Citi Highlights Takeaways from Google's 10-Q (GOOG)

Citi is out with a research note this morning reviewing Google's (Nasdaq: GOOG) 10-Q, which was issued yesterday after the close. The firm reiterates its Buy rating and $610 price target on shares of Google.

The firm cites several unusual items which potentially made Google's Q2 earnings lower:

• general & administrative expenses rose to $441 million in Q2, a record 11.3% of net sales. Citi believes the large jump was due to a $62 million quarter-over-quarter rise in professional services fees, "the majority of which were legal costs", which compares to a $15 million rise in fees from Q4 to Q1. Notably, the firm says these are not one time charges, "but the point is that the Q2 increase was a bit unusual and helps explain the Q2 G&A bump."
  
• interest income fell $109 million from Q1 to Q2, reflecting 1. Google's yield on its cash/investments which went from 4% in Q1 to 2.8% in Q2, 2. a $7 million gain from market securities, which was much lower than the $47 million gain reported in Q1, and 3. a $43 million loss from foreign exchange in Q2, which compares to a $2 million foreign exchange gain in Q1. As Citi points out that these costs from FX "were due to more hedging activity under Google's risk management program", it once again points out that the lump was unusual.

Citi says, "The 10Q Takeaway is that 'normalized' Q2 results (assuming, say, only $30MM increased professional services fees & no FX hedging losses) could have been more like $4.81 vs. the $4.62 reported." On the other hand, the firm says this is not the reason to buy Google. Instead, Citi recommends buying the stock given its "30% organic bottom line growth which is below its 25x P/E, potential opex leverage in '09 from 'normalized' personnel/capex spend, and most importantly, material new '09 product cycles - display advertising, video (YouTube), and Mobile Search."

Google, Inc., a technology company, maintains index of Web sites and other online content for users, advertisers, Google network members, and other content providers.

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