluding Motorola Mobility) Page 2

3 AdWords How it works 1. Customers enter into an auction for advertising space on Google s websites or partner websites (AdSense) 2. Consumers visit these websites and Google displays the advertisement based on a quality score (i.e. relevancy of the advertisement) and the maximum bid price. 3. Google receives revenue only when a consumer clicks on a customer s advertisement (CPC) 100% 80% 60% 40% 20% 0% Source: StatCounter 19 Google dominates the online search market in computers, mobile, tablets, and gaming. This enables the business model to become more efficient as Google gains better consumer data to sell to its customers. Ad Types August 2014 Global Search Market Share Google search: advertisements placed next to Google search results. In the past this has been segmented by computer and mobile, but Google is offering bundling service as internet access through mobile becomes more prevalent AdSense: display advertisements on partners websites YouTube: display advertisements at the beginning, end, and during YouTube videos A look forward Google Yahoo! bing Other We expect AdWords to grow at a 16.9% CAGR over the next five years and to outpace AdSense growth. Historically Google s growth has come from the sheer number of new internet users, so the two units grew in lockstep. However, going forward we view mobile internet access as gaining prominence in Google s growth story and driving more growth on Google websites than on partner websites. AdSense How it works 1. Google partners make advertising space available on their websites 2. Customers (AdWords) bid for space on the website and the highest ranked bidder, based on quality and price, is displayed 3. Google charges a commission fee of 32% for content and 49% for search advertisement revenue generated on the partner s websites Ad Types All of the below can be displayed on computers, mobile, and in interstitial game (i.e., while the game loads) advertisements Content: advertisements displayed next to a partner s online content Search: advertisements displayed on the partner s website next to the partners own search engine results or powered by Google s search engine on the partner s website Video: display advertisements at the beginning, end, and during YouTube videos A look forward We forecast AdSense to grow at a 12.0% CAGR over the next five years. We see Google having more trouble delivering relevant ads to partner mobile websites as consumer behavior is different on mobile than it is on a computer. 11 Considering that, we do expect Google to improve, but not before losing some growth opportunity that is available to the AdWords segment. Other Revenues Google Play Google s online media store that sells movies, TV shows, music, books, and publications via SaaS on the cloud. Licensing and Enterprise Page 3

4 Google maps API of its products to developers and businesses. This accounts for a small fraction of the other revenues. A look forward We expect Google Play to drive all of the growth in the segment at a 27.3% CAGR over the next five years as Android has an 84.7% mobile device global market share. Google s app store has always been much smaller than Apple s and is now finally getting large enough, $4B 2014E, to have a meaningful impact on Google s top line revenue. October 17, 2013 RECENT DEVELOPMENTS Q3 earnings beat estimates with billion vs. $13.70 billion estimates Google sites continues to see strong revenue growth more than offset declining CPC April 3, 2014 Google completed 2:1 stock split with the second Class C share having no voting rights Google will pay Class C shareholders the difference in value between Class A and C shares if the Class C shares are 1% or more less valuable than Class A shares after one year May 16, 2014 Google and Apple agree to drop all lawsuits between them, including those that date back to 2010 July 17, 2014 Nikesh Arora, Chief Business Officer, left Google to work at SoftBank He was one of Googles top executives responible for Google's business strategy and had a 10 year tenure with the company Google has seen a decline in cost per click of advertisements in the last two years. We forecast this trend to continue, but to improve with each quarter until it finally levels off in mid At that point we expect the cost per click prices to stay the same for our modeling purposes. Acquisitions Google follows an acquisition strategy of enhancing its responsible web search technology and existing products, to introduce new products, and buy patents. In particular, the new product category focuses on introducing a small product to the market quickly and then performing rapid iterations to improve it. 1 Defensive positioning is also a strong driver for acquisitions within the industry as many companies maintain large cash reserves for the explicit purpose of purchasing small startup companies when new and potentially disruptive technologies emerge. As the economy continues to do well we see ample opportunities to purchase small companies at ever higher valuations. We anticipate that Google $75.5 billion in cash and cash equivalents in 2014, $112 per share. We anticipate that Google will hold onto this cash reserve explicitly to conduct M&A deals, but may face strong pressure down the line to start paying a dividend with its excess cash. The management team has engaged in unfriendly shareholder actions in the past (e.g., stock split to reduce voting rights), so we do not forecast a dividend. Nest Labs Inc. Nest Labs manufactures thermostat systems that are connected to the internet. 2 Deal Summary Date January 13, 2014 Deal Status Completed Role Acquirer Deal Value (M) $3,200 % Sought 88.0% Revenue Multiple 10.7 Stock Price Before Deal $1,123.0 Stock Price After Deal $1,149.4 Company Information Name Nest Labs Inc. Nationality United States Public Status Private Industry Industrials Source: ThomsonONE Investment Banking 2 Google is strategically expanding its presence in the internet of things trend, which will increase the robustness of the Android platform and provide revenue growth Page 4

5 potential for the company. 3 Google can use its size and technical capabilities to quickly scale up the technology if it is designed well. Lenovo Group Ltd. Lenovo will purchase Motorola Mobility arm of Google. The division has seen moderate growth with Google as the company primarily wanted the patents to protect its Android platform from litigation. Deal Summary Date January 29, 2014 Deal Status Pending Role Divestiture Deal Value (M) $2,910 % Sought 100.0% Revenue Multiple 0.7 Stock Price Before Deal $1,120.2 Stock Price After Deal $1,146.1 Company Information Name Lenovo Group Ltd. Nationality Hong Kong Public Status Public Industry Technology Source: ThomsonONE Investment Banking 2 Google sold Motorola Mobility for a little bit less than expected. Google paid $6.5 billion for Motorola Mobility and its patents, and is now selling the division for $2.9 billion sans patents. 4 However, it can now focus on what it does best and no longer be viewed as a direct competitor by its hardware partners. With the completion of this deal, Google will also own a 5.9% stake, $750 million, in Lenovo Group Ltd. 5 The key takeaway from this deal is that Google s operating margins will improve with the divestiture of Motorola Mobility a business line that really only provided patent value to Google. Skybox Imaging Inc. Skybox manufactures satellites, which offer images of earth and communication. 2 Deal Summary Date June 10, 2014 Deal Status Completed Role Acquirer Deal Value (M) $500 % Sought 100.0% Stock Price Before Deal $563.8 Stock Price After Deal $574.9 Company Information Name Skybox Imaging Inc. Nationality United States Public Status Private Industry Technology Source: ThomsonONE Investment Banking 2 Google hopes to improve upon Google Maps, offer internet access in remote regions (exactly like failed Teledesic of 2002), data analytics and offerings. 6 We believe Google will use this to augment other product offerings through better data analytics and potentially improving its map system. Internet access to remote region with nobody living in them is an expensive venture when no consumer is there to pay for the service, but luckily they only spent $500 million. DropCam Inc. DropCam makes home security cameras and offers cloud based security services. 2 Deal Summary Date June 20, 2014 Deal Status Pending Role Acquirer Deal Value (M) $555 % Sought 100.0% Stock Price Before Deal $574.9 Stock Price After Deal $570.5 Company Information Name DropCam Inc. Nationality United States Public Status Private Industry Consumer Goods Source: ThomsonONE Investment Banking 2 Nest Labs, operating independently inside Google, will add DropCam to its portfolio of internet of things inside the home. In addition, this is a means by which Google hopes to diversify its revenues. 7 Page 5

