Google Announces Second Quarter 2008 Results

2008-07-17 15:01:00

MOUNTAIN VIEW, Calif.–(EMWNews)–Google Inc. (NASDAQ:GOOG) today announced financial results for the

quarter ended June 30, 2008.

“Strong international growth as well as sustained traffic increases on

Google’s web properties propelled us to another strong quarter, despite

a more challenging economic environment,” said Eric Schmidt, CEO of

Google. “As we continue to focus on innovating in our core business of

search, ads and apps, we also look forward to enhancing the experience

of our users and expanding the reach of our advertisers and partners

with new technologies and formats, particularly as our integration of

DoubleClick gains momentum and creates new opportunities in display

advertising and elsewhere.”

Q2 Financial Summary

Google reported revenues of $5.37 billion for the quarter ended June 30,

2008, an increase of 39% compared to the second quarter of 2007 and an

increase of 3% compared to the first quarter of 2008. Google reports its

revenues, consistent with GAAP, on a gross basis without deducting

traffic acquisition costs, or TAC. In the second quarter of 2008, TAC

totaled $1.47 billion, or 28% of advertising revenues.

Google reports operating income, net income, and earnings per share

(EPS) on a GAAP and non-GAAP basis. The non-GAAP measures, as well as

free cash flow, an alternative non-GAAP measure of liquidity, are

described below and are reconciled to the corresponding GAAP measures in

the accompanying financial tables.

  • GAAP operating income for the second quarter of 2008 was $1.58

    billion, or 29% of revenues. This compares to GAAP operating income of

    $1.55 billion, or 30% of revenues, in the first quarter of 2008.

    Non-GAAP operating income in the second quarter of 2008 was $1.85

    billion, or 34% of revenues. This compares to non-GAAP operating

    income of $1.83 billion, or 35% of revenues, in the first quarter of

    2008.

  • GAAP net income for the second quarter of 2008 was $1.25 billion as

    compared to $1.31 billion in the first quarter of 2008. Non-GAAP net

    income in the second quarter of 2008 was $1.47 billion, compared to

    $1.54 billion in the first quarter of 2008.

  • GAAP EPS for the second quarter of 2008 was $3.92 on 318 million

    diluted shares outstanding, compared to $4.12 for the first quarter of

    2008 on 317 million diluted shares outstanding. Non-GAAP EPS in the

    second quarter of 2008 was $4.63, compared to $4.84 in the first

    quarter of 2008.

  • Non-GAAP operating income, non-GAAP operating margin, non-GAAP net

    income, and non-GAAP EPS are computed net of stock-based compensation

    (SBC). In the second quarter of 2008, the charge related to SBC was

    $273 million as compared to $281 million in the first quarter of 2008.

    Tax benefits related to SBC have also been excluded from non-GAAP net

    income and non-GAAP EPS. The tax benefit related to SBC was $48

    million in the second quarter of 2008 and $51 million in the first

    quarter of 2008. Reconciliations of non-GAAP measures to GAAP

    operating income, operating margin, net income, and EPS are included

    at the end of this release.

Q2 Financial Highlights

Revenues Google reported revenues of

$5.37 billion for the quarter ended June 30, 2008, representing a 39%

increase over second quarter 2007 revenues of $3.87 billion and a 3%

increase over first quarter 2008 revenues of $5.19 billion. Google

reports its revenues, consistent with GAAP, on a gross basis without

deducting TAC.

Google Sites Revenues – Google-owned sites generated

revenues of $3.53 billion, or 66% of total revenues, in the second

quarter of 2008. This represents a 42% increase over second

quarter 2007 revenues of $2.49 billion and a 4% increase over

first quarter 2008 revenues of $3.40 billion.

 

Google Network Revenues – Google’s partner sites generated

revenues, through AdSense programs, of $1.66 billion, or 31% of

total revenues, in the second quarter of 2008. This represents a

22% increase over network revenues of $1.35 billion generated in

the second quarter of 2007 and a 2% decrease over first quarter

2008 revenues of $1.69 billion.

 

International Revenues – Revenues from outside of the

United States totaled $2.80 billion, representing 52% of total

revenues in the second quarter of 2008, compared to 48% in the

second quarter of 2007 and 51% in the first quarter of 2008. Had

foreign exchange rates remained constant from the first quarter of

2008 through the second quarter of 2008, our revenues in the

second quarter of 2008 would have been $88 million lower. Had

foreign exchange rates remained constant from the second quarter

of 2007 through the second quarter of 2008, our revenues in the

second quarter of 2008 would have been $249 million lower.

