MOUNTAIN VIEW, Calif. - April 19, 2007 - Google Inc. (NASDAQ: GOOG)
today announced financial results for the quarter ended March 31,
2007.
"The global growth of our core search and ads business and our focus
on building our partnerships drove our strong results in the quarter,"
said Eric Schmidt, CEO of Google. "We continued to expand our
worldwide footprint, adding important new partners and growing our
platform to increase our ability to deliver targeted and measurable
ads. The ongoing expansion of our network allows us to improve the
user experience through new opportunities and programs."
Q1 Financial Summary
Google reported revenues of $3.66 billion for the quarter ended March
31, 2007, an increase of 63% compared to the first quarter of 2006 and
an increase of 14% compared to the fourth quarter of 2006. Google
reports its revenues, consistent with GAAP, on a gross basis without
deducting traffic acquisition costs, or TAC. In the first quarter of
2007, TAC totaled $1.13 billion, 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 first quarter of 2007 was $1.22
billion, or 33% of revenues. This compares to GAAP operating income
of $1.06 billion, or 33% of revenues, in the fourth quarter of 2006.
Non-GAAP operating income in the first quarter of 2007 was $1.41
billion, or 38% of revenues. This compares to non-GAAP operating
income of $1.20 billion, or 37% of revenues, in the fourth quarter of
2006.
· GAAP net income for the first quarter of 2007 was $1.0 billion as
compared to $1.03 billion in the fourth quarter of 2006. Non-GAAP net
income in the first quarter of 2007 was $1.16 billion, compared to
$997 million in the fourth quarter of 2006.
· GAAP EPS for the first quarter of 2007 was $3.18 on 315 million
diluted shares outstanding, compared to $3.29 for the fourth quarter
of 2006 on 313 million diluted shares outstanding. Non-GAAP EPS in
the first quarter of 2007 was $3.68, compared to $3.18 in the fourth
quarter of 2006.
· 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 from the calculation of non-GAAP
net income and EPS tax benefits of $90 million related to the advanced
pricing agreement we entered into with the IRS in December 2006 and
$43 million related to the 2006 R&D tax credit. In the first quarter
of 2007, the charge related to SBC was $184 million as compared to
$134 million in the fourth quarter of 2006. Tax effects related to
SBC have also been excluded from these non-GAAP measures. The tax
benefit related to SBC was $27 million in the first quarter of 2007
and $35 million in the fourth quarter of 2006. Reconciliations of non-
GAAP measures to GAAP operating income, net income, and EPS are
included at the end of this release.
Q1 Financial Highlights
Revenues - Google reported revenues of $3.66 billion for the quarter
ended March 31, 2007, representing a 63% increase over first quarter
2006 revenues of $2.25 billion and a 14% increase over fourth quarter
2006 revenues of $3.21 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 $2.28
billion, or 62% of total revenues, in the first quarter of 2007. This
represents a 76% increase over first quarter 2006 revenues of $1.30
billion and a 15% increase over fourth quarter 2006 revenues of $1.98
billion.
Google Network Revenues - Google's partner sites generated revenues,
through AdSense programs, of $1.35 billion, or 37% of total revenues,
in the first quarter of 2007. This represents a 45% increase over
network revenues of $928 million generated in the first quarter of
2006 and a 12% increase over fourth quarter 2006 revenues of $1.20
billion.
International Revenues - Revenues from outside of the United States
totaled $1.71 billion, representing 47% of total revenues in the first
quarter of 2007, compared to 42% in the first quarter of 2006 and 44%
in the fourth quarter of 2006. Had foreign exchange rates remained
constant from the fourth quarter of 2006 through the first quarter of
2007, our revenues in the first quarter of 2007 would have been $23
million lower. Had foreign exchange rates remained constant from the
first quarter of 2006 through the first quarter of 2007, our revenues
in the first quarter of 2007 would have been $115 million lower.
Revenues from the United Kingdom totaled $578 million, representing
16% of revenue in the first quarter of 2007, compared to 15% in the
first quarter of 2006 and 15% in the fourth quarter of 2006.
Paid Clicks - Aggregate paid clicks, which include clicks related to
ads served on Google sites and our AdSense partners, increased
approximately 52% over the first quarter of 2006 and approximately 13%
over the fourth quarter of 2006.
TAC - Traffic Acquisition Costs, the portion of revenues shared with
Google's partners, increased to $1.13 billion in the first quarter of
2007. This compares to TAC of $976 million in the fourth quarter of
2006. TAC as a percentage of advertising revenues was 31% in the
first quarter of 2007 and the fourth quarter of 2006.