6 Internet User Growth INDUSTRY TRENDS Over 1.3 billion new internet users are expected to come online between 2013 and 2018 as the total number of internet users climbs from 2.5 billion to 3.9 billion. 13 China and India will account for 300 million and 313 million, respectively. The majority of this growth will come from increased broadband penetration in China and increased wireless penetration in India. 25 We note that Google will not benefit from internet user growth in China. Broadband internet penetration United States Western Europe Japan China Worldwide Brazil Central/Eastern Europe India Chinese and Indian consumers will be much poorer than their western counterparts, and subsequently only make up approximately 25% of total global consumption, which will be slightly less than that of the United States alone. 26 Google s strategy of bringing new users online will have to be altered for these markets, assuming it ever decides to reenter China, to be much lower cost as consumers will be unwilling to spend money on internet access otherwise. Should internet penetration rise as expected, Google will find its advertising services in high demand as customers seek to sell new products to consumers. Mobile Internet Connected Devices Smart mobile devices account for 26% of the world s connections to the internet in 2014, and will increase to 54% of the world s internet connections in Connection Share (%) % 20% 40% 60% 80% 100% Source: S&P Capital IQ 31 Monetizing these new consumer will prove to be a challenge as real GDP per capita is expected to reach $9,000 and $3,000 in China and India by k 11k 4k Real GDP per Capita 9k 1k 3k 58k 47k 53k 43k 44k 37k Brazil China India USA Japan UK Source: Bain Smart Devices and Connections Non Smart Devices and Connections Source: Cisco 13 Smartphones are expected to be 88% of total global phone sales in 2014, up from 66% in In addition, smartphones will account for 76.6% of total internet connected device shipments in Worldwide Internet Connected Device Shipments (000) Traditional PCs 296, , ,657 Growth rate 6.7% 5.3% Ultramobiles, Premium 21,517 32,251 55,032 Growth rate 49.9% 70.6% PC Market Total 317, , ,689 Growth rate 2.9% 2.7% Tablets 206, , ,964 Page 6

7 Growth rate 23.9% 25.2% Mobile Phones 1,806,964 1,862,766 1,946,456 Growth rate 3.1% 4.5% Other Ultramobiles 2,981 5,381 7,645 Growth rate 80.5% 42.1% Total 2,334,400 2,432,927 2,591,753 Growth rate 4.2% 6.5% Source: Gartner 27 Accompanying the rise in mobile devices are two marketing trends: Geo targeting: targeting consumers with relevant products while they are in a specific location Narrowcasting: precise marketing segments consisting of very few consumers The combination of these two trends creates an opportunity for greater company value in mobile advertisement spending as more niches can be filled and companies could have greater control over product pricing. This presents an opportunity to Google in that it could stop the price decline of its advertisement services. Mobile ecommerce is in the process of maturing as it has seen rapid growth in share of overall traffic. However, the value of the purchases made on mobile platforms is still 19.6% lower than the average order value of purchases made on PCs. 29 Share of ecommerce traffic This average order value drives down CPC (cost per click) price as customers are unwilling to pay as much for mobile advertisement slots. Companies look at the average order value as the primary decision point when deciding how much to pay for advertisements CPC % PRICE CHANGE (YOY) 2% 4% 9% Source: Google Q2 14 Earnings 30 We believe the CPC price decline is lessening in recent quarters partly because Google has moved to bundle mobile and desktop advertisement packages. However, we do expect the CPC price declines to continue through the next three years unless mobile marketing strategy can stem this tide. In addition, the wave of new internet users is more than offsetting the decline in cost per click prices for Google, so the company continues to see top line growth in the advertisement segment. Online Video 5% 6% 8% 6% 8% 13% 11% 15% 9% 11% 12% 6% 7% 13% Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14 Aggregate Network Google Sites % 34% 75% 85% Desktop Phone Tablet 14% 16% 9% 10% 5% Most consumers will watch internet video at least a few times this year. 28 We forecast a trend that this number will rise each year as more consumers gain access to the internet and internet video content becomes more professional. Source: Clickz 29 Average Order Value 7% 6% 13% Desktop Phone Tablet Source: Clickz 29 Page 7

8 Proportion of consumers who watch internet video 2012 Willingness to pay for internet video 69% 31% Overall 90% % 38% Brazil Spain Italy France USA 96% 95% 94% 91% 86% Willing to pay Unwilling to pay Source: Accenture 28 MARKETS AND COMPETITION Digital Advertising UK 85% Source: Accenture 28 Online video will be the driving force behind mobile internet usage, growing to account for 69.1% of all mobile internet traffic by In fact, AT&T just purchased DirecTV as a means to deliver more video content. Digital advertising is expected to grow at 10.7% CAGR over four years from $117.2 billion, globally, in 2013 to $194.5 billion in At the same time, non digital advertisement spending is expected to grow at a 1.9% CAGR through Total global advertisement spending amounted to $516.2 billion in The net effect is that the advertisement pie is being redistributed in Google s favor. We see a decline in consumer willingness to pay for online video in the short term, which provides evidence that the internet video advertising model could be very successful. At the same time, Google could also start charging for YouTube content with no advertisements. Net US Digital Ad Revenue Share by Company % of total media ad spending Google 9.1% 10.0% 10.6% 11.1% 11.3% Facebook Yahoo Microsoft AOL Amazon IAC Twitter Total Digital 22.3% 25.2% 28.2% 30.9% 33.2% Source: AdAge 18 Search dominates digital advertisement spending by accounting for 43% of the entire market in Google will retain a hefty portion of the overall digital advertising market with its continued dominance in search and its growth potential in mobile and online video. Page 8

