TEXT - S&P raises Google corporate credit rating to 'AA'
Overview -- Google Inc.'s revenues have risen 45% (including acquisitions) in the quarter ended Sept. 30, 2012, with net income of $2.2 billion, and the company ended the quarter with about $46 billion of cash and securities. -- We raised the corporate credit rating to `AA' from `AA-' and removed the ratings from CreditWatch, where they were placed on Aug. 21, 2012. The outlook is stable. -- At the same time, we affirmed our 'A-1+' short-term rating on the company. -- The stable outlook reflects our expectation that the company will sustain its leadership position in online search, display, and advertising and will generate profitable growth in emerging market places. Rating Action On Nov. 19, 2012, Standard & Poor's Ratings Services raised its corporate credit rating on Mountain View, Calif.-based Google Inc. to `AA' from `AA-'. We removed the ratings from CreditWatch, where they were placed with positive implications on Aug. 21, 2012. At the same time, we affirmed our 'A-1+' short-term rating on the company. The outlook is stable. Rationale The upgrade reflects Google's strong operating performance, albeit in a challenging and evolving market, while it continues to maintain exceptional liquidity, a conservative financial policy, and a minimal financial risk profile. The ratings on search-based advertising service provider Google Inc. reflect its "minimal" financial risk profile, its "strong" business risk profile, and Standard & Poor's Ratings Services' belief that the company will maintain the technical, managerial, and financial wherewithal to adapt to evolving markets and modes of delivery. Operating lease-adjusted debt to EBITDA is below 0.5x. For the nine months ended Sept. 30, 2012, revenues approached $37 billion, up 36%. Google has solidified its position as the leading Internet search engine (with a global market share of about 60%) and is actively exploring other revenue opportunities in mobile, display, video, and hosted solutions. Standard & Poor's expects that the search, mobile advertising, and display (including video) businesses will continue to demonstrate healthy growth over the long term, as consumers spend more time online and marketers increasingly shift advertising budgets toward online channels. In addition, Google's revenues are not concentrated in specific geographies, customers, or vertical markets. EBITDA margins are high and relatively stable--in the 40% area--due to its limited fixed-cost structure. We see key risks facing Google to be the evolving nature of its markets, competitive challenges from new entrants and well-established firms, and revenues that could be increasingly correlated to economic cycles as Internet advertising matures. However, we believe that the company's robust technology and data create a competitive advantage difficult to replicate in the intermediate term. While total ad spending follows the business cycle, we expect secular growth in Google's markets to offset cyclical effects, especially if its efforts in high-growth areas, such as mobile advertising, continues to be successful. Google's competitive advantage includes: -- Leading technology and a low infrastructure cost structure; -- Intellectual and financial capital, which we believe will allow it to effectively compete with potential new entrants; and -- The ability to capitalize on its search advertising revenues and engineering expertise to explore new businesses and opportunities. We expect research and development (R&D) expense to remain in the 9% to 10% area and capital expenditures to stay below 5% (the majority related to IT infrastructure investments). We also expect potential acquisitions to be of moderate size, intended to expand current capabilities. Recent acquisitions include YouTube, which provided a foothold in the fast-growing online video advertising market; DoubleClick Inc., which further expanded the company's online advertising business beyond paid search to display advertising; and AdMob, which expanded its mobile advertising capability. The acquisition of Motorola Mobility Holdings Inc. (MMI) in a cash-based transaction valued at $12.5 billion provided Google access to Motorola's base of more than 17,000 issued patents, including those related to wireless technology, which could enhance its mobile capabilities. Despite entering the handset business directly, Google indicated that it would run MMI as a separate business and maintain the openness of the Android operating system. While MMI is currently modestly unprofitable, it does not materially alter our view of Google's strong business risk profile. Over time, the transaction could enhance the Android user experience, and MMI's profitability could improve as a result of cost reduction initiatives and potential growth in smartphone handset volumes. Robust cash generation gives Google the flexibility to make large acquisitions or pursue shareholder-friendly initiatives--if it chooses--without detracting from overall credit quality. Return on capital has averaged more than 25% over the past five years. We expect free operating cash flow ($10.7 billion generated in 2011) to benefit from the existing investments related to Google's data center build-out. In our assessment, the company's management and governance is "strong," reflecting our view of its strategic positioning and organizational effectiveness. Google's financial policy is conservative, including the maintenance of a very significant net cash position and ample debt capacity. We expect the company to size and finance any share repurchases, dividends, and acquisitions in a manner consistent with our expectations, such that debt to EBITDA remains at or less than 0.75x. Operating lease-adjusted leverage of 0.4x in September 2012 provides substantial debt capacity within the rating. While litigation and regulation is an ongoing concern, we believe the company has ample liquidity to mitigate such risks. Liquidity The short-term rating on Google is 'A-1+'. The following factors support Google's "exceptional" liquidity and significant access to capital: -- Sources of cash are likely to substantially exceed uses over the next 24 month, with cash and marketable securities totaling about $46 billion as of Sept. 30, 2012; -- Discretionary free cash flow has averaged $8.8 billion per year over the past three years; -- A committed $3 billion unsecured revolving credit facility, maturing in June 2013; and -- We expect Google to maintain significant net cash balances. Outlook The stable outlook reflects our expectation that the company will sustain its leadership position in online search, display, and advertising and will generate profitable growth in emerging markets. Moreover, we expect Google to maintain modest minimal leverage (below 0.75x), coupled with a conservative strategy of largely organic growth. We could raise ratings over the intermediate term if the company continues its strong operating performance and successful diversification strategy, while maintaining its current financial policy and profile. A change to a more aggressive financial policy such that it sustains leverage in the 1x area, or significant loss of market share due to increased competition from established or emerging competitors could trigger a possible downgrade. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Temporary contact number: Philip Schrank (516-503-1164) Ratings List Upgraded; CreditWatch/Outlook Action; Ratings Affirmed To From Google Inc. Corporate Credit Rating AA/Stable/A-1+ AA-/Watch Pos/A-1+ Commercial Paper A-1+ A-1+ Senior Unsecured AA AA-/Watch Pos