 

Revenues from the United Kingdom totaled $774 million,

representing 14% of revenue in the second quarter of 2008,

compared to 15% in the second quarter of 2007 and 15% in the first

quarter of 2008.

 

Paid Clicks – Aggregate paid clicks, which include clicks

related to ads served on Google sites and the sites of our AdSense

partners, increased approximately 19% over the second quarter of

2007 and decreased approximately 1% over the first quarter of 2008.

TAC – Traffic Acquisition Costs, the portion of revenues shared

with Googles partners, decreased to $1.47

billion in the second quarter of 2008. This compares to TAC of $1.49

billion in the first quarter of 2008. TAC as a percentage of advertising

revenues was 28% in the second quarter, compared to 29% in the first

quarter of 2008.

The majority of TAC expense is related to amounts ultimately paid to our

AdSense partners, which totaled $1.32 billion in the second quarter of

2008. TAC is also related to amounts ultimately paid to certain

distribution partners and others who direct traffic to our website,

which totaled $154 million in the second quarter of 2008.

Other Cost of Revenues – Other cost of revenues, which is

comprised primarily of data center operational expenses, amortization of

intangible assets, credit card processing charges as well as content

acquisition costs, increased to $674 million, or 13% of revenues, in the

second quarter of 2008, compared to $624 million, or 12% of revenues, in

the first quarter of 2008.

Operating Expenses – Operating expenses, other than cost of

revenues, were $1.64 billion in the second quarter of 2008, or 31% of

revenues, compared to $1.53 billion in the first quarter of 2008, or 29%

of revenues. The operating expenses in the second quarter of 2008

included $810 million in payroll-related and facilities expenses,

compared to $809 million in the first quarter of 2008.

Stock-Based Compensation (SBC) In the

second quarter of 2008, the total charge related to SBC was $273 million

as compared to $281 million in the first quarter of 2008.

We currently estimate stock-based compensation charges for grants to

employees prior to July 1, 2008 to be approximately $1.1 billion for

2008. This does not include expenses to be recognized related to

employee stock awards that are granted after July 1, 2008 or

non-employee stock awards that have been or may be granted. We currently

anticipate that dilution related to all equity grants to employees will

be at or below 2% this year.

Operating Income – GAAP operating income in the second quarter of

2008 was $1.58 billion, or 29% of revenues. This compares to GAAP

operating income of $1.55 billion, or 30% of revenues, in the first

quarter of 2008. Non-GAAP operating income in the second quarter of 2008

was $1.85 billion, or 34% of revenues. This compares to non-GAAP

operating income of $1.83 billion, or 35% of revenues, in the first

quarter of 2008.

Interest Income and Other, Net Interest

income and other was $58 million in the second quarter of 2008, compared

with $167 million in the first quarter of 2008. The decrease was

primarily related to lower yields on our cash balances, as well as lower

average cash balances as a result of cash used in the first quarter to

acquire DoubleClick; lower net realized gains on the sale of our

marketable securities; and an increase in expenses as a result of more

activity under our foreign exchange risk management program.

Net Income GAAP net income for the

second quarter of 2008 was $1.25 billion as compared to $1.31 billion in

the first quarter of 2008. Non-GAAP net income was $1.47 billion in the

second quarter of 2008, compared to $1.54 billion in the first quarter

of 2008. GAAP EPS for the second quarter of 2008 was $3.92 on 318

million diluted shares outstanding, compared to $4.12 for the first

quarter of 2008, on 317 million diluted shares outstanding. Non-GAAP EPS

for the second quarter of 2008 was $4.63, compared to $4.84 in the first

quarter of 2008.

Income Taxes Our effective tax rate

was 24% for the second quarter of 2008.

Cash Flow and Capital Expenditures

Net cash provided by operating activities for the second quarter of 2008

totaled $1.77 billion as compared to $1.78 billion for the first quarter

of 2008. In the second quarter of 2008, capital expenditures were $698

million, the majority of which was related to IT infrastructure

investments, including data centers, servers, and networking equipment.

Free cash flow, an alternative non-GAAP measure of liquidity, is defined

as net cash provided by operating activities less capital expenditures.

In the second quarter of 2008, free cash flow was $1.07 billion.

We expect to continue to make significant capital expenditures.

A reconciliation of free cash flow to net cash provided by operating

activities, the GAAP measure of liquidity, is included at the end of

this release.

Cash As of June 30, 2008, cash, cash

equivalents, and marketable securities were $12.7 billion.

On a worldwide basis, Google employed 19,604 full-time employees as of

June 30, 2008, up from 19,156 full-time employees as of March 31, 2008.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Googles second

quarter 2008 earnings release call will be available at http://investor.google.com/webcast.html.

The call begins today at 1:30 PM (PT) / 4:30 PM (ET). This press

release, the financial tables, as well as other supplemental information

including the reconciliations of certain non-GAAP measures to their

nearest comparable GAAP measures, are also available at that site. A

replay of the call will be available beginning at 7:30 PM (ET) today

through midnight Thursday, July 24, 2008 by calling 888-203-1112 in the

United States or 719-457-0820 for calls from outside the United States.

The required confirmation code for the replay is 2445002.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements that involve

risks and uncertainties. These statements include statements relating to

our success in integrating DoubleClick, our ability to innovate in our

core business, enhance the experience of our users and expand the reach

of our advertisers and partners with new technologies and formats, our

expected stock-based compensation charges, the expected dilution related

to equity grants to our employees, and our plans to make significant

capital expenditures. Actual results may differ materially from the

results predicted and reported results should not be considered as an

indication of future performance. The potential risks and uncertainties

that could cause actual results to differ from the results predicted

include, among others, difficulties in integrating DoubleClick into our

business, unforeseen changes in our hiring patterns, the amount of

stock-based compensation we issue to our service providers, our need to

expend capital to accommodate the growth of the business, as well as

those risks and uncertainties included under the captions Risk

Factors and Managements

Discussion and Analysis of Financial Condition and Results of Operations,

in our Quarterly Report on Form 10-Q for the quarter ended March 31,

2008, which is on file with the SEC and is available on our investor

relations website at investor.google.com

and on the SEC website at www.sec.gov.

Additional information will also be set forth in our report on Form 10-Q

for the quarter ended June 30, 2008, which will be filed with the SEC in

August 2008. All information provided in this release and in the

attachments is as of July 17, 2008, and Google undertakes no duty to

update this information.

ABOUT NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which statements

are prepared and presented in accordance with GAAP, we use the following

non-GAAP financial measures: non-GAAP operating income, non-GAAP

operating margin, non-GAAP net income, non-GAAP EPS and free cash flow.

The presentation of this financial information is not intended to be

considered in isolation or as a substitute for, or superior to, the

financial information prepared and presented in accordance with GAAP.

For more information on these non-GAAP financial measures, please see

the tables captioned Reconciliations of

non-GAAP results of operations measures to the nearest comparable GAAP

measures and Reconciliation

from net cash provided by operating activities to free cash flow

included at the end of this release.

We use these non-GAAP financial measures for financial and operational

decision making and as a means to evaluate period-to-period comparisons.

Our management believes that these non-GAAP financial measures provide

meaningful supplemental information regarding our performance and

liquidity by excluding certain expenses and expenditures that may not be

indicative of our recurring core business

operating results, meaning our operating

performance excluding not only non-cash charges, such as stock-based

compensation, but also discrete cash charges that are infrequent in

nature. We believe that both management and investors benefit from

referring to these non-GAAP financial measures in assessing our

performance and when planning, forecasting and analyzing future periods.

These non-GAAP financial measures also facilitate managements

internal comparisons to our historical performance and liquidity as well

as comparisons to our competitors operating

results. We believe these non-GAAP financial measures are useful to

investors both because (1) they allow for greater transparency with

respect to key metrics used by management in its financial and

operational decision making and (2) they are used by our institutional

investors and the analyst community to help them analyze the health of

our business.

Non-GAAP operating income and operating margin. We define

non-GAAP operating income as operating income plus stock-based

compensation. Non-GAAP operating margin is defined as non-GAAP operating

income divided by revenues. Google considers these non-GAAP financial

measures to be useful metrics for management and investors because they

exclude the effect of stock-based compensation so that Googles

management and investors can compare Googles

recurring core business operating results over multiple periods. Because

of varying available valuation methodologies, subjective assumptions and

the variety of award types that companies can use under FAS 123R, Googles

management believes that providing a non-GAAP financial measure that

excludes stock-based compensation allows investors to make meaningful

comparisons between Googles recurring core

business operating results and those of other companies, as well as

providing Google’s management with an important tool for financial and

operational decision making and for evaluating Googles

own recurring core business operating results over different periods of

time. There are a number of limitations related to the use of non-GAAP

operating income versus operating income calculated in accordance with

GAAP. First, non-GAAP operating income excludes some costs, namely,

stock-based compensation, that are recurring. Stock-based compensation

has been and will continue to be for the foreseeable future a

significant recurring expense in Googles

business. Second, stock-based compensation is an important part of our

employees compensation and impacts their

performance. Third, the components of the costs that we exclude in our

calculation of non-GAAP operating income may differ from the components

that our peer companies exclude when they report their results of

operations. Management compensates for these limitations by providing

specific information regarding the GAAP amounts excluded from non-GAAP

operating income and evaluating non-GAAP operating income together with

operating income calculated in accordance with GAAP.

Non-GAAP net income and EPS. We define non-GAAP net income as net

income plus stock-based compensation, less the related tax effects. We

define non-GAAP EPS as non-GAAP net income divided by the weighted

average shares, on a fully-diluted basis, outstanding as of June 30,

2008. We consider these non-GAAP financial measures to be a useful

metric for management and investors for the same reasons that Google

uses non-GAAP operating income and non-GAAP operating margin. However,

in order to provide a complete picture of our recurring core business

operating results, we exclude from non-GAAP net income and non-GAAP EPS

the tax effects associated with stock-based compensation. Without

excluding these tax effects, investors would only see the gross effect

that excluding these expenses had on our operating results. The same

limitations described above regarding Googles

use of non-GAAP operating income and non-GAAP operating margin apply to

our use of non-GAAP net income and non-GAAP EPS. Management compensates

for these limitations by providing specific information regarding the

GAAP amounts excluded from non-GAAP net income and non-GAAP EPS and

evaluating non-GAAP net income and non-GAAP EPS together with net income

and EPS calculated in accordance with GAAP.

Free cash flow. We define free cash flow as net cash provided by

operating activities minus capital expenditures. We consider free cash

flow to be a liquidity measure that provides useful information to

management and investors about the amount of cash generated by the

business that, after the acquisition of property and equipment,

including information technology infrastructure and land and buildings,

can be used for strategic opportunities, including investing in our

business, making strategic acquisitions and strengthening the balance

sheet. Analysis of free cash flow also facilitates managements

comparisons of our operating results to competitors

operating results. A limitation of using free cash flow versus the GAAP

measure of net cash provided by operating activities as a means for

evaluating Google is that free cash flow does not represent the total

increase or decrease in the cash balance from operations for the period

since it excludes cash used for capital expenditures during the period.

Our management compensates for this limitation by providing information

about our capital expenditures on the face of the cash flow statement

and under Managements Discussion and

Analysis of Financial Condition and Results of Operations in our Form

10-Q and Annual Report on Form 10-K. Google has computed free cash flow

using the same consistent method from quarter to quarter and year to

year.

The accompanying tables have more details on the GAAP financial measures

that are most directly comparable to non-GAAP financial measures and the

related reconciliations between these financial measures.

Google Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

 

December 31,

June 30,

20071

2008

(unaudited)

Assets

Current assets:

Cash and cash equivalents

$

6,081,593

$

7,363,536

Marketable securities

8,137,020

5,370,133

Accounts receivable, net of allowance

2,162,521

2,641,901

Deferred income taxes, net

68,538

94,402

Income taxes receivable

145,253

Prepaid revenue share, expenses and other assets

694,213

846,865

 

 

Total current assets

17,289,138

16,316,837

Prepaid revenue share, expenses and other assets, non-current

168,530

444,844

Deferred income taxes, net, non-current

33,219

220,079

Non-marketable equity securities

1,059,694

1,067,520

Property and equipment, net

4,039,261

5,137,710

Intangible assets, net

446,596

1,138,991

Goodwill

2,299,368

4,853,805

 

 

Total assets

$

25,335,806

 

$

29,179,786

 

 

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

282,106

$

439,281

Accrued compensation and benefits

588,390

493,284

Accrued expenses and other current liabilities

465,032

555,117

Accrued revenue share

522,001

517,287

Deferred revenue

178,073

197,433

Income taxes payable

143,113

 

 

Total current liabilities

2,035,602

2,345,515

 

Deferred revenue, non-current

30,249

30,933

Deferred income taxes, net, non-current

22,197

Income taxes payable, non-current

478,372

711,827

Other long-term liabilities

101,904

156,299

 

Stockholders’ equity:

Common stock

313

314

Additional paid-in capital

13,241,221

13,904,271

Accumulated other comprehensive income

113,373

119,181

Retained earnings

9,334,772

11,889,249

 

 

Total stockholders’ equity

22,689,679

25,913,015

 

 

Total liabilities and stockholders’ equity

$

25,335,806

 

$

29,179,786

 

1 Derived from audited financial

statements.

Google Inc.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts, unaudited)

 

 

 

 

 

Google Inc.
Krista Bessinger, 650-214-5825 (Investor)
kbessinger@google.com
Jon

Murchinson, 650-253-4437 (Media)
jonm@google.com

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