Google Announces Second Quarter 2007 Results

Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended June 30, 2007.

“Our performance once again demonstrates the strength of our core search and ads business. The growth in our global traffic combined with our ongoing improvements in monetization resulted in solid revenue growth, even in a seasonally slow quarter,” said Eric Schmidt, CEO of Google. “We continue to expand our commitment to deliver compelling hosted applications to businesses of all sizes, most recently agreeing to acquire Postini and its robust set of tools for web communication for the Google Apps suite of products. At the same time, we remain focused on addressing the tremendous opportunities we see worldwide, adding the talent and building the infrastructure that will allow us to continue to provide rich user experiences to Google users around the world.”

Q2 Financial Summary

Google reported revenues of $3.87 billion for the quarter ended June 30, 2007, an increase of 58% compared to the second quarter of 2006 and an increase of 6% compared to the first quarter of 2007. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the second quarter of 2007, TAC totaled $1.15 billion, or 30% 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 second quarter of 2007 was $1.10 billion, or 29% of revenues. This compares to GAAP operating income of $1.22 billion, or 33% of revenues, in the first quarter of 2007. Non-GAAP operating income in the second quarter of 2007 was $1.35 billion, or 35% of revenues. This compares to non-GAAP operating income of $1.41 billion, or 38% of revenues, in the first quarter of 2007.
GAAP net income for the second quarter of 2007 was $925 million as compared to $1.0 billion in the first quarter of 2007. Non-GAAP net income in the second quarter of 2007 was $1.12 billion, compared to $1.16 billion in the first quarter of 2007.
GAAP EPS for the second quarter of 2007 was $2.93 on 315 million diluted shares outstanding, compared to $3.18 for the first quarter of 2007 on 315 million diluted shares outstanding. Non-GAAP EPS in the second quarter of 2007 was $3.56, compared to $3.68 in the first 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 second quarter of 2007, the charge related to SBC was $242 million as compared to $184 million in the first quarter of 2007. Tax benefits related to SBC have also been excluded from these non-GAAP measures. The tax benefit related to SBC was $43 million in the second quarter of 2007 and $27 million in the first 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.
Q2 Financial Highlights

Revenues – Google reported revenues of $3.87 billion for the quarter ended June 30, 2007, representing a 58% increase over second quarter 2006 revenues of $2.46 billion and a 6% increase over first quarter 2007 revenues of $3.66 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues - Google-owned sites generated revenues of $2.49 billion, or 64% of total revenues, in the second quarter of 2007. This represents a 74% increase over second quarter 2006 revenues of $1.43 billion and a 9% increase over first quarter 2007 revenues of $2.28 billion.

Google Network Revenues - Google’s partner sites generated revenues, through AdSense programs, of $1.35 billion, or 35% of total revenues, in the second quarter of 2007. This represents a 36% increase over network revenues of $997 million generated in the second quarter of 2006 and approximately flat with first quarter 2007 revenues of $1.35 billion.

International Revenues - Revenues from outside of the United States totaled $1.84 billion, representing 48% of total revenues in the second quarter of 2007, compared to 42% in the second quarter of 2006 and 47% in the first quarter of 2007. Had foreign exchange rates remained constant from the first quarter of 2007 through the second quarter of 2007, our revenues in the second quarter of 2007 would have been $35 million lower. Had foreign exchange rates remained constant from the second quarter of 2006 through the second quarter of 2007, our revenues in the second quarter of 2007 would have been $121 million lower.

Revenues from the United Kingdom totaled $600 million, representing 15% of revenue in the second quarter of 2007, compared to 15% in the second quarter of 2006 and 16% in the first 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 47% over the second quarter of 2006 and remained approximately the same as the first quarter of 2007.

TAC - Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $1.15 billion in the second quarter of 2007. This compares to TAC of $1.13 billion in the first quarter of 2007. TAC as a percentage of advertising revenues was 30% in the second quarter, compared to 31% in the first quarter of 2007.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.06 billion in the second 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 $87 million in the second 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 $412 million, or 11% of revenues, in the second quarter of 2007, compared to $345 million, or 9% of revenues, in the first quarter of 2007.

Operating Expenses - Operating expenses, other than cost of revenues, were $1.21 billion in the second quarter of 2007, or 31% of revenues, compared to $972 million in the first quarter of 2007 or 27% of revenues. The operating expenses in the second quarter of 2007 included $625 million in payroll-related and facilities expenses, compared to $506 million in the first quarter of 2007.

Stock-Based Compensation (SBC) – In the second quarter of 2007, the total charge related to SBC was $242 million as compared to $184 million in the first quarter of 2007.

We launched our employee transferable stock option (TSO) program in the second quarter of 2007. As a result of the launch of the TSO program, we incurred an SBC modification charge in accordance with GAAP of $62 million in the second quarter related to vested options as of the end of the quarter and expect to incur a charge of approximately $160 million related to unvested options over their remaining vesting periods (up to approximately four years).

We currently estimate stock-based compensation charges for grants to employees prior to July 1, 2007 to be approximately $770 million for 2007. This does not include expenses to be recognized related to employee stock awards that are granted after July 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 second quarter of 2007 was $1.10 billion, or 29% of revenues. This compares to GAAP operating income of $1.22 billion, or 33% of revenues, in the first quarter of 2007. Non-GAAP operating income in the second quarter of 2007 was $1.35 billion, or 35% of revenues. This compares to non-GAAP operating income of $1.41 billion, or 38% of revenues, in the first quarter of 2007.

Net Income – GAAP net income for the second quarter of 2007 was $925 million as compared to $1.0 billion in the first quarter of 2007. Non-GAAP net income was $1.12 billion in the second quarter of 2007, compared to $1.16 billion in the first quarter of 2007. GAAP EPS for the second quarter of 2007 was $2.93 on 315 million diluted shares outstanding, compared to $3.18 for the first quarter of 2007, on 315 million diluted shares outstanding. Non-GAAP EPS for the second quarter of 2007 was $3.56, compared to $3.68 in the first quarter of 2007.

Income Taxes – Our effective tax rate was 25.5% for the second quarter of 2007.

Cash Flow and Capital Expenditures – Net cash provided by operating activities for the second quarter of 2007 totaled $1.23 billion as compared to $1.22 billion for the first quarter of 2007. In the second quarter of 2007, capital expenditures were $575 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 second quarter of 2007, free cash flow was $655 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 June 30, 2007, cash, cash equivalents, and marketable securities were $12.5 billion.

On a worldwide basis, Google employed 13,786 full-time employees as of June 30, 2007, up from 12,238 full time employees as of March 31, 2007.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Google’s second 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, July 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 4803849.