9 Global Internet advertising revenue by share of category Search Display Classified Video Mobile Source: PWC 12 Digital advertisement spending on online video and mobile will grow at 23.8% and 21.5% CAGR through 2018, respectively. 12 The advertising industry shift is a powerful trend that Google will capitalize on with its leading position in three out of five categories Global digital advertising revenue CAGR (%) through 2018 Search Display Classified Video Mobile Source: PWC 12 Google online video, i.e. YouTube, leads the pack in this segment. 25 Google s TrueView advertising platform has been fully built out and scaled up over the years, so we expect it to start monetizing the YouTube consumers with ever greater success going forward. As Google begins to monetize online video, so comes the entire industry as nearly every unique viewer in the United States visits YouTube. Top U.S. online video properties by unique viewers Unique viewers (000) in July 2014 Google Sites 157,204 Facebook 103,081 AOL, Inc. 58,621 Yahoo Sites 48,750 VEVO 43,523 NDN 39,421 Maker Studios Inc. 38,583 Microsoft Sites 37,367 Fullscreen 36,126 Vimeo 34,216 Total unique viewers 190,273 Source: ComScore 25 Android shipped with over 255 million smartphones in Q and reached 84.7% market share. 24 Android continues to do well as ios is the only other competitor of any size and Apple phones are much more expensive than Androids. To illustrate the point, Google recently released an Android One phone in India that costs $100, while the iphone 5C costs $450. This strategy will enable Google to obtain significant growth in its Google Play revenue streams, projected to reach $4B this year. Google mobile advertising is fairly independent of OS as it captures 46.8% of the market share in Internet advertising revenue broken down by industry category shows that Google s revenues are highly linked to retail advertising spending, and 46.0% of total revenues is derived from retail, finance, and automotive industries. 21 Internet Ad revenues by major industry category Retail Financial Services Automotive Telecom Leisure Travel Tech/Computing Packaged Goods Pharma & Healthcare Media Entertainment Peer Comparisons 9% 8% 6% 7% 5% 5% 4% 13% 12% 21% Source: IAB 21 Facebook operates a social networking website and derives all of its profits by selling advertising space on the internet to its customers. Page 9

10 Facebook represents the largest competitive threat to Google as it has taken considerable market share from Google in the mobile market. Net Worldwide Mobile Internet Ad Revenue Share % of total mobile Google 52.6% 49.3% 46.8% Facebook Twitter Pandora YP Other 35.0% 26.6% 25.6% Total Mobile (B) $8.76 $17.96 $31.45 Source: emarketer.com 8 Strong network effects in social networking continue to rebuff Google as it has made several attempts to enter the space over the years (e.g., Orkut, Google+). Meanwhile Facebook benefits from this economic effect and has solidified its position as the social network company. The problem this poses for Google is that social networks contain consumer data that is highly desirable to its customers. From a strategic stand point, Facebook has the ability to reach into Google s core business of advertising, specifically mobile, but Google does not have the same ability in social network advertising. This gives Facebook the option to press Google s margins with cheap products while its margins remain intact. Yahoo! operates an internet portal site where consumers come as a one stop shop for online content. Yahoo! derives all of its profits by selling advertising space on the internet. Yahoo! dominates the portal arena in this industry, and has a well established business model. However, the company is not levered to any of the key advertising growth trends and continues to see competitors take its market share year over year. Additionally, Yahoo! has ceded nearly the entire search advertising market to Google. Baidu operates a search engine in China, a market Google exited in 2010 and has no intention of returning to due to disagreement with the Chinese government. Baidu derives all of its profits by selling advertising space on its search website in the same way Google does. 9 Baidu is seeing rapid growth as China will gain 300 million new internet users by 2018, which accounts for 21% of total internet user growth. 13 Microsoft is a software company that primarily sells Office, Windows operating system, and enterprise solutions. It operates Bing, a competing search engine. Microsoft competes directly with Google for consumers in almost every facet of Google s businesses. However, it derives only 4.6% of its revenues from advertising, so it does not compete as directly for customers. 10 GOOG FB YHOO BIDU MSFT Market Cap (B) $392.5 $201.5 $42.6 $76.4 $384.8 P/E (TTM) P/E (FY1) ROE 15.4% 11.0% 9.9% 32.0% 26.2% Div. Yield 0.0% 0.0% 0.0% 0.0% 2.6% Gross Profit M. 56.8% 75.8% 70.2% 63.4% 68.9% SG&A % Sales 33.3% 38.7% 57.9% 28.3% 36.9% Profit Margin 20.5% 18.9% 29.2% 32.9% 25.5% 5-yr CAGR 17.0% 37.4% 4.8% 31.7% 14.6% D/E 6.0% 3.1% 34.0% 46.0% 25.8% Beta (52wk) Source: FactSet 14 The S&P 500 P/E multiple is currently 17.1 and the Internet Software and Services industry is currently trading at 32.3 times earnings. 22 Google, trading at only 22.1 times earnings, looks cheap relative to its industry. We see the industry average P/E is trading upwards based on high growth prospects as mobile internet connectivity continues to disrupt other industries and bring hundreds of millions of new internet users online. Google is an established company with lower growth prospects than other companies in the industry, which may explain part of why it trades at a lower P/E, but not all of it. Google s profit margin is slightly lower than competitors as its efficient operations are unable to offset the lower gross profit margin, which is still very good. We worry that Google may have trouble maintaining its margins as it looks to diversify is revenue streams as many business opportunities offer lower returns. United States ECONOMIC OUTLOOK US Real GDP increased by 4.2% in Q (based on the second estimate released August 28th) as businesses replaced inventories, businesses increased spending on buildings and equipment, and consumer spending increased, most notably in durable goods a healthy Page 10

11 mixture of growth drivers. We forecast a 2.8% GDP growth for the next six months based on less slowdown in Q3 than consensus. We expect this to continue to drive healthy advertising spending for Google s customers. Internet user growth: Google is linked directly to internet user growth as it is the dominant internet search engine around the world and its business scales up with ease. 3.0% US GDP % Growth YoY Mobile Internet growth: Android phones account for 84.7% of total phone shipments around the world, which positions it well to grow its App Store and Google Play. In addition, Google takes in 46.8% of total mobile advertisement revenue. 2.0% 1.0% Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Source: FRED Database 15 Online video growth: YouTube is the dominant player in online video and nearly all online video consumers visit YouTube at least once a month. Google s TrueView platform is setup to increase online video monetization. INVESTMENT POSITIVES Consumer Confidence index is now at 92.4, which is the highest it has been in the past seven years. We believe that consumer confidence is largely shaped by perception of a better unemployment situation and expected GDP growth for the near future. We expect this index to be positively correlated with consumer spending as people will feel more comfortable buying goods when they think their jobs are more secure. Eurozone GDP growth for the second quarter of 2014 came is expected to be 0.7% with Italy, Greece, Spain, and France lagging behind. We forecast a 0.9% growth for the region and 3.2% growth for the UK through As Europe s economies languish we expect conditions to mildly improve and provide growth opportunities for Google. Eurozone GDP % Growth YoY 89.7% of global internet searches go through Google Well positioned to capture online video and mobile advertising revenue growth Google Play and Nest Labs offer opportunities for Google to diversify its revenues Low P/E valuation compared to peers DCF model projects 23.3% upside in stock price INVESTMENT NEGATIVES Google does not pay a dividend even though it is sitting on $75.5 billion in cash Mobile internet CPC is much lower than computers and is driving prices down, which could result in margin compression for Google Google Network Partner sites underperform on mobile and are seeing slower growth rates than Google sites VALUATION 1.5% 0.5% 0.5% 1.5% Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 CATALYSTS FOR GROWTH Source: Eurostat 16 Google class C (non voting) shares will receive the difference in value if the stock price of Class C shares trades lower than Class A (voting) shares by 1% or more on April 3, We recommend an investment in the nonvoting shares as an additional arbitrage opportunity as the class C shares have consistently traded more than 1% off of the Class A shares since the stock split was initiated on April 3, We do not anticipate Google changing its capital structure in the future as Google has more than enough cash to fund Page 11

