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Google Announces Third Quarter Fiscal 2005 Results
MOUNTAIN VIEW, Calif. – October 20, 2005 – Google Inc. (NASDAQ: GOOG)
today announced financial results for the quarter ended September 30,
2005.„Although this is typically a slower season for Internet properties, we
had another exceptional quarter,” said Eric Schmidt, Google chief
executive officer. „Our focus on end users and on quality of
information and advertising worldwide continues to work extremely well.
We are very pleased with how well this is working at scale.”Financial Summary
Google reported record revenues of $1.578 billion for the quarter ended
September 30, 2005, up 96% compared to the third quarter of 2004, and
up 14% compared to last quarter. Google reports its revenues,
consistent with GAAP, on a gross basis without deducting traffic
acquisition costs, or TAC. This quarter, TAC totaled $530 million, or
34% percent of advertising revenues.We have reported operating income, net income and earnings per share
(EPS) on a GAAP basis and have also provided related non-GAAP, or pro
forma, results on a supplemental basis below. Please also refer to the
section below titled „About non-GAAP financial measures.”· GAAP operating income for the third quarter was $529 million. This
compares to $476 million in the second quarter, an increase of 11%.
Non-GAAP operating income was $596 million, compared to $523 million in
the second quarter, an increase of 14%.
· GAAP net income for the third quarter was $381 million as compared
to $343 million in the second quarter, an increase of 11%. Non-GAAP
net income was $437 million, compared to $381 million in the second
quarter, an increase of 15%.
· GAAP EPS for the third quarter was $1.32 on 290 million diluted
shares outstanding, compared to $1.19 for the second quarter, on 287
million diluted shares outstanding. Non-GAAP EPS was $1.51, compared
to $1.33 in the second quarter.
· Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS
are all pro forma measures, computed net of stock-based compensation
(SBC) and in-process research and development (IPR&D) charges. This
quarter, the SBC charge was $46 million as compared to $47 million in
the second quarter. The IPR&D charge was $21 million this quarter,
with no IPR&D charge in the second quarter. The IPR&D charge relates
to an acquisition in the third quarter. Tax benefits related to SBC
charges have been excluded from non-GAAP net income and non-GAAP EPS.
The tax benefit related to SBC totaled $11 million in the third quarter
and $9 million in the second quarter.
· Reconciliations of non-GAAP measures to GAAP operating income, net
income, EPS, and research and development (R&D) expenses are included
at the end of this release.Financial Highlights
Revenues – Revenues in the third quarter totaled a record $1.578
billion, representing a 96% increase over third quarter 2004 revenues
of $806 million, and a 14% increase over second quarter 2005 revