Q3 2008 Quarterly Earnings Summary
Third Quarter 2008 Highlights
•
Revenue growth of 31% Y/Y and 3% Q/Q
– – –
Google properties revenue growth of 34% Y/Y and 4% Q/Q G l ti th f d Network revenues increased 15% Y/Y and 1% Q/Q International revenue was $2.8 billion
•
Operational Highlights
– – –
Traffic and revenue solid in Q3 despite difficult economic environment Key investments in our core search and ads businesses Increasing prioritization of our newer investments:
• Apps, Display, YouTube, and Geo
•
Maintaining a clear focus on operational efficiency and cost containment, better positioning Google for healthy long-term growth
2
Quarterly Revenue
5,541
$5,500 $5,000 $4,500 $4,000 $3,500
5,367 Q3’08 Y/Y Growth = 31% Q3’08 Q/Q Growth = 3% Q G % 5,186 4,827 4,231 3,872 3,664 3,205
1,455 1,352 1,345 1,198 1,037 997 928 799 675 2,282 2,486 1,977 885 1,098 1,297 1,432 1,626 3,122 2,735 3,672 3,400 3,530 1,636 1,680 1,686 1,655
$ in millions
$3,000 $2,500 $2,000
2,690 2,456 2,254 1,919 1,578
$1,500 1,257 1,384 $1,000 $500
657 584 630
737
$0
05
05
05
05
06
06
06
06
07
07
07
07
08
08 Q 2'
Q 1'
Q 3'
Q 4'
Q 1'
Q 3'
Q 4'
Q 1'
Q 2'
Q 3'
Q 4'
Q 1'
Google.com
3
Network
Licensing and Other
Q 3'
Q 2'
Q 2'
08
U.S. vs. U S vs International Revenue
5,541
$5,500
5,367 5,186 4,827 4 827 4,231 3,872 3,664 51% 48% 48% 2,690 47% 44% 44% 52% 58% 61% 62% 58% 56% 56% 53% 52% 52% 49% 48% 49% 2,456 2,254 1,919 1,578 42% 38% 39% 1,257 1,384 42% 48% 3,205 52% 51%
$5,000 $5 000 $4,500 $4,000 $3,500
$ in millions n
$3,000 $2,500 $2,000 $1,500 $1,000 $500
39% 39% 61%
61%
$0
Q 1' 05 Q 2' 05
Q 3' 05
Q 4' 05
Q 1' 06
US
4
International
Q 3' 08
Q 2' 06
Q 3' 06
Q 4' 06
Q 2' 07
Q 3' 07
Q 4' 07
Q 1' 08
Q 2' 08
Q 1' 07
Traffic Acquisition Costs
$1,500 $ , $1,400 $1,300 $1,200 $1,100 $1,000
$ in millions n
976
31.0% 31 0% 30.7% 0% 31.0% 31 37.2% 36.1% 34.0% 33.2% 32.5% 32.3%
1,440
1,4861,4741,495
40%
1,221 1,125 1,148
35%
30%
29.9% 29.1%30.3% 29.2% 28.4% 27.9%
$900 $800 $700 $600 $500 $400 $300 $200 $100 $0
06 05 05
462 494 530 629 785 723
825
25%
20%
15%
10%
06 07 05 05 06 06 07 07 07 08 Q 4' Q 1' Q 4' Q 1' Q 2' Q 1' Q 2' Q 4' Q 2' Q 3' Q 2' Q 3' Q 3' Q 3' 08 08
Q 1'
TAC
5
TAC as % of Advertising Revenues
Costs and Expenses
GAAP $Millions
Cost of Revenues
Percent of revenues
Q3'07
$1,663
39%
Q2'08
$2,148
40%
Q3'08
$2,173
40%
Research & Development
Percent of revenues
$549
13%
$682
13%
$705
13%
Sales & Marketing
Percent of revenues
$381
9%
$485
9%
$509
9%
General & Administrative
Percent of revenues
$321
8%
$474
9%
$412
7%
Total Costs & Expenses
Percent of revenues
$2,914
69%
$3,789
71%
$3,799
69%
Non GAAP Non-GAAP $Millions
Cost of Revenues
Percent of revenues
Q3'07
$1,659
39%
Q2'08
$2,139
40%
Q3'08
$2,162
39%
Research & Development
Percent of revenues
$418
10%
$495
10%
$536
10%
Sales & Marketing
Percent of revenues
$351
8%
$442
8%
$445
8%
General & Administrative
Percent of revenues
$288
7%
$440
8%
$376
7%
Total Costs & Expenses
Percent of revenues
$2,716
64%
$3,516
66%
$3,519
64%
Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and expenses to GAAP costs and expenses
6
Profitability
GAAP $Millions Income from Operations Operating Margin Net Income EPS (diluted) Non-GAAP $Millions Income from Operations Operating Margin Net Income EPS (diluted) Q3'07 $1,318 $
31%
Q2'08 1,578
29%
Q3'08 $ $ 1,743
31%
$1,070 $ $3.38
1,247
$3.92
1,346
$4.24
Q3'07 $1,516 $
36%
Q2'08 1,851
34%
Q3'08 $ $
$
2,023
37%
$1,237 $ $3.91 $
1,472
4.63
1,563
4.92
Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations pp g p measures to the nearest comparable GAAP measures
7
Free Cash Flow
$Millions Net cash provided by operating activities Less purchases of property and equipment q p
Q3'07
$1,633 $1 633
Q2'08
$1,766 $1 766
Q3'08
$2,185 $2 185
($ ) ($553)
($ ) ($697)
($ ) ($452)
Free cash flow (Non-GAAP)
$1,080
$1,069
$1,733
8
Cash Flow Hedging 101: Why does Google need cash flow hedging?
