Google Announces Third Quarter 2007 Results

October 18, 2007; 11:38 AM

MOUNTAIN VIEW, Calif. -- Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended September 30, 2007.

"We are very pleased with the impressive growth we experienced across our business," said Eric Schmidt, CEO of Google. "Our core search advertising business experienced continued momentum driven by growth in monetization and traffic, and we are creating a wider and deeper ads system through our focus on innovation, bringing more ad formats to our advertisers. Our efforts to offer more products and services in international markets as well as effectively grow our technology infrastructure and add to our deep talent base during the quarter helped to deliver growth by enabling Google to reach more users around the world."

Q3 Financial Summary

Google reported revenues of $4.23 billion for the quarter ended September 30, 2007, an increase of 57% compared to the third quarter of 2006 and an increase of 9% compared to the second quarter of 2007. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the third quarter of 2007, TAC totaled $1.22 billion, or 29% 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, as well as free cash flow, an alternative non-GAAP measure of liquidity, are described below and are reconciled to the corresponding GAAP measures in the accompanying financial tables.

• GAAP operating income for the third quarter of 2007 was $1.32 billion, or 31% of revenues. This compares to GAAP operating income of $1.10 billion, or 29% of revenues, in the second quarter of 2007. Non-GAAP operating income in the third quarter of 2007 was $1.52 billion, or 36% of revenues. This compares to non-GAAP operating income of $1.35 billion, or 35% of revenues, in the second quarter of 2007.

• GAAP net income for the third quarter of 2007 was $1.07 billion as compared to $925 million in the second quarter of 2007. Non-GAAP net income in the third quarter of 2007 was $1.24 billion, compared to $1.12 billion in the second quarter of 2007.

• GAAP EPS for the third quarter of 2007 was $3.38 on 317 million diluted shares outstanding, compared to $2.93 for the second quarter of 2007 on 315 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2007 was $3.91, compared to $3.56 in the second quarter of 2007.

• Non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, and non-GAAP EPS are computed net of stock-based compensation (SBC). In the third quarter of 2007, the charge related to SBC was $198 million as compared to $242 million in the second quarter of 2007. Tax benefits related to SBC have also been excluded from these non-GAAP measures. The tax benefit related to SBC was $31 million in the third quarter of 2007 and $43 million in the second quarter of 2007. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release.

Q3 Financial Highlights

Revenues - Google reported revenues of $4.23 billion for the quarter ended September 30, 2007, representing a 57% increase over third quarter 2006 revenues of $2.69 billion and a 9% increase over second quarter 2007 revenues of $3.87 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues - Google-owned sites generated revenues of $2.73 billion, or 65% of total revenues, in the third quarter of 2007. This represents a 68% increase over third quarter 2006 revenues of $1.63 billion and a 10% increase over second quarter 2007 revenues of $2.49 billion.

Google Network Revenues - Google's partner sites generated revenues, through AdSense programs, of $1.45 billion, or 34% of total revenues, in the third quarter of 2007. This represents a 40% increase over network revenues of $1.04 billion generated in the third quarter of 2006 and an 8% increase over second quarter 2007 revenues of $1.35 billion.

International Revenues - Revenues from outside of the United States totaled $2.03 billion, representing 48% of total revenues in the third quarter of 2007, compared to 44% in the third quarter of 2006 and 48% in the second quarter of 2007. Had foreign exchange rates remained constant from the second quarter of 2007 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $24 million lower. Had foreign exchange rates remained constant from the third quarter of 2006 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $121 million lower.

Revenues from the United Kingdom totaled $661 million, representing 16% of revenue in the third quarter of 2007, compared to 16% in the third quarter of 2006 and 15% in the second quarter of 2007.

Paid Clicks - Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 45% over the third quarter of 2006 and approximately 5% over the second quarter of 2007.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.12 billion in the third 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 $105 million in the third quarter of 2007.

Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data center operational expenses, credit card processing charges as well as content acquisition costs, increased to $441 million, or 10% of revenues, in the third quarter of 2007, compared to $412 million, or 11% of revenues, in the second quarter of 2007.

Operating Expenses - Operating expenses, other than cost of revenues, were $1.25 billion in the third quarter of 2007, or 30% of revenues, compared to $1.21 billion in the second quarter of 2007, or 31% of revenues. The operating expenses in the third quarter of 2007 included $659 million in payroll-related and facilities expenses, compared to $625 million in the second quarter of 2007.

Stock-Based Compensation (SBC) - In the third quarter of 2007, the total charge related to SBC was $198 million as compared to $242 million in the second quarter of 2007. In the second quarter of 2007, we launched our employee transferable stock option (TSO) program and, in connection with this launch, incurred an SBC modification charge of $62 million.

We currently estimate stock-based compensation charges for grants to employees prior to October 1, 2007 to be approximately $801 million for 2007. This does not include expenses to be recognized related to employee stock awards that are granted after October 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 third quarter of 2007 was $1.32 billion, or 31% of revenues. This compares to GAAP operating income of $1.10 billion, or 29% of revenues, in the second quarter of 2007. Non-GAAP operating income in the third quarter of 2007 was $1.52 billion, or 36% of revenues. This compares to non-GAAP operating income of $1.35 billion, or 35% of revenues, in the second quarter of 2007.

Net Income - GAAP net income for the third quarter of 2007 was $1.07 billion as compared to $925 million in the second quarter of 2007. Non-GAAP net income was $1.24 billion in the third quarter of 2007, compared to $1.12 billion in the second quarter of 2007. GAAP EPS for the third quarter of 2007 was $3.38 on 317 million diluted shares outstanding, compared to $2.93 for the second quarter of 2007, on 315 million diluted shares outstanding. Non-GAAP EPS for the third quarter of 2007 was $3.91, compared to $3.56 in the second quarter of 2007.

Income Taxes - Our effective tax rate was 27.3% for the third quarter of 2007 compared to 25.5% in the second quarter of 2007.

Cash Flow and Capital Expenditures - Net cash provided by operating activities for the third quarter of 2007 totaled $1.63 billion as compared to $1.23 billion for the second quarter of 2007. In the third quarter of 2007, capital expenditures were $553 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 of 2007, free cash flow was $1.08 billion.

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 September 30, 2007, cash, cash equivalents, and marketable securities were $13.1 billion.