New Orleans Saints are Superbowl Champs but what of the Commercials?

A football team embraced by a city as escapism; and for the excitement it provided the residents of New Orleans following the disastrous aftermath of Hurricane Katrina, has now come full circle to offer its hometown the celebration it deserves and desires. The New Orleans Saints defeated the Indianapolis Colts in Superbowl XLIV, the 44th such contest of football's conference champions, and sent the French Quarter and the surrounding and still rebuilding areas into a frenzy that's likely the continue well into Mardi Gras.

As much as the spectacle of the Superbowl is remembered for what happens on the field, it gets almost as much attention for what happens in between the action. Commercials, are always a hot ticket and with price tags in the $2.5Million to $3Million range for a spot this year it was up to corporations to deliver catchy, memorable and likable ads. A game that featured two of the league's top Quarterbacks was sure to be a windfall for CBS Corp. (CBS), and early ratings would suggest that's the case. A report this morning puts viewership of the game at a 23 year high. That's a lot of eyeballs watching the players on the field and all those commercials.

Alcohol always seems to go after the comedic bone with Anheuser-Busch InBev (BUD) and its legendary stable of Superbowl spots. The Clydesdale's, the Wassup guys, the Frogs and more have all pushed Budweiser Beer onto the masses for years with recent Bud Light ads becoming the "lighter" touch. This year's game featured the musical technique known as Auto-tune with several men crooning to each other over the phone after getting some Bud Light. The ad also featured Auto-tunes foremost proponent Mr. "I'm In Love With A Stripper" T-Pain, or as he's known amongst the younger hipster crowd, the dude on the [expletive] boat with Andy Samberg.

Motorola (MOT) went for comedy and sex appeal as it showed off its new Android powered smartphone the Devour. Using Google's (GOOG) Android operating system and its own MOTOBLUR interface, Motorola looks to continue the successful smartphone push it has enjoyed on Verizon (VZ) with the Droid. The ad featured a bubble bathing Megan Fox pondering what if any consequences would arise from her sending a photo of herself in the bath. Subsequently men all over the country are instantly distracted and much chaos ensues. The company has even put several out-takes from the ad on its website.

Staying with Google for a moment, the company for the first time has decided to advertise on this big a stage. The results, one part sappy, one part romantic, one part technology and all parts effective for portraying the message of Google being THE destination to find anything. The ad features the main Google search screen as a story unfolds of Boy meets French Girl, Boy searches for ways to impress French Girl, Boy Searches for flights to France, Boy searches for work in France, Boy searches for chapels in France, Boy searches for help building a crib.

Discount Brokerage and Superbowl mainstay E*Trade (ETFC) brought back its popular baby investors with a little twist, female companions and a new catch-phrase "milk-a-holic".

Taken together, the ads this year have according to early reviews been lacking the punch of previous incarnations, but sifting through the mass of advertisements, which are all featured on a special YouTube channel one can still find some that will undoubtedly be talked about over the water-cooler for the week to come.

Disclosure: Author owns GOOG, VZ

Google's Q1 Earnings blow past Estimates

Search giant and Internet bell-weather Google (GOOG) reported 1st quarter results after the closing bell Thursday and although Traders were confused and opinions varied wildly the company blew the doors off of another strong 3 months. These strong results came to $4.12/share in earnings versus an estimated $3.96/share. Excluding items Google earned $4.84/share vs an expected $4.55/share.

Profit this quarter rose to $1.3Billion from $1Billion on a year over year basis and perhaps even more impressively, climbed from $1.2Billion over the holiday quarter. With that also comes net cash additions of almost $1Billion into Google's coffers. At the top line, Revenue was also impressive as Google for the first time broke the $5Billion revenue mark for a quarter. Also, for the first time, International Revenue led US Revenue by a 51-49% margin.

So is there anything negative to be said about the quarter? Well, International growth has been very strong, and this is somewhat inflated by the weakening of the US dollar. A nit-pick point for some but Johnson & Johnson (JNJ) reported a majority of its quarterly growth was simply due to currency conversion. Traders weren't too impressed and sent JNJ lower. The response to Google's International growth and quarterly numbers? Overwhelmingly positive, with shares up in After-hours almost $75 to $524, after closing at $449 in regular trading.

Was DoubleClick a factor in the increased numbers? No, in fact management's statement relayed to Investors that DoubleClick's revenue was completely immaterial and income was dilutive to the general numbers. DoubleClick will become a factor in Google's earnings going forward but for the first quarter this part of the company was in the fold for only 20 days. Google is also being adamant about reducing headcount from DoubleClick due to overlap, which should lower DoubleClick's expense footprint going forward.

