Analysis of Google's 10-K (GOOG)

Stifel Nicolaus analyst Scott Devitt analyzes Google Inc.'s (GOOG) 10-K filing:

The line from the Google 10-K says it best: "We began as a technology company and have evolved into a software, technology, Internet, advertising and media company all rolled into one". Google has effectively transitioned itself into a network of information, applications, and entertainment. Below we discuss some of the highlights from the recent SEC annual filing.

Enhancements. Google has made significant strides in recent quarters, adding salient enhancements to its stockpile of offerings. Recent enhancements have been made to the local search offering, including Google Maps as well as to Google Desktop Search, which now has the capability to support additional file formats.

Global Access. The company now boasts 136 international domains, up from 112 reported in the 2004 10-k, including many developing countries. In neither 2004 nor 2005 was the company able to recover its costs in these countries.

Platforms. As mobile technology continues to develop, consumers are demanding greater features and access from mobile phones. Google continues to invest in improving its mobile search functions and recently introduced a beta version of Google Local for Mobile to give users relevant information directly on their phones. Further, the company has begun testing ad placements in mobile search in Japan.

Ad in New Media. In February 2006, Google acquired dMarc, and plans to link its network of advertisers with dMarc's radio and distribution product. Additionally, Google is testing ad placements in magazines and newspapers, as well as streamlining the print ad process. As noted earlier, Google is also testing mobile ads.

Content. We believe that Google is effectively forcing offline content into online content, thus allowing them to monetize it and provide users with more ample resources. The company has developed new storage and access technologies to allow content owners and producers to distribute and monetize more types of online and offline content. Bringing non-traditional, online or offline content into Google's index will encourage the preservation of this content and create a richer online experience. Example of this are Google Scholar, Google Book Search, Google Video, and Google Base, which allows users to upload, store and describe online or offline content for free.

AOL Deal. Google has completed negotiations with Time Warner for a 5% ownership stake in AOL in exchange for $1 billion in cash. It is expected that the investment will close during the second quarter of 2006. In addition, Google has agreed to create an AOL marketplace, collaborate in video search highlighting AOL's premium video service, allow Google Talk and AIM users to communicate with each other, among others things. For 2005, AOL accounted for 9% of Google's revenues, down from 12% last year.

Spending. Operating margins are expected to decline. This downward pressure is a result of increased expenditures. In addition, the company's capital expenditures have grown from $319.0 million in 2004 to $838.2 million in 2005. Google's investments in PPE, will likely be significantly greater in 2006 compared to 2005.

Ownership. As of year end 2005, the founders, executive officers and directors together owned common stock representing 78% of the voting power on outstanding stock. Further, the Larry Page, Sergey Brin and Eric Schmidt combined controlled approximately 84% of outstanding Class B shares, which represent 69% of voting power of outstanding stock.

Trends.
- International revenues grew from 34% in 2004 to 39% in 2005
- Effective tax rate is expected to drop to about 30% in 2006, down from 31.6% in 2005
- More than half of all Google user traffic came from outside the U.S. in 2005
- Google Network Web sites accounted for 44% of revenues, down from 49% last year

Acquisitions. The company noted that 15 acquisitions were made during 2005. The total purchase price for these companies was $130.5 million. In addition, Google paid $400,000 for an undisclosed patent last year. Several other acquisitions have already been made in 2006, including dMarc (for $102 million, with about $1.2 billion in payments through 2008 if certain goals are met), Writely, and @Last Software.

Related:

1. More opinion and analysis of Google Inc. and its stock
2. More opinion and analysis of Yahoo! Inc. and its stock
3. Google Finance: 6 Short, Must-Read Articles
4. Founder of MarketWatch on Impact of Google Finance
5. Full transcript of Google's most recent conference call

You can search for analysis of any stock using the search box at the top of this page. Seeking Alpha carries articles by fund managers, analysts, industry experts and others. You can also install a stock search plug-in for Firefox; details here.