GOOGLE ANNOUNCES FOURTH QUARTER AND FISCAL YEAR 2006 RESULTS
MOUNTAIN VIEW, Calif. - January 31, 2007 - Google Inc. (NASDAQ: GOOG) today
announced financial results for the quarter and fiscal year ended December
31, 2006.
"Our impressive performance in the fourth quarter demonstrates the
continuing strength of our business model across Google properties and those
of our partners," said Eric Schmidt, CEO of Google. "Our growing
organization allows us to deliver ever increasing amounts of information and
content to our users both through investments in search and ads as well as
through strategic partnerships."
Q4 Financial Summary
Google reported revenues of $3.21 billion for the quarter ended December 31,
2006, an increase of 67% compared to the fourth quarter of 2005 and an
increase of 19% compared to the third quarter of 2006. Google reports its
revenues, consistent with GAAP, on a gross basis without deducting traffic
acquisition costs, or TAC. In the fourth quarter of 2006, TAC totaled $976
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 fourth quarter of 2006 was $1.06 billion, or
33% of revenues. This compares to GAAP operating income of $931 million, or
35% of revenues, in the third quarter of 2006. Non-GAAP operating income in
the fourth quarter was $1.20 billion, or 37% of revenues. This compares to
non-GAAP operating income of $1.03 billion, or 38% of revenues, in the third
quarter.
. GAAP net income for the fourth quarter of 2006 was $1.03 billion as
compared to $733 million in the third quarter. Non-GAAP net income in the
fourth quarter was $997 million, compared to $812 million in the third
quarter.
. GAAP EPS for the fourth quarter of 2006 was $3.29 on 313 million diluted
shares outstanding, compared to $2.36 for the third quarter, on 311 million
diluted shares outstanding. Non-GAAP EPS in the fourth quarter was $3.18,
compared to $2.62 in the third quarter.
. The effective tax rate was 13% for the fourth quarter of 2006 and 23% for
the full year. In December 2006, Google entered into an Advanced Pricing
Agreement ("APA") with the IRS in connection with certain intercompany
transfer pricing arrangements. The APA applies to the taxation years
beginning in 2003. As a result of the APA, we reduced certain of our income
tax contingency reserves and recognized an income tax benefit of $90 million
in the fourth quarter. This amount is excluded from our non-GAAP results for
the quarter and for the year. In addition, in the fourth quarter, the 2006
R&D tax credit was enacted, which resulted in a $78 million benefit to our
provision for income taxes. $43 million of this benefit pertained to the
first three quarters of 2006 and is excluded from our non-GAAP results for
the fourth quarter. Without these discrete items, our non-GAAP effective
tax rate for the fourth quarter of 2006 and for the full year 2006 was 24%
and 26%, respectively.
. Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS are
computed net of stock-based compensation (SBC). In addition, in the fourth
quarter of 2006, we excluded tax benefits of $90 million related to the APA
and $43 million related to the 2006 R&D tax credit from the calculation of
non-GAAP net income and EPS. Also, for 2006, we excluded tax benefits of
$90 million related to the APA from the calculation of our non-GAAP net
income and EPS. In the fourth quarter of 2006, the charge related to SBC
was $134 million as compared to $100 million in the third quarter. Tax
effects related to SBC have also been excluded from these non-GAAP measures.
The tax benefit related to SBC was $35 million in the fourth quarter and $21
million in the third quarter. Reconciliations of non-GAAP measures to GAAP
operating income, net income, EPS, and our effective tax rate are included
at the end of this release.
Q4 Financial Highlights
Revenues - Google reported revenues of $3.21 billion for the quarter ended
December 31, 2006, representing a 67% increase over fourth quarter 2005
revenues of $1.92 billion and a 19% increase over third quarter 2006
revenues of $2.69 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 $1.98
billion, or 62% of total revenues, in the fourth quarter of 2006. This
represents an 80% increase over fourth quarter 2005 revenues of $1.10
billion and a 22% increase over third quarter 2006 revenues of $1.63
billion.