The margin question? Google maintained the same 30% margins that the company witnessed over the holiday quarter. The good news on this front is the fall of Traffic Acquisition Costs (TAC) to 29.2% from 30.3% in the holiday quarter. Maybe results were boosted by a low tax rate? Google's tax rate this quarter: 24%, comparing to the holiday quarter tax rate of 25%. Seemingly a non-issue when it comes to these quarterly results.

Google seems to be positioning itself to grow even more substantially internationally and as the slowdown in the US, especially in the Financial Sector, continues to put pressure on earnings and advertising Google seems poised to hold their own and continue to deliver top notch results. The recently completed test ad partnership with Yahoo (YHOO) was reported to be a success and Yahoo is reportedly trying to expand the partnership in order to shore up its own bottom-line. Just a testament to how efficient and ahead of the game Google's AdWords and AdSense programs really are.

Due to today's after-hours stock surge, Google will be once again in a P/E range bordering on expensive (trailing P/E of 37, forward P/E about 30) given the overall US economic picture, but when comparing it to its main Internet competitors such as Yahoo, the company is simply executing better and deserves its premium valuation. As CEO Eric Schmidt put it "It's clear to us that we're well positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by".

Google's Ad game is in full stride with AdSense and AdWords, the earnings and revenue speak for themselves, but now with the beginnings of monetization of YouTube and Video Advertising Google is looking beyond search ads towards next generation drivers of explosive growth. This same strategy applies to DoubleClick with banner/display advertising also. Becoming an all-encompassing Ad-Platform is clearly in Google's sights, as is their long term plan/goal of becoming a $100Billion Revenue company.

Google's dominance in search is well know and for yet another quarter, its ability to monetize and deliver outstanding growth has also been confirmed. With its main competitors in Search (Yahoo and Microsoft (MSFT)) dancing away and towards each other with Merger talks and other distractions, the core search advertising business is Google's for the taking.

Disclosure: Author owns GOOG

Major Tech Earnings Start Q3 with a Bang Part 3: Google Growth Continues

All eyes were on Google (GOOG) Thursday as Investors had digested a couple days of very positive Technology earnings and some not so positive Financial earnings. Momentum Traders hoping to continue the Tech ride further into the Fall pinned their hopes on favourable numbers from everyone's favourite Internet Giant, Google.

In terms of raw numbers it was an all around exceptional quarter from the Internet Advertising behemoth. Revenue climbed 57% year over year to $4.2Billion, which also represented a 9% quarter over quarter increase. Profit numbers, without stock option expenses, were $3.91/share, beating analyst expectations of $3.78. Google continues to dumbfound analysts when it comes to growth prospects and projections.

All the rage last quarter surrounded a drop in margins from 35% to 29% due to over hiring. Management was adament that hiring would be more disciplined and they re-iterated that same fact during this conference call. Google infact added even more employees this quarter than last. However, these additions were due to pre-signed contracts with University Graduates and 300 employees from the acquisition of Postini. Management seemed to relieve analysts during the call with specifics about hiring and their diligence about keeping an extra eye on hiring practices. Margins improved to 31%, becoming more normalized, however this number is still below year ago levels. This I believe, can be attributed to a tax rate rise from 25% to over 27% this quarter. Google typically projects a tax rate of near 30% and the assumption is that the company wil be paying more with an increased rate in the following quarter. A cause for concern perhaps, but at these growth levels, expected tax levels shouldn't be a real problem.

Google's cash horde is ever increasing and analysts began to question the company on potential uses of that cash. In response management seemed very disciplined in their approach to spending the money on only causes that make seemingly perfect sense strategically. This is clearly a company with a vision of the future, not ready to throw money around to get into businesses that don't fit. I believe this is one of Google's greatest core competencies! The minds at Google have a plan, a broad plan, and things that fit this plan get bought or invested in. They don't go after fliers, buy on whims, or buy things on hype.

Cases in point:
YouTube -> a clear direction in online video and its expansive possibilities into video and TV advertising
DoubleClick -> a clear direction for display advertising and advertising campaign management
Writely -> Online word processing technology to create an online Office suite
Postini -> Strengtening security in Email for Google Apps to break into Enterprise markets heavily
GrandCentral -> Telephone consolidation with online management, another pool for Apps or AdWords campaigns

Capital Expenditures at Google are always a concern for Investors as Google seems to wave its nose at the concept of Cost Cutting/Slowing. It's building a vast network of computing architecture and no one will tell the company differently. Where this comes into effect in the Finances is when the depreciation and replacement of all that computing equipment starts to kick in. The upside though, is that Google's technology is far and wide beyond its competitors and they can't catch up if Google keeps spending more, and more effectively, on development and technology.