12 its operations and shareholders are not placing too much pressure on the company to pay a dividend. Google currently treats its cash as a strategic weapon to acquire companies and invest heavily in a new product or service. The continuing value growth rate of the company is set to 3% because we believe that it does not possess any special attributes that will allow it to attain better than average growth in the long term. The discounted cash flow and economic profit models suggest a fair stock price of $697, which is a 23.3% increase from the current price. The price is highly sensitive to beta, cost of equity, free cash flow or economic profit, continuing value, revenue, sales and marketing expense, cost of sales, and to a lesser extent normal cash forecasts. Revenue growth is the key driver in this model as Google is primarily a growth company. While the margins of the organization are changing with the transition to mobile advertising and the divestiture of Motorola Mobility, we forecast them as remaining fairly constant after the sale of Motorola Mobility is complete. On the balance sheet, the Motorola Mobility divestiture will reduce inventory to 0% of revenues (internet advertising space requires no inventory), reduce accounts receivable by 1%, accounts payable by 2.5%, accrued expenses and other liabilities by 2%. On the income statement, the Motorola Mobility divestiture will reduce total cost of revenues by 8% and general and administrative expense by 0.5%. Overall, we remain confident that Google will close out the year on track with growth estimates and will meet the upcoming year in the same fashion. The dividend discount model suggests a fair stock price of $357, which is entirely unrealistic for Google. The primary reason the model poses such divergent stock price is because Google does not pay a dividend and we do not anticipate that it will do so in our forecast. Google operates in an industry with tremendous growth potential and will likely use significant portions of its excess cash to fund acquisitions and additional R&D. This model is particularly sensitive to the declining ROE that comes about due to our not forecasting a dividend. Relative P/E multiple for 2014 suggests a fair stock price of $899. Google trades at a lower P/E relative to competitors, but at a premium relative to the S&P 500 as it is one of few large companies with strong EPS growth. The relative valuation model suggests to us that Google is a good choice for exposure to the technology sector and internet software and services industry as it is not trading at a small premium to the sector and lower than the rest of the industry. However, Google s competitors have significantly different growth expectations placed upon them and operate in other lines of business that Google does not operate in. The relative valuation target price of $899 is unrealistic from that standpoint and we do not place any weight on this valuation technique when recommending the stock. Consensus estimates forecast a stock price of $673 for Google our forecast has 2.0% more upside. Our model uses the effective tax rate of 17.5% as we expect it to increase from the 15.7% listed in Google s 10 k, but consensus estimates put Google s effective tax rate at 20.7%, which accounts for the entire difference. KEYS TO MONITOR Operating Margins: if mobile CPC creates enough downward pressure on pricing while being a large growth driver in internet advertising revenues then Google could face continued compressed margins and reduced profits. We believe the margins of the company will stabilize in Revenue Growth: deviations in revenue growth in the short term indicate a likely decrease in long term ability to meet growth expectations. Monitoring Google s performance each quarter is critical to this thesis. Political Landscape: consumer privacy on the internet is an ever increasing concern and politicians could impose regulations limiting the use of consumer data. We suggest that the EU antitrust case be followed closely to see how it develops. Interest Rates: price to earnings expansion drove much of the S&P 500 growth this last quarter as interest rates are so low that capital has flown out of fixed income and into equities. This may reverse next year as the Federal Reserve is expected to raise interest rates in mid REFERENCES 1. Google: 10 K, ThomsonONE Investment Banking, September Zacks: Google to Acquire Nest, January Zacks: Google Sheds Motorola Mobility, January 2014 Page 12

13 5. Reuters: Google to own $750 million Lenovo stake after Motorola deal closes: HK exchange, February Zacks: Google Acquires Skybox for $500M, June Zacks: Google's Nest Labs Offers $555M to Acquire Dropcam, June emarketer: Driven by Facebook and Google, Mobile Ad Market Soars 105% in 2013, March Baidu: 20F, Microsoft: 10 K, Search Engine Land: Analyzing The Impact Of Amazon s Departure From Google s Search Network, September PWC: Global entertainment and media outlook , Cisco, Visual Networking Index: Global Mobile Data Traffic Forecast Update, , February FactSet, Finance Database, August Federal Reserve, FRED Database, April European Commission, Eurostat, September Mergent, Mergent Online, August AdAge: Yahoo Slips Behind Google, Facebook and Even Microsoft In Online Ad Share, December StatCounter.com: Global Stats, September emarketer: Global Ad Spending Growth to Double This Year, June IAB: internet advertising revenue report, April Fidelity Investments: Market Overview, September ComScore: comscore Releases July 2014 U.S. Online Video Rankings, July IDC: Smartphone OS Market Share, Q2 2014, August S&P Capital IQ: Industry Surveys Computers: Consumer Services & the Internet, May Bain: The Next Billion Consumers, September Gartner: Gartner Says Worldwide Traditional PC, Tablet, Ultramobile and Mobile Phone Shipments to Grow 4.2 Percent in 2014, July Accenture: Video over the internet consumer survey, Clickz: Mobile Retail Traffic Spiking, Sales Not So Much, July Google: 2014 Q2 Earnings Call, July S&P Capital IQ: Computer Software Industry Survey, April 2014 Henry Fund reports are created by student enrolled in the Applied Securities Management (Henry Fund) program at the University of Iowa s Tippie School of Management. These reports are intended to provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of Henry Fund students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold a financial interest in the companies mentioned in this report. IMPORTANT DISCLAIMER Page 13