• Over 50% of Google’s revenues are billed in currencies other
than the U.S. dollar; however, we ultimately measure and report our financial results in U.S. dollars. • As a result, we are subject to the impact of foreign exchange fluctuations on our revenue, earnings, and cash flow. o If the USD strengthens, our revenues invoiced in other currencies become less when translated to USD, and vice versa. • In order to manage this risk, we have implemented a program g g g to hedge against downside risk to our revenues and earnings reported in USD.
Cash Flow Hedging 101: How does Google hedge?
• We have a rolling program of foreign exchange options to
hedge forecasted revenues over the next 18 months. • We hedge revenue, but the amount of options we purchase is computed based on our economic exposure to a currency (revenue less expenses) • In Q3 2008, we hedged revenues denominated in Euro, CAD, and GBP. o Note, however, that our GBP hedges were rolled out late in the quarter - so there was no benefit realized to revenues.
Cash Flow Hedging 101: SFAS 133 – How does the accounting work?
•
SFAS 133 is the standard we use to account for our cash flow hedging program.
o
Prior to maturity, an option’s unrealized gain or “intrinsic value” – the difference between the strike price of the option and the spot rate of the underlying currency – is recorded as Other Comprehensive Income (OCI) on our balance sheet on a tax effected basis. At maturity, any unrealized gain is initially recorded to OCI and subsequently recognized as revenue – on a gross basis or before the tax effect - when the corresponding revenue (hedged item) is recognized. During Q3, the amount reclassified to revenue from OCI was $34M. The unrealized gain in OCI does not necessarily reflect the eventual benefit to revenue; the ultimate benefit will depend on exchange rates at the maturity of the option contracts. The benefit to revenue will be recognized when the corresponding revenue (hedged item) is recognized within the next 18 months.
o
o o
Cash Flow Hedging 101: SFAS 133 – How does the accounting work?
• Because we do not purchase in-the-money options (options with
“intrinsic value”) the cost will always equal their “time value ” intrinsic value ), time value.
• The cost or “time value” of the option is amortized over its term on a
mark to market mark-to-market basis (not on a straight-lined basis) to Interest straight lined Income and Other, net.
• As a result, the amount of amortization expense we recognize in any p g y
particular quarter is impacted by how much the option moves into or out of the money, as well as the underlying currency’s volatility.
• The more an option moves into or out of the money, generally the f
lower its “time value,” and the greater the amount of amortization expense we will recognize. This could result in a front end loading of expense. expense
Table 1 - Reconciliations of non-GAAP costs and expenses to GAAP costs and expenses
$Millions Cost of Revenues (GAAP) Less: Stock-based compensation Cost of Revenues (non-GAAP) Research and development (GAAP) Less: Stock-based compensation Stock based Research and development (non-GAAP) Sales and marketing (GAAP) Less: Stock-based compensation Sales and marketing (non-GAAP) General and administrative (GAAP) Less: Stock-based compensation General and administrative (non-GAAP) Total costs and expenses (GAAP) Less: Stock based compensation Stock-based Total costs and expenses (non-GAAP) $ $ $ $ $ $ $ $ $ $ Q3'07 1,663 (4) 1,659 549 (131) 418 381 (30) 351 321 (33) 288 2,914 (198) 2,716 As a % of Revenues (1) 39% $ 39% $ 13% $ 10% $ 9% $ 8% $ 8% $ 7% $ 69% $ 64% $ Q2'08 2,148 (9) 2,139 682 (187) 495 485 (43) 442 474 (34) 440 3,789 (273) 3,516 As a % of Revenues (1) 40% $ 40% $ 13% $ 10% $ 9% $ 8% $ 9% $ 8% $ 71% $ 66% $ Q3'08 2,173 (11) 2,162 705 (169) 536 509 (64) 445 412 (36) 376 3,799 (280) 3,519 As a % of Revenues (1) 40% 39% 13% 10% 9% 8% 7% 7% 69% 64%
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Table 2 - Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures
Figures in millions except per share amounts Income from operations (GAAP) Add: Stock-based compensation Stock based Income from operations (non-GAAP) Net income (GAAP) Add: Stock-based compensation (net of tax) Net income (non-GAAP) Net income per share - diluted (GAAP) Net income per share - diluted (non-GAAP) Shares used in per share calculation - diluted $ $ $ $ $ $
Q3'07 1,318 198 1,516 1,070 167 1,237 3.38 3.91 317
Operating Margin (1) 31% $ 36% $ $ $ $ $
Q2'08 1,578 273 1,851 1,247 225 1,472 3.92 4.63 318
Operating Margin (1) 29% $ 34% $ $ $ $ $
Q3'08 1,743 280 2,023 1,346 217 1,563 4.24 4.92
Operating Margin (1) 31% 37%
( ) (1) Percentages based on GAAP revenues of $4,231 million in Q3 '07, $5,367 million in Q2 '08 and $5,541 million in Q3 '08. g , , , ,
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Q3 2008 Quarterly Earnings Summary