Google's AdSense partners are getting less and less of a percentage of revenues. Last year at this time, the amount Google paid out to its partners was 31% of revenues, this year 29%. This percentage has been dropping steadily since Google became a public company. This means that an increasing percentage of revenue is coming from Google's own properties, meaning that all of the advertising dollars are going to Google's bottom line and not its partner sites (Of which this blog is one).

Google is growing still, has its mind set on strategic advancements and search improvements, is leaving its competitors in its Search dust (60% of searches at last count), and is continuing to make money hand over fist. What's next for the company? TV ads?, The Mobile Space?, GPhone? Only management knows and only future quarters will tell. So this isn't a boat to jump off of just yet.

Disclosure: Author is long GOOG

Google Seriously Looks to the Mobile Space

gPhone? That's the moniker that's been plastered over the headlines since the Wall Street Journal article (Link) that cited Google (GOOG) as having "invested hundreds of millions" into cellular phone development. Reports are that this project goes far and beyond current incarnations of Google products on today's mobile handsets.

So what exactly is Google up to? Are they in fact developing hardware to show to carriers and manufacturers? This in effect could be a Google Phone or gPhone if you so desire to call it. So to break down Google's strategy, I think we need to look at their current and past offerings. Google's made major leaps into the mobile space of late as it expands Google Search, Gmail and Maps onto any and every phone. I expect this strategy to seriously continue, the problem is however, that carriers bog down their cell phones with all kinds of proprietary software. Why do you think Google fought so hard to win open access for the 700Mhz band in the FCC auction. By making that area of the network open, it means that any and all devices would in essence have to work with any and all types of software. It also happens that this band is ideal for longer distance broadband Internet, a space Google desperately wants to be and excel in.

The Wall Street Journal also quoted figures saying that the mobile ad market could be worth $14Billion in 2011, up from about $1.5Billion currently, now that's sizable growth for a business. While Google already makes its billions from Internet advertising; attempts at print, radio, video and mobile ads show the company is intent to broaden itself from a Search company to an Ad firm. The mobile space is that next wave of advertising. Phones with full Internet capability are here and more are on the horizon, none more publicized than Apple's (AAPL) iPhone, which features a majority of full-fledged browser features in its Safari application. Not surprisingly, Google's products (GMail, Maps, YouTube) are available as standalone applications on this product.

If Google is indeed pushing multi-millions into R&D in the cellular space I would think the money is used currently to provide a framework for openness within mobile devices rather than the development of a Google Uberphone. When iPhone was announced it was labelled the "Jesus Phone" so any product that Google may or may not be working on would have the grave distinction of falling under the category of "Yeah, it is pretty cool but it's no iPhone".

With Google's CEO on Apple's board of directors it would be an odd step for the company to try to push itself with a new product into this competitive space, given that Google has no experience creating hardware, except for its servers and mini appliances. A more realistic approach is that Google may in fact be using some R&D resources to create mock-up or engineering versions of cellular device concepts that it shows to manufacturers and carriers in order to try to get everyone on the same page as to what the next generation of technology could and should be. Both from the hardware perspective and the software perspective. For an innovative software company this seems like the logical course of action, however Google is anything but conventional. For all we know, during the Google's Engineering 20% personal time someone had the bright idea for make a "simple Internet phone" and here we are today.

What this all leads to is Google's attempt to place itself within the mobile space in a very meaningful way. Reports go on to say that Google's device would offer free subscriptions to customers and support the costs with advertising. Now that is certainly the ambitious undertaking and one that has the potential to turn the industry on its ear. However, the idea of advertising before, after or during phone calls or regular phone use is certainly a tough sell. If Google can get the message across that devices should be open and function equally well with all types of software, then the innovative nature of Google's products would be at the forefront for millions of cellular users. A new wave of Internet enabled handsets are much more likely to prominently feature Google services, ad supported of course, if the company is deeply involved during the development phase.

No one at this point who is speculating can say for certain what Google's plans are, but the facts of the matter are clear. Google making a push into the hardware space would be by far its toughest challenge yet and the carriers would certainly have high demands of their own. On the software side expect to see the G inside more devices as Internet capabilities of cellular phones improve and users become accustomed to using their mobile phones the same way they use the Internet at home. Google's shown that a broad base of users click aplenty on targeted advertising and if the same Net experience can be found while on the go, I would, and certainly Google hopes for strikingly similar advertising results.