14 Google Revenue Decomposition 1 All figures in thousands of U.S. Dollar Fiscal Years Ending Dec E 2015E 2016E 2017E 2018E 2019E 2020E 2021E ADVERTISING REVENUES: Google websites $ 26,145,000 $ 31,221,000 $ 37,453,000 45,318,130 53,928,575 62,557,147 71,315,147 78,446,662 83,937,928 87,295,445 89,914,309 Growth rate YoY 34.5% 19.4% 20.0% 21.0% 19.00% 16.0% 14.00% 10.0% 7.0% 4.0% 3.00% Google Network Members' websites 10,386,000 12,465,000 13,125,000 14,175,000 16,017,750 17,939,880 19,913,267 21,705,461 22,790,734 23,702,363 24,413,434 Growth rate YoY 18.1% 20.0% 5.3% 8.0% 13.00% 12.0% 11.00% 9.0% 5.00% 4.0% 3.00% Total advertising revenues 36,531,000 43,686,000 50,578,000 59,493,130 69,946,325 80,497,027 91,228, ,152, ,728, ,997, ,327,743 Growth rate YoY 29.4% 19.6% 15.8% 17.6% 17.6% 15.1% 13.3% 9.8% 6.6% 4.0% 3.0% Other revenues 1,374,000 2,353,000 4,972,000 7,458,000 10,068,300 12,786,741 14,960,487 16,905,350 18,426,832 19,532,442 20,509,064 Growth rate YoY 26.6% 71.3% 111.3% 50.0% 35.0% 27.0% 17.0% 13.0% 9.0% 6.0% 5.0% Google segment revenues 37,905,000 46,039,000 55,550,000 66,951,130 80,014,625 93,283, ,188, ,057, ,155, ,530, ,836,807 Growth rate YoY 29.3% 21.5% 20.7% 20.5% 19.5% 16.6% 13.8% 10.2% 6.9% 4.3% 3.3% Motorola Mobility segment revenues - 4,136,000 4,443,000 Growth rate YoY 7.4% Elimination and other - - (168) Growth rate YoY TOTAL REVENUES $ 37,905,000 $ 50,175,000 $ 59,992,832 $ 66,951,130 $ 80,014,625 $ 93,283,768 $ 106,188,901 $ 117,057,473 $ 125,155,494 $ 130,530,250 $ 134,836,807 Growth Rate YoY 29.3% 32.4% 19.6% 11.6% 19.5% 16.6% 13.8% 10.2% 6.9% 4.3% 3.3% $ Google websites Network Members' websites Other revenues Growth DCF Growth DCF Growth DCF 15.0% % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % % %

15 Google Income Statement 9 All figures in thousands of U.S. Dollar, except per share items. December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014E December 31, 2015E December 31, 2016E December 31, 2017E December 31, 2018E December 31, 2019E December 31, 2020E December 31, 2021E 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days REVENUES: Google (advertising & other) 37,905,000 46,039,000 55,519,000 66,951,130 80,014,625 93,283, ,188, ,057, ,155, ,530, ,836,807 Motorola Mobile (hardware & other) - 4,136,000 4,306,000 Total revenues 37,905,000 50,175,000 59,825,000 66,951,130 80,014,625 93,283, ,188, ,057, ,155, ,530, ,836,807 OPERATING EXPENSES: Cost of revenues - Google (advertising & other) 13,188,000 17,176,000 21,993,000 23,606,968 28,213,157 32,891,856 37,442,206 41,274,465 44,129,827 46,024,966 47,543,458 Costs of revenues - Motorola Mobile (hardware & other) - 3,458,000 3,865,000 Research & development expense 5,162,000 6,793,000 7,952,000 9,025,012 10,785,971 12,574,652 14,314,264 15,779,347 16,870,961 17,595,478 18,176,002 Sales & marketing expense 4,589,000 6,143,000 7,253,000 8,141,257 9,729,778 11,343,306 12,912,570 14,234,189 15,218,908 15,872,478 16,396,156 General & administrative expense 2,724,000 3,845,000 4,796,000 5,101,676 6,097,114 7,108,223 8,091,594 8,919,779 9,536,849 9,946,405 10,274,565 Charge related to the resolution of Department of Justice investigation 500, Total operating expenses 26,163,000 37,415,000 45,859,000 45,874,914 54,826,021 63,918,038 72,760,635 80,207,780 85,756,544 89,439,327 92,390,180 INCOME (LOSS) FROM OPERATIONS 11,742,000 12,760,000 13,966,000 21,076,216 25,188,604 29,365,730 33,428,266 36,849,692 39,398,949 41,090,923 42,446,627 Impairment of equity investments Interest & other income, net 584, , , , , , , , , , ,438 INCOME (LOSS) BEFORE INCOME TAXES 12,326,000 13,386,000 14,496,000 21,678,126 25,805,802 29,998,605 34,077,216 37,515,126 40,081,285 41,790,590 43,164,065 Provision for income taxes 2,589,000 2,598,000 2,282,000 3,793,672 4,516,015 5,249,756 5,963,513 6,565,147 7,014,225 7,313,353 9,496,094 Net income (loss) from discontinued operations - (51,000) 706,000 NET INCOME (LOSS) $ 9,737,000 $ 10,737,000 $ 12,920,000 $ 17,884,454 $ 21,289,787 $ 24,748,849 $ 28,113,703 $ 30,949,979 $ 33,067,060 $ 34,477,236 $ 33,667,971 Year end shares outstanding 649, , , , , , , , , , ,698 Net income per class A & B share - basic $ $ $ $ $ $ $ $ $ $ $ 49.75