The majority of TAC expense is related to amounts ultimately paid to
our AdSense partners, which totaled $1.05 billion in the first quarter
of 2007. TAC is also related to amounts ultimately paid to certain
distribution partners and others who direct traffic to our website,
which totaled $73 million in the first quarter of 2007.
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 $345 million, or 9% of revenues, in
the first quarter of 2007, compared to $307 million, or 10% of
revenues, in the fourth quarter of 2006.
Operating Expenses - Operating expenses, other than cost of revenues,
were $972 million in the first quarter of 2007, compared to $862
million in the fourth quarter of 2006. These operating expenses
included $506 million in payroll-related and facilities expenses,
compared to $493 million in the fourth quarter of 2006.
Stock-Based Compensation - In the first quarter of 2007, the total
charge related to stock-based compensation was $184 million as
compared to $134 million in the fourth quarter of 2006.
We anticipate that we will launch our employee transferable stock
options (TSO) program in the second quarter. We expect to incur a
modification charge for SBC in accordance with GAAP of approximately
$90 million in the second quarter related to vested options as of the
end of the quarter and a charge of approximately $170 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 $476 per share.
Also, as a result of allowing eligible options to be transferred in
the TSO program, the fair value of each TSO granted in the future will
be greater than it otherwise would be, 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 April 1, 2007 to be approximately $639 million for
2007. This does not include expenses to be recognized related to
employee stock awards that are granted after April 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% this year.
Operating Income - GAAP operating income in the first quarter of 2007
was $1.22 billion, or 33% of revenues. This compares to GAAP
operating income of $1.06 billion, or 33% of revenues, in the fourth
quarter of 2006. Non-GAAP operating income in the first quarter of
2007 was $1.41 billion, or 38% of revenues. This compares to non-GAAP
operating income of $1.20 billion, or 37% of revenues, in the fourth
quarter of 2006.
Net Income - GAAP net income for the first quarter of 2007 was $1.0
billion as compared to $1.03 billion in the fourth quarter of 2006.
Non-GAAP net income was $1.16 billion in the first quarter of 2007,
compared to $997 million in the fourth quarter of 2006. GAAP EPS for
the first quarter of 2007 was $3.18 on 315 million diluted shares
outstanding, compared to $3.29 for the fourth quarter of 2006, on 313
million diluted shares outstanding. Non-GAAP EPS for the first
quarter of 2007 was $3.68, compared to $3.18 in the fourth quarter of
2006.
Income Taxes - Our effective tax rate was 26% for the first quarter of
2007.
Cash Flow and Capital Expenditures - Net cash provided by operating
activities for the first quarter of 2007 totaled $1.22 billion as
compared to $911 million for the fourth quarter of 2006. In the first
quarter of 2007, capital expenditures were $597 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
first quarter of 2007, free cash flow was $623 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 March 31, 2007, cash, cash equivalents, and marketable
securities were $11.9 billion.
On a worldwide basis, Google employed 12,238 full-time employees as of
March 31, 2007, up from 10,674 full time employees as of December 31,
2006.
Board of Directors
Google also announced that Eric Schmidt has been elected Chairman of
the Board of Directors, and John L. Hennessy, President of Stanford
University, has been elected Lead Independent Director. Dr. Schmidt
has been a Director since March 2001, and Dr. Hennessy has been a
Director since April 2004.
WEBCAST AND CONFERENCE CALL INFORMATION
A live audio webcast of Google's first quarter 2007 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, April 26, 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 4168088.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements that involve
risks and uncertainties, including statements relating to the expenses
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, 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, our need to expend capital to accommodate
the growth of the business, the extent to which the number of options
outstanding at the time we launch the TSO program is different than
our expectations, and the extent to which the variables used to
revalue TSOs at the time we launch the TSO program, including the
market value and volatility of our stock, are different than our
expectations, 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 Annual
Report on Form 10-K for the year ended December 31, 2006, 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 March 31, 2007, which will be filed with the
SEC in May 2007. All information provided in this release and in the
attachments is as of April 19, 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 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 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. Because of varying available
valuation methodologies, subjective assumptions and the variety of
award types that companies can use under 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.
In addition, in the fourth quarter of 2006, we subtracted discrete tax
items consisting of 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 define non-GAAP EPS as non-GAAP net income divided by the weighted
average shares, on a fully-diluted basis, outstanding as of March 31,
2007. 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. In addition, in the fourth quarter of 2006, we
excluded the discrete benefits to our provision for income taxes
discussed above. 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 our
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.
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 website 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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