Google Announces First Quarter 2007 Results

April 20, 2007; 05:48 AM
Google Inc. (NASDAQ: GOOG) 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.