16 Google Balance Sheet 9 All figures in thousands of U.S. Dollar, except per share items. December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014E December 31, 2015E December 31, 2016E December 31, 2017E December 31, 2018E December 31, 2019E December 31, 2020E December 31, 2021E 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days ASSETS CURRENT ASSETS: $ 0 $ (0) $ 0 $ (0) $ (0) $ 0 $ 0 $ 0 Cash & cash equivalents $ 9,983,000 $ 14,778,000 $ 18,898,000 $ 34,256,741 $ 54,011,720 $ 73,464,028 $ 98,273,898 $ 124,725,514 $ 153,954,644 $ 185,639,027 $ 216,336,472 Marketable securities 34,643,000 33,310,000 39,819,000 40,830,403 41,867,495 42,930,929 44,021,375 45,139,518 46,286,061 47,461,727 48,667,255 Total cash, cash equivalents, & marketable securities 44,626,000 48,088,000 58,717,000 75,087,143 95,879, ,394, ,295, ,865, ,240, ,100, ,003,728 Accounts receivable, net 5,427,000 7,885,000 8,882,000 9,286,122 11,098,028 12,938,459 14,728,401 16,235,872 17,359,067 18,104,546 18,701,865 Inventories - 505, ,000 Receivable under reverse repurchase agreements 745, , , , , , , , , , ,221 Deferred income taxes, net 215,000 1,144,000 1,526,000 2,283,335 2,416,339 2,458,146 2,393,873 2,196,698 1,878,269 1,469,691 1,273,806 Income taxes receivable, net ,000 Prepaid revenue share, expenses & other assets 1,745,000 2,132,000 2,827,000 3,032,886 3,624,662 4,225,755 4,810,357 5,302,704 5,669,544 5,913,020 6,108,107 Total current assets 52,758,000 60,454,000 72,886,000 89,792, ,123, ,125, ,338, ,713, ,263, ,707, ,209,727 NON CURRENT AASSETS: Prepaid revenue share, expenses & other assets, non-current 499,000 2,011,000 1,976,000 1,928,193 2,304,421 2,686,573 3,058,240 3,371,255 3,604,478 3,759,271 3,883,300 Non-marketable equity securities 790,000 1,469,000 1,976,000 2,026,190 2,077,656 2,130,428 2,184,541 2,240,028 2,296,925 2,355,267 2,415,091 Property & equipment, net 9,603,000 11,854,000 16,524,000 22,787,087 27,497,084 32,988,158 37,801,935 42,316,397 46,296,366 48,680,919 51,144,145 Intangible assets, net 1,578,000 7,473,000 6,066,000 4,075,000 2,205, ,000 Goodwill 7,346,000 10,537,000 11,492,000 11,492,000 11,492,000 11,492,000 11,492,000 11,492,000 11,492,000 11,492,000 11,492,000 Total long-term assets 19,816,000 33,344,000 38,034,000 42,308,470 45,576,161 49,926,159 54,536,716 59,419,680 63,689,770 66,287,457 68,934,536 TOTAL ASSETS $ 72,574,000 $ 93,798,000 $ 110,920,000 $ 132,100,496 $ 158,699,550 $ 186,051,290 $ 218,875,174 $ 253,133,347 $ 288,953,597 $ 324,994,663 $ 360,144,263 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 588,000 $ 2,012,000 $ 2,453,000 $ 1,071,218 $ 1,280,234 $ 1,492,540 $ 1,699,022 $ 1,872,920 $ 2,002,488 $ 2,088,484 $ 2,157,389 Short-term debt 1,218,000 2,549,000 3,009,000 2,010,000 3,236,000 2,000,000 2,166,000 2,166,000 2,166,000 2,166,000 2,166,000 Accrued compensation & benefits 1,818,000 2,239,000 2,502,000 2,972,630 3,552,649 4,141,799 4,714,787 5,197,352 5,556,904 5,795,543 5,986,754 Accrued expenses & other current liabilities 1,370,000 3,258,000 3,755,000 2,789,631 3,333,944 3,886,825 4,424,539 4,877,396 5,214,814 5,438,762 5,618,202 Accrued revenue share 1,168,000 1,471,000 1,729,000 1,988,449 2,376,434 2,770,528 3,153,810 3,476,607 3,717,118 3,876,748 4,004,653 Securities lending payable 2,007,000 1,673,000 1,374,000 2,437,021 2,912,532 3,395,529 3,865,276 4,260,892 4,555,660 4,751,301 4,908,060 Deferred revenue 547, ,000 1,062,000 1,118,084 1,336,244 1,557,839 1,773,355 1,954,860 2,090,097 2,179,855 2,251,775 Income taxes payable, net 197, ,000 24, , , , , , , , ,610 Total current liabilities 8,913,000 14,337,000 15,908,000 14,644,795 18,336,094 19,604,203 22,205,617 24,256,698 25,784,929 26,799,235 27,745,443 NON CURRENT LIABILITIES: Long-term debt 2,986,000 2,988,000 2,236,000 5,085,146 5,656,642 6,093,533 6,675,127 7,291,559 7,944,411 8,515,322 8,862,633 Deferred revenue, non-current 44, , ,000 93, , , , , , , ,772 Income taxes payable, net, non-current 1,693,000 2,046,000 2,638,000 3,222,023 3,850,704 4,489,281 5,110,341 5,633,391 6,023,108 6,281,768 6,489,021 Deferred income taxes, net, non-current 287,000 1,872,000 1,947,000 2,913,085 3,082,451 3,135,364 3,052,841 2,800,692 2,393,815 1,871,926 1,620,414 Other long-term liabilities 506, , , ,840 1,080,197 1,259,331 1,433,550 1,580,276 1,689,599 1,762,158 1,820,297 Total long-term liabilities 5,516,000 7,746,000 7,703,000 12,217,826 13,782,016 15,108,106 16,420,524 17,469,798 18,226,151 18,613,917 18,981,136 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Class A & class B common stock & additional paid-in capital 20,264,000 22,835,000 25,922,000 25,966,422 26,020,200 26,028,891 26,825,239 27,033,079 27,501,684 27,663,442 27,831,644 Accumulated other comprehensive income 276, , , , , , , , , , ,000 Retained earnings 37,605,000 48,342,000 61,262,000 79,146, ,436, ,185, ,298, ,248, ,315, ,793, ,461,039 Total shareholders' equity (deficit) 58,145,000 71,715,000 87,309, ,237, ,581, ,338, ,249, ,406, ,942, ,581, ,417,684 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 72,574,000 $ 93,798,000 $ 110,920,000 $ 132,100,496 $ 158,699,550 $ 186,051,290 $ 218,875,174 $ 253,133,347 $ 288,953,597 $ 324,994,663 $ 360,144,263 Note: common stock has no par value

