Google Announces Third Quarter 2006 Results

Google Announces Third Quarter 2006 Results

MOUNTAIN VIEW, Calif. - October 19, 2006 - Google Inc. (NASDAQ: GOOG)
today announced financial results for the quarter ended September 30,
2006.

"Our third quarter results are a testament to the strength of our
network of advertisers and partners, as well as our continuing focus on
users," said Eric Schmidt, CEO of Google. "We were particularly
pleased with the contributions of our international business in a
seasonally weaker quarter. In addition, we continued to forge
significant partnerships with companies such as eBay, Fox Interactive
Media, and Intuit that will be of great value to all involved."

Q3 Financial Summary

Google reported revenues of $2.69 billion for the quarter ended
September 30, 2006, an increase of 70% compared to the third quarter of
2005 and an increase of 10% compared to the second quarter of 2006.
Google reports its revenues, consistent with GAAP, on a gross basis
without deducting traffic acquisition costs, or TAC. In the third
quarter of 2006, TAC totaled $825 million, or 31% 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 are
described below and are reconciled to the corresponding GAAP measures
in the accompanying financial tables.

· GAAP operating income for the third quarter of 2006 was $931
million, or 35% of revenues. This compares to GAAP operating income of
$815 million, or 33% of revenues, in the second quarter of 2006.
Non-GAAP operating income in the third quarter was $1.03 billion, or
38% of revenues. This compares to non-GAAP operating income of $925
million, or 38% of revenues, in the second quarter.

· GAAP net income for the third quarter of 2006 was $733 million as
compared to $721 million in the second quarter. Non-GAAP net income in
the third quarter was $812 million, compared to $772 million in the
second quarter.

· GAAP EPS for the third quarter of 2006 was $2.36 on 311 million
diluted shares outstanding, compared to $2.33 for the second quarter,
on 310 million diluted shares outstanding. Non-GAAP EPS in the third
quarter was $2.62, compared to $2.49 in the second quarter.

· Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS
are computed net of stock-based compensation (SBC). In addition, in
the second quarter, we excluded investment gains of $55 million related
to the sale of our investment in Baidu from the calculation of non-GAAP
net income and non-GAAP EPS. In the third quarter of 2006, the charge
related to stock-based compensation was $100 million as compared to
$109 million in the second quarter. Tax effects related to SBC charges
and the sale of the investment in Baidu have also been excluded from
non-GAAP net income and non-GAAP EPS. The tax benefit related to SBC
was $21 million in the third quarter and $26 million in the second
quarter. The tax expense related to the investment gains from the sale
of the Baidu investment in the second quarter was $23 million.
Reconciliations of non-GAAP measures to GAAP operating income, net
income, and EPS are included at the end of this release.

Q3 Financial Highlights

Revenues - Google reported revenues of $2.69 billion for the quarter
ended September 30, 2006, representing a 70% increase over third
quarter 2005 revenues of $1.58 billion and a 10% increase over second
quarter 2006 revenues of $2.46 billion. Google reports its revenues,
consistent with GAAP, on a gross basis without deducting traffic
acquisition costs, or TAC.

Google Sites Revenues - Google-owned sites generated revenues of $1.63
billion, or 60% of total revenues, in the third quarter of 2006. This
represents an 84% increase over third quarter 2005 revenues of $885
million and a 14% increase over second quarter 2006 revenues of $1.43
billion.

Google Network Revenues - Google's partner sites generated revenues,
through AdSense programs, of $1.04 billion, or 39% of total revenues,
in the third quarter of 2006. This is a 54% increase over network
revenues of $675 million generated in the third quarter of 2005 and a
4% increase over second quarter 2006 revenues of $997 million.

International Revenues - Revenues from outside of the United States
contributed 44% of total revenues in the third quarter of 2006,
compared to 42% in the second quarter of 2006 and 39% in the third
quarter of 2005. Had foreign exchange rates remained constant from the
second quarter through the third quarter of 2006, our revenues in the
third quarter of 2006 would have been $19 million lower. Had foreign
exchange rates remained constant from the third quarter of 2005 through
the third quarter of 2006, our revenues in the third quarter of 2006
would have been $35 million lower.

TAC - Traffic Acquisition Costs, the portion of revenues shared with
Google's partners, increased to $825 million in the third quarter of
2006. This compares to TAC of $785 million in the second quarter. TAC
as a percentage of advertising revenues decreased to 31% in the third
quarter from 32% in the second quarter.

The majority of TAC expense is related to amounts ultimately paid to
our AdSense partners, which totaled $780 million in the third quarter
of 2006. TAC is also related to amounts ultimately paid to certain
distribution partners and others who direct traffic to our website,
which totaled $45 million in the third quarter of 2006.

Other Cost of Revenues - Other cost of revenues, which is comprised
primarily of data center operational expenses, as well as credit card
processing charges, increased to $223 million, or 8% of revenues, in
the third quarter of 2006, compared to $204 million, or 8% of revenues,
in the second quarter. Other cost of revenues also included
stock-based compensation of $2 million in the third quarter of 2006,
compared to $2 million in the second quarter of 2006.

Operating Expenses - Operating expenses, other than cost of revenues,
were $710 million in the third quarter. These operating expenses
included $382 million in payroll-related and facilities expenses, $98
million in stock-based compensation, and $50 million in advertising and
promotional expenses, of which $14 million was related to certain
distribution deals.