Google Network Revenues - Google's partner sites generated revenues, through
AdSense programs, of $1.20 billion, or 37% of total revenues, in the fourth
quarter of 2006. This is a 50% increase over network revenues of $799
million generated in the fourth quarter of 2005 and a 16% increase over
third quarter 2006 revenues of $1.04 billion.
International Revenues - Revenues from outside of the United States
contributed 44% of total revenues in the fourth quarter of 2006, compared to
44% in the third quarter of 2006 and 38% in the fourth quarter of 2005. Had
foreign exchange rates remained constant from the third quarter through the
fourth quarter of 2006, our revenues in the fourth quarter of 2006 would
have been $18 million lower. Had foreign exchange rates remained constant
from the fourth quarter of 2005 through the fourth quarter of 2006, our
revenues in the fourth quarter of 2006 would have been $81 million lower.
Paid Clicks - Aggregate paid clicks, which include clicks related to ads
served on Google sites and our AdSense partners, increased approximately 61%
over the fourth quarter of 2005 and approximately 22% over the third quarter
of 2006.
TAC - Traffic Acquisition Costs, the portion of revenues shared with
Google's partners, increased to $976 million in the fourth quarter of 2006.
This compares to TAC of $825 million in the third quarter. TAC as a
percentage of advertising revenues was 31% in both the fourth quarter and
the third quarter.
The majority of TAC expense is related to amounts ultimately paid to our
AdSense partners, which totaled $916 million in the fourth 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 $60
million in the fourth 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 $307 million, or 10% of revenues, in the
fourth quarter of 2006, compared to $223 million, or 8% of revenues, in the
third quarter.
Operating Expenses - Operating expenses, other than cost of revenues, were
$862 million in the fourth quarter. These operating expenses included $493
million in payroll-related and facilities expenses.
Stock-Based Compensation - In the fourth quarter, the total charge related
to stock-based compensation was $134 million as compared to $100 million in
the third quarter.
We currently anticipate that we will launch our employee transferable stock
options (TSO) program in the second quarter of 2007. Because all
outstanding stock options granted under our 2004 Stock Plan after our
initial public offering to employees other than our Executive Management
Group will be modified to allow selling under the program, we expect to
incur a modification charge in accordance with GAAP of approximately $90
million in the second quarter of 2007 related to vested options as of the
end of that quarter and a charge of approximately $160 million over their
remaining vesting periods of up to approximately four years related to
unvested options.
The market value of our stock used to compute the above forecasted
modification charges was $494 per share. The actual charge will be different
to the extent the number of options outstanding at the time we launch the
TSO program is different than our expectations, or to the extent the
variables used to revalue these options, including the market value and
volatility of our stock, are different.
Also, the fair value of each option granted under the TSO program in the
future will be greater, resulting in more stock-based compensation per
option.
Before these incremental charges related to the TSO program, we currently
estimate stock-based compensation charges for grants to employees prior to
January 1, 2007 to be approximately $621 million for 2007. This does not
include expenses to be recognized related to employee stock awards that are
granted after January 1, 2007 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% per year.
Operating Income - GAAP operating income in the fourth quarter of 2006 was
$1.06 billion, or 33% of revenues. This compares to GAAP operating income
of $931 million, or 35% of revenues, in the third quarter. Non-GAAP
operating income in the fourth quarter was $1.20 billion, or 37% of
revenues. This compares to non-GAAP operating income of $1.03 billion, or
38% of revenues, in the third quarter.
Net Income - GAAP net income for the fourth quarter of 2006 was $1.03
billion as compared to $733 million in the third quarter. Non-GAAP net
income was $997 million in the fourth quarter, compared to $812 million in
the third quarter. GAAP EPS for the fourth quarter was $3.29 on 313 million
diluted shares outstanding, compared to $2.36 for the third quarter, on 311
million diluted shares outstanding. Non-GAAP EPS for the fourth quarter was
$3.18, compared to $2.62 in the third quarter.
Income Taxes - Our effective tax rate was 13% for the fourth quarter of 2006
and 23% for the full year 2006.
In December 2006, Google entered into an Advanced Pricing Agreement ("APA")
with the IRS in connection with certain intercompany transfer pricing
arrangements. The APA applies to the taxation years beginning in 2003. As a
result of the APA, we reduced certain of our income tax contingency reserves
and recognized an income tax benefit of $90 million in the fourth quarter.