17 Google Statement of Cash Flows 9 All figures in thousands of U.S. Dollar, except per share items. December 31, 2011 December 31, 2012 December 31, Days 366 Days 365 Days CASH FLOW FROM OPERATING ACTIVITIES: Net income $ 9,737,000 $ 10,737,000 $ 12,920,000 Adjustments: Depreciation & amortization of property & equipment 1,396,000 1,988,000 2,781,000 Amortization of intangibles & other assets 455, ,000 1,158,000 Stock-based compensation expense 1,974,000 2,692,000 3,343,000 Excess tax benefits from stock-based award activities (86,000) (188,000) (481,000) Deferred income taxes 343,000 (266,000) (437,000) Impairment of equity investments 110, Gain on divestiture of business - (188,000) (700,000) Other net income adjustments 6,000 (28,000) 106,000 Changes in assets and liabilities, net of effects of acquisitions: Accounts receivable (1,156,000) (787,000) (1,307,000) Income taxes, net 731,000 1,492, ,000 Inventories - 301,000 (234,000) Prepaid revenue share, expenses & other assets (262,000) (833,000) (696,000) Accounts payable 101,000 (499,000) 605,000 Accrued expenses & other liabilities 795, , ,000 Accrued revenue share 259, , ,000 Deferred revenue 162, , ,000 Net cash flows from operating activities 14,565,000 16,619,000 18,659,000 CASH FLOW FROM INVESTING ACTIVITIES: Purchases of property & equipment (3,438,000) (3,273,000) (7,358,000) Purchases of marketable securities (61,672,000) (33,410,000) (45,444,000) Maturities & sales of marketable securities 48,746,000 35,180,000 38,314,000 Investments in non-marketable equity securities (428,000) (696,000) (569,000) Cash collateral received (returned) from securities lending (354,000) (334,000) (299,000) Investments in reverse repurchase agreements 5,000 45, ,000 Proceeds from divestiture of businesses - - 2,525,000 Acquisitions, net of cash acquired & proceeds received from divestiture, & purchases of intangible & other assets (1,900,000) (10,568,000) (1,448,000) Net cash flows from investing activities (19,041,000) (13,056,000) (13,679,000) CASH FLOW FROM FINANCING ACTIVITIES: Net proceeds (payments) from stock-based award activities (5,000) (287,000) (781,000) Excess tax benefits from stock-based award activities 86, , ,000 Repurchase of common stock in connection with acquisitions Proceeds from issuance of debt, net of costs 10,905,000 16,109,000 10,768,000 Repayment of debt (10,179,000) (14,781,000) (11,325,000) Proceeds from issuance of short-term debt Repayment of short-term debt Net proceeds from public offerings Net cash flows from financing activities 807,000 1,229,000 (857,000) Effect of exchange rate changes on cash & cash equivalents 22,000 3,000 (3,000) Net increase (decrease) in cash & cash equivalents $ (3,647,000) $ 4,795,000 $ 4,120,000 Cash & cash equivalents at beginning of year 13,630,000 9,983,000 14,778,000 Cash & cash equivalents at end of year 9,983,000 14,778,000 18,898,000 Cash paid for taxes 1,471,000 2,034,000 1,932,000 Cash paid for interest 40,000 74,000 72,000

18 Google Statement of Cash Flow, Forecasted All figures in thousands of U.S. Dollar, except per share items. December 31, 2014E December 31, 2015E December 31, 2016E December 31, 2017E December 31, 2018E December 31, 2019E December 31, 2020E December 31, 2021E 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days CASH FLOW FROM OPERATING ACTIVITIES: Net Income $ 17,884,454 $ 21,289,787 $ 24,748,849 $ 28,113,703 $ 30,949,979 $ 33,067,060 $ 34,477,236 $ 33,667,971 Adjustments: Stock-based compensation expense (959,309) 140, , ,735 (24,094) (211,510) (277,987) (112,604) Depreciation & amortization of property & equipment 3,578,729 2,251,275 2,624,613 2,300,880 2,157,814 1,902,338 1,139,764 1,177,368 Amortization of intangibles & other assets 1,991,000 1,870,000 1,576, , Change in deferred taxes 208,750 36,363 11,106 (18,250) (54,975) (88,448) (113,311) (55,627) Changes in working capital accounts: Change in receivables (404,122) (1,811,907) (1,840,430) (1,789,942) (1,507,471) (1,123,195) (745,479) (597,319) Change in receivable under reverse repurchase agreements (2,540) (2,605) (2,671) (2,739) (2,808) (2,879) (2,953) (3,028) Change in inventories 426, Change in prepaid expenses (158,079) (968,005) (983,243) (956,270) (805,361) (600,063) (398,269) (319,116) Change in accounts payable (1,381,782) 209, , , , ,568 85,996 68,905 Change in other liabilities 160, , , , , ,323 72,559 58,139 Change in accrued liabilities (235,290) 1,512,317 1,536,125 1,493,984 1,258, , , ,556 Change in income taxes payable 817, , , , , , , ,322 Change in income taxes receivable (408,000) Change in deferred revenue 3,912,167 1,047, ,887 1,051,342 1,012, , , ,069 Net cash flows from operating activities $ 25,430,603 $ 26,429,046 $ 29,957,618 $ 31,994,889 $ 33,868,867 $ 35,488,190 $ 35,905,680 $ 35,244,636 CASH FLOW FROM INVESTING ACTIVITIES: Change in marketable securities $ (1,011,403) $ (1,037,092) $ (1,063,434) $ (1,090,446) $ (1,118,143) $ (1,146,544) $ (1,175,666) $ (1,205,528) Change in non-marketable equity securities $ (50,190) $ (51,465) $ (52,772) $ (54,113) $ (55,487) $ (56,897) $ (58,342) $ (59,824) Change in securities lending payable (1,063,021) (475,511) (482,997) (469,747) (395,616) (294,768) (195,641) (156,759) Change in PPE (9,841,816) (6,961,272) (8,115,688) (7,114,656) (6,672,276) (5,882,308) (3,524,317) (3,640,594) Net cash flows from investing activities $ (11,966,430) $ (8,525,341) $ (9,714,891) $ (8,728,962) $ (8,241,522) $ (7,380,517) $ (4,953,966) $ (5,062,704) CASH FLOW FROM FINANCING ACTIVITIES: Changes in current portion of long-term debt $ (999,000) $ 1,226,000 $ (1,236,000) $ 166,000 $ - $ - $ - $ - Proceeds from issuance of long-term debt 2,849, , , , , , , ,311 Proceeds from issuance of common stock 44,422 53,778 8, , , , , ,202 Repurchase of common stock Net cash flows from financing activities $ 1,894,568 $ 1,851,274 $ (790,419) $ 1,543,943 $ 824,272 $ 1,121,457 $ 732,669 $ 515,513 Net increase (decrease) in cash & cash equivalents 15,358,741 19,754,979 19,452,308 24,809,870 26,451,616 29,229,130 31,684,383 30,697,445 Cash & cash equivalents, beginning of period 18,898,000 34,256,741 54,011,720 73,464,028 98,273, ,725, ,954, ,639,027 Cash & cash equivalents, end of period $ 34,256,741 $ 54,011,720 $ 73,464,028 $ 98,273,898 $ 124,725,514 $ 153,954,644 $ 185,639,027 $ 216,336,472