Disclosure: Author is long GOOG, AAPL

Investors Punish Google for Expenditures

Google (GOOG) reported earnings after the close today and investors saw the numbers and headed for the exits not in single file but in a horde. Google earned $3.56/share excluding employee options expenses and other things. The street wanted $3.59/share, so Google missed expectations, however the highest analyst opinion had an estimate of $3.93/share. Keep that in mind. Shares were sent down from $550 to as low as around $510 in extended-hours trading.

The raw numbers. $3.8Billion in revenue which is a 58% year over year increase and a 6% quarter over quarter increase. International revenue inched closer to being on par with US revenue with the split now being 52% to 48%. Of note, Google said that strength came from Spain, France and Italy. Every other call and talk about international markets, especially in Europe centered around the UK and Germany as being Google's strongest points. It's good to see strength increasing across the board.

Another key metric Traffic Acquisition Costs actually fell in the quarter to under 30% of revenue, this is how much Google spends on other sites to make money through ads on affiliated sites. In essence more and more traffic is coming from core Google.com properties.

Here comes the troubling or not so troubling part of the equation, depending on your investment time frame. Costs and Expenditures. While costs of Revenue stayed flat this quarter at about 40%, there were cost increases across the board for Research & Development, Sales & Marketing and General Administration. These cost increases led to overall margin deterioration from 33% down to 28%. That's a full 5% fall in profit margins. This is huge and the main reason for the earnings miss, which caused the stock to plummet after-hours.

Let's take another look. A company growing like Google, as a long term investor would I want my company investing in the future of its core businesses and beyond, researching into new revenue streams. I say yes. Shorter-term investors would probably say No, as they were looking for a quick gains, riding the coat-tails of this Internet giant. Google was helped in the past by favourable tax rates and more information will be shed on the tax issue during the company conference call. However, with Google looking to expand into other businesses, it should be no surprise to investors that Google would heavily invest in R&D. It certainly takes a lot of capital to invest in the heavy computing infrastructure that Google develops so it can provide the ever-increasing bevy of services that it provides such as Adsense, Adwords, GMail, Google Calendar, Google Apps, YouTube, Blogger, Picasa and more. It is through this R&D that will allow Google to continue to innovate as it tries to expand past search ads into new revenue streams.

To a long-term investor in the stock, as I am, I see this as a blip on the radar screen and look forward to the buying opportunity provided by these dips in the stock. Had Google not decided to book large increases in R&D this quarter how would the numbers look?

$3.87Billion in revenue dispersed over 315Million shares and using an average margin of 33.3% gives a Earnings Per Share number of $4.09!

Without the R&D spending increases Google would have blown away numbers by posting $4.09 vs. the expected $3.59, that's a $0.50/share earnings beat. Would this make shorter-term investors happy? I bet it certainly would. Being a long term holder I wouldn't complain if Google reported a number like this. Google's strategy of being a longer-term looking company (chalk that up to the Warren Buffet style of investing) is certainly showing its colours this quarter and with this brings disappointment to the growing crowd of Google fans who are growth investors.

The choice on Google becomes very simple at this point. Are you a believer that Google can effectively diversify its revenue streams making all this R&D spending worthwhile? Or do you think they are throwing money at the wind and should stick to what they both best in the short term, Search ads?

For a long term investor the choice seems easy, however a company as highly valued in the marketplace and as young as Google, brings with it high volatility and much risk, and today's earnings backslash showed this in full force.

Disclosure: Author is long GOOG

Innovators within Technology

It's really Apple (AAPL) and Google (GOOG) that are the two driving forces of innovation within the Internet/Computer part of the technology sector. When Google's CEO became an Apple board member there was some signs that the companies would work together on many more projects. We're seeing this now with Google Maps integration into the iPhone, YouTube on AppleTV and the iPhone and Google's search being prominent in Safari and Leopard.

Yahoo (YHOO) also is involved with Apple providing push e-mail to the iPhone, the Stock app and a host of other innovative services, however, it's a company very much in limbo, having just ousted long time CEO Terry Semel. Any reaps from their long-awaited ad platform Project Panama have yet to show major dividends and it seems like Yahoo has a long way to go to steer the ship in the right direction.

Microsoft (MSFT) on the other hand seems stuck in the mud, is a company that has far too many silos for its own good and cannot innovate as quickly as the others. While companies like Apple, Google, and Research In Motion (RIMM) are busy combining all of their products and services over a common platform, Microsoft is missing the party by having completely separate divisions trying to integrate separate products into a common themes. However thus far very few have ended in success and nothing but bad press surrounds this "innovative" company of late with Vista issues, charges on Xbox problems and who could forget the almighty Zune.

Disclosure: Author is long AAPL & GOOG