This amount is excluded from our non-GAAP results for the quarter and for
the year.
Also, in the fourth quarter, the 2006 R&D tax credit was signed into federal
law, which resulted in a $78 million benefit to our provision for income
taxes. $43 million of this benefit pertained to the first three quarters of
2006 and is excluded from our non-GAAP results for the fourth quarter.
Our non-GAAP effective tax rate, defined as our income before income taxes
divided into the sum obtained by adding the applicable aforementioned
discrete items to our provision for income taxes, for the fourth quarter and
for the year was 24% and 26%, respectively. Our effective tax rate will be
greater in 2007 under the APA than it would have been without it. However,
we expect our effective tax rate for 2007 will be at or below 30%.
Cash Flow and Capital Expenditures - Net cash provided by operating
activities for the fourth quarter of 2006 totaled $911 million as compared
to $1 billion for the third quarter. In the fourth quarter of 2006, capital
expenditures were $367 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 fourth quarter, free cash flow was $544 million.
In 2007, 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 December 31, 2006, cash, cash equivalents, and marketable
securities were $11.2 billion.
On a worldwide basis, Google employed 10,674 full-time employees as of
December 31, 2006, up from 9,378 full time employees as of September 30,
2006.
WEBCAST AND CONFERENCE CALL INFORMATION
A live audio webcast of Google's fourth 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 Wednesday,
February 7, 2007 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 5499052.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements that involve risks
and uncertainties, including statements relating to the costs associated
with implementing our TSO program, our plans to invest in our business, our
expected stock-based compensation charges, the expected dilution related to
equity grants to our employees, our anticipated effective tax rate for 2007,
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, 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 September 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 Annual
Report on Form 10-K for the year ended December 31, 2006, which will be
filed with the SEC in March 2007. All information provided in this release
and in the attachments is as of January 31, 2007, 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, non-GAAP effective tax rate, 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", Reconciliations of GAAP
to non-GAAP effective tax rate for discrete tax items" 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.
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 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 FAS 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 FAS 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 FAS 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 EPS. We define non-GAAP net income as net income
plus stock-based compensation, less the related tax effects minus certain
discrete benefits to our provision for income taxes. We define non-GAAP EPS
as non-GAAP net income divided by the weighted average shares, on a
fully-diluted basis, outstanding as of December 31, 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, as well as certain discrete benefits to our
provision for income taxes. 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 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.
Non-GAAP effective tax rates. We define the non-GAAP effective tax rates as
income before income taxes divided into the sum obtained by adding certain
discrete items to our provision for income taxes. These discrete items
included amounts we were able to deduct from our provision for income taxes
as a result of releasing certain reserves upon our entering into an advanced
pricing agreement with the IRS and the enactment of the 2006 R&D tax credit
in the fourth quarter of 2006. We consider this non-GAAP financial measure
to be a useful metric for management and investors because it excludes the
effect of certain discrete items so that Google's management and investors
can compare Google's recurring earnings results over multiple periods. The
same limitations described above regarding Google's use of non-GAAP
operating income and non-GAAP operating margin apply to our use of the
non-GAAP effective tax rates. Management compensates for these limitations
by providing specific information regarding the GAAP amounts excluded from
the non-GAAP effective tax rates and evaluating the non-GAAP effective tax
rates together with the effective tax rates computed on a GAAP basis.
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 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.
DISCLOSURE RELATED TO TRANSFERABLE STOCK OPTION PROGRAM:
Google may file a registration statement (including a prospectus) with the
SEC for the offering to which this communication relates. Before you invest,
you should read the prospectus in that registration statement and other
documents Google has filed with the SEC for more complete information about
Google and this offering. You may get these documents for free by visiting
EDGAR on the SEC Web site at www.sec.gov. Alternatively, Google will arrange
to send you the prospectus after filing if you request it by calling
toll-free 1-866-468-4664 or sending an e-mail to investors@google.com.
Investor Contact:
Maria Shim
650-253-7663
marias@google.com
Media Contact:
Jon Murchinson
650-253-4437
jonm@google.com
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