19 Google Common Size Income Statement All figures in thousands of U.S. Dollar, except per share items. December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014E December 31, 2015E December 31, 2016E December 31, 2017E December 31, 2018E December 31, 2019E December 31, 2020E December 31, 2021E 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days REVENUES: Google (advertising & other) % 91.76% 92.80% % % % % % % % % Motorola Mobile (hardware & other) 0.00% 8.24% 7.20% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Total revenues % % % % % % % % % % % OPERATING EXPENSES: Cost of revenues - Google (advertising & other) 34.79% 34.23% 36.76% 35.26% 35.26% 35.26% 35.26% 35.26% 35.26% 35.26% 35.26% Costs of revenues - Motorola Mobile (hardware & othe 0.00% 6.89% 6.46% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Research & development expense 13.62% 13.54% 13.29% 13.48% 13.48% 13.48% 13.48% 13.48% 13.48% 13.48% 13.48% Sales & marketing expense 12.11% 12.24% 12.12% 12.16% 12.16% 12.16% 12.16% 12.16% 12.16% 12.16% 12.16% General & administrative expense 7.19% 7.66% 8.02% 7.62% 7.62% 7.62% 7.62% 7.62% 7.62% 7.62% 7.62% Total operating expenses 69.02% 74.57% 76.66% 68.52% 68.52% 68.52% 68.52% 68.52% 68.52% 68.52% 68.52% INCOME (LOSS) FROM OPERATIONS 30.98% 25.43% 23.34% 31.48% 31.48% 31.48% 31.48% 31.48% 31.48% 31.48% 31.48% Interest & other income, net 1.54% 1.25% 0.89% 0.90% 0.77% 0.68% 0.61% 0.57% 0.55% 0.54% 0.53% INCOME (LOSS) BEFORE INCOME TAXES 32.52% 26.68% 24.23% 32.38% 32.25% 32.16% 32.09% 32.05% 32.03% 32.02% 32.01% Provision for income taxes 6.83% 5.18% 3.81% 5.67% 5.64% 5.63% 5.62% 5.61% 5.60% 5.60% 7.04% Net income (loss) from discontinued operations 0.00% -0.10% 1.18% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% NET INCOME (LOSS) 25.69% 21.40% 21.60% 26.71% 26.61% 26.53% 26.48% 26.44% 26.42% 26.41% 24.97%

20 Google Common Size Balance Sheet All figures in thousands of U.S. Dollar, except per share items. December 31, 2011 December 31, 2012 December 31, 2013 December 31, 2014E December 31, 2015E December 31, 2016E December 31, 2017E December 31, 2018E December 31, 2019E December 31, 2020E December 31, 2021E 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days 365 Days 365 Days 366 Days 365 Days ASSETS CURRENT ASSETS: Cash & cash equivalents 26.34% 29.45% 31.59% 51.17% 67.50% 78.75% 92.55% % % % % Marketable securities 91.39% 66.39% 66.56% 60.99% 52.32% 46.02% 41.46% 38.56% 36.98% 36.36% 36.09% Total cash, cash equivalents, & marketable securities % 95.84% 98.15% % % % % % % % % Accounts receivable, net 14.32% 15.71% 14.85% 13.87% 13.87% 13.87% 13.87% 13.87% 13.87% 13.87% 13.87% Inventories 0.00% 1.01% 0.71% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Receivable under reverse repurchase agreements 1.97% 1.40% 0.17% 0.15% 0.13% 0.12% 0.10% 0.10% 0.09% 0.09% 0.09% Deferred income taxes, net 0.57% 2.28% 2.55% 3.41% 3.02% 2.64% 2.25% 1.88% 1.50% 1.13% 0.94% Income taxes receivable, net 0.00% 0.00% 0.68% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Prepaid revenue share, expenses & other assets 4.60% 4.25% 4.73% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53% 4.53% Total current assets % % % % % % % % % % % NON CURRENT AASSETS: Prepaid revenue share, expenses & other assets, non- 1.32% 4.01% 3.30% 2.88% 2.88% 2.88% 2.88% 2.88% 2.88% 2.88% 2.88% Non-marketable equity securities 2.08% 2.93% 3.30% 3.03% 2.60% 2.28% 2.06% 1.91% 1.84% 1.80% 1.79% Property & equipment, net 25.33% 23.63% 27.62% 34.04% 34.37% 35.36% 35.60% 36.15% 36.99% 37.29% 37.93% Intangible assets, net 4.16% 14.89% 10.14% 6.09% 2.76% 0.67% 0.00% 0.00% 0.00% 0.00% 0.00% Goodwill 19.38% 21.00% 19.21% 17.16% 14.36% 12.32% 10.82% 9.82% 9.18% 8.80% 8.52% Total long-term assets 52.28% 66.46% 63.58% 63.19% 56.96% 53.52% 51.36% 50.76% 50.89% 50.78% 51.12% TOTAL ASSETS % % % % % % % % % % % LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 1.55% 4.01% 4.10% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% 1.60% Short-term debt 3.21% 5.08% 5.03% 3.00% 4.04% 2.14% 2.04% 1.85% 1.73% 1.66% 1.61% Accrued compensation & benefits 4.80% 4.46% 4.18% 4.44% 4.44% 4.44% 4.44% 4.44% 4.44% 4.44% 4.44% Accrued expenses & other current liabilities 3.61% 6.49% 6.28% 4.17% 4.17% 4.17% 4.17% 4.17% 4.17% 4.17% 4.17% Accrued revenue share 3.08% 2.93% 2.89% 2.97% 2.97% 2.97% 2.97% 2.97% 2.97% 2.97% 2.97% Securities lending payable 5.29% 3.33% 2.30% 3.64% 3.64% 3.64% 3.64% 3.64% 3.64% 3.64% 3.64% Deferred revenue 1.44% 1.78% 1.78% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% 1.67% Income taxes payable, net 0.52% 0.48% 0.04% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.39% 0.48% Total current liabilities 23.51% 28.57% 26.59% 21.87% 22.92% 21.02% 20.91% 20.72% 20.60% 20.53% 20.58% NON CURRENT LIABILITIES: Long-term debt 7.88% 5.96% 3.74% 7.60% 7.07% 6.53% 6.29% 6.23% 6.35% 6.52% 6.57% Deferred revenue, non-current 0.12% 0.20% 0.23% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% 0.14% Income taxes payable, net, non-current 4.47% 4.08% 4.41% 4.81% 4.81% 4.81% 4.81% 4.81% 4.81% 4.81% 4.81% Deferred income taxes, net, non-current 0.76% 3.73% 3.25% 4.35% 3.85% 3.36% 2.87% 2.39% 1.91% 1.43% 1.20% Other long-term liabilities 1.33% 1.47% 1.24% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% 1.35% Total long-term liabilities 14.55% 15.44% 12.88% 18.25% 17.22% 16.20% 15.46% 14.92% 14.56% 14.26% 14.08% COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Convertible preferred stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Class A & class B common stock & additional paid-in c 53.46% 45.51% 43.33% 38.78% 32.52% 27.90% 25.26% 23.09% 21.97% 21.19% 20.64% Accumulated other comprehensive income 0.73% 1.07% 0.21% 0.19% 0.16% 0.13% 0.12% 0.11% 0.10% 0.10% 0.09% Retained earnings 99.21% 96.35% % % % % % % % % % Total shareholders' equity (deficit) % % % % % % % % % % % TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY % % % % % % % % % % %