17 April, 2009

The Google Cash Machine

Henry Blodget of Alley Insider probably said it best after Google's (GOOG) Calendar Q1 results crossed the wires: "cash flow will knock you silly" (Link). While the overall economic situation has admittedly hit even the mighty search giant, by controlling costs at unprecedented levels the company was able to generate $2Billion in free cash flow in the quarter. Just Staggering.

Being a heavy market share leader in North America and an even bigger leader in Europe, Google's revenue growth had to come to a halt at some point. The global downturn and recessionary attitudes of advertisers have made that growth halt quicker than previously anticipated. Google earned $5.51Billion in revenue which was a 3% drop quarter over quarter. When factoring in Traffic Acquisition Costs, Revenue came in at $4.07Billion vs the $4.08Billion expected by the street. Pretty much in line there.

Earnings pre share blew past expectations and even increased from the December quarter on a non-gaap basis. $5.16/share this quarter versus $5.10/share last quarter and $4.84/share last year. The bottom line expands while the top line contracts, the textbook cost-cutting profit driver. This also precipitated a similar uptick in operating margin, which was at 34% and 39% on a gaap and non-gaap basis, an increase of 1% and 4% from a quarter and year ago, respectively.

The cash is the real story here though, and even though management is very conservative with its $18Billion war chest, the company now generates from its operations enough cash to buy General Motors, twice! Every 3 months! What's even more remarkable about this is that it isn't some oil baron, or enormous retailer, it's a silly-named 10 year old Internet search engine that dabbles in advertising. To say Google dabbles in advertising is of-course the understatement of our still young century. The company has moved in and out of, with some great and some not so great successes, every form of advertising, but now more than ever is the Internet advertising sector helping it tremendously as rivals are sputtering.

The general nature of Internet browsing was built on the basis of tracking capabilities, and as the generation of today puts more and more of its life online advertisers are looking to target with greater accuracy driving substantially higher ROIs. And guess who's the best at delivering high ROIs? Google of course. As dollars keep shifting online, where ROI is trackable and higher, Google stands in the best position to keep reaping the benefits. And if the company is doing this well keeping costs under control and generating cash flow in struggling economics, it'll be that much better riding along on the road to recovery.

While there are some chinks in the armor, bears would be quick to point out Revenue decelerated for the first time ever and the company is going into 2 straight seasonally weaker quarters. A seasonality weakness that will only be exasperated by current down-trending economics. But with its main rivals continuing to stumble over and around each other (Microsoft search bleeding cash while Yahoo struggles with an identity crisis), Google can afford to run its main business efficiently and look into further growth areas such as Mobile and online productivity applications.

Google has built itself such market and mind share in search that it can certainly sustain itself on that future hardly breaking a sweat. But if DoubleClick, YouTube, Google Apps or Android start to make the company any serious cash, watch out below, because the company will then be on a blistering pace to reach its own lauded goal of being a $100Billion yearly revenue generator. While response to the latest numbers has been tepid to say the least, Google at $400/share, looking to make roughly $20 in EPS and having a free cash flow rate of about $8Billion yearly just screams must-own. With each passing quarter it is making less and less sense owning second best.

Disclosure: Author owns GOOG

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