Stock-Based Compensation - In the third quarter, the total charge
related to stock-based compensation was $100 million as compared to
$109 million in the second quarter.

For the full year, we expect stock-based compensation charges for
grants to employees prior to October 1, 2006 to be $377 million. This
does not include expenses to be recognized over the remainder of the
year related to employee stock awards that are granted after October 1,
2006 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 approximately 1% to 1.5% per year.

Operating Income - GAAP operating income in the third quarter of 2006
was $931 million, or 35% of revenues. This compares to GAAP operating
income of $815 million, or 33% of revenues, in the second quarter.
Non-GAAP operating income in the third quarter was $1.03 billion, or
38% of revenues. This compares to non-GAAP operating income of $925
million, or 38% of revenues, in the second quarter.

Net Income - GAAP net income for the third quarter of 2006 was $733
million as compared to $721 million in the second quarter. Non-GAAP
net income was $812 million in the third quarter, compared to $772
million in the second quarter. GAAP EPS for the third quarter was
$2.36 on 311 million diluted shares outstanding, compared to $2.33 for
the second quarter, on 310 million diluted shares outstanding.
Non-GAAP EPS for the third quarter was $2.62, compared to $2.49 in the
second quarter.

Income Taxes - Our effective tax rate was 29% for the third quarter.
We currently anticipate that our effective tax rate for the full year
will be at or below 30%.

Cash Flow and Capital Expenditures - Net cash provided by operating
activities for the third quarter of 2006 totaled $1 billion as compared
to $841 million for the second quarter. In the third quarter of 2006,
capital expenditures were $492 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 third quarter,
free cash flow was $512 million.

We continue to expect that the growth rate in capital expenditures in
2006 will be substantially greater than the revenue growth rate for the
year.

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 September 30, 2006, cash, cash equivalents, and
marketable securities were $10.4 billion.

On a worldwide basis, Google employed 9,378 full-time employees as of
September 30, 2006, up from 7,942 full time employees as of June 30,
2006.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Google's third quarter 2006 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, October 26, 2006 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 2704080.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements that involve
risks and uncertainties, including statements relating to the value of
our partnerships with eBay, Fox Interactive Media, and Intuit, our
plans to acquire YouTube, invest in our business, our expected
stock-based compensation charges, the expected dilution related to
equity grants to our employees, our anticipated tax rate for 2006, and
our expectations regarding the growth rate in our 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, the failure to receive regulatory approval for our proposed
acquisition of YouTube, the failure of the other closing conditions in
our agreement to purchase YouTube to be satisfied, risks related to our
hiring patterns, the amount of stock-based compensation we issue to our
service providers, the uncertain and complex nature of tax forecasting,
the fact that we may have exposure to greater than expected tax
liabilities, and 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations," in
our report on Form 10-Q for the quarter ended June 30, 2006, which is
on file with the SEC and is available on our investor relations website
at investor.google.com and on the SEC's website at www.sec.gov.
Additional information will also be set forth in our quarterly report
on Form 10-Q for the quarter ended September 30, 2006, which will be
filed with the SEC in November 2006. All information provided in this
release and in the attachments is as of October 19, 2006, 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 net income, non-GAAP operating margins, 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, such as
gains from the sale of investments and the related tax effects of such
non-cash charges. 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
management's 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 minus stock-based compensation.
We define non-GAAP operating margin 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 Google's
management and investors can compare Google's recurring core business
operating results over multiple periods. We believe that, given our
recent adoption of SFAS 123R, it is difficult for investors to evaluate
our GAAP results of operations on a year-over-year basis because our
GAAP results of operations for 2005 calculated our stock-based
compensation expense in a different manner than that required under
SFAS 123R. Therefore, investors cannot compare the year-over-year
results of our recurring core business operating results unless we
exclude these non-cash charges that result from two different
accounting methods. Moreover, because of varying available valuation
methodologies, subjective assumptions and the variety of award types
that companies can use when adopting SFAS 123R, Google's management
believes that providing a non-GAAP financial measure that excludes
stock-based compensation allows investors to make meaningful
comparisons between Google's 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 Google's 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 Google's 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 non-GAAP EPS. We define non-GAAP net income as
net income minus stock-based compensation and, for the second quarter
of 2006, the gains from the sale of our investment in Baidu, as well as
the related tax effects of such items. We define non-GAAP EPS as
non-GAAP net income divided by the weighted average shares, on a
fully-diluted basis, outstanding as of September 30, 2006. 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 and the gains from the sale of
our investment in Baidu in the second quarter of 2006. Without
excluding these tax effects, investors would only see the gross effect
that excluding these expenses and gains had on our operating results.
The same limitations described above regarding Google's 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 management's
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 Management's Discussion and Analysis of Financial Condition
and Results of Operations in its Form 10-Q.

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.

Investor Contact:
Maria Shim
650-253-7663
marias@google.com

Media Contact:
Jon Murchinson
650-253-4437
jonm@google.com

Note to Editors:

Video of CEO Eric Schmidt addressing the third quarter results, capital
investments, and other topics will be available in Google's multi media
press room (www.google.com/press) and The News Market
(www.thenewsmarket.com/google) at 2:30 p.m. PDT in the following
formats: broadcast quality MPEG2, QuickTime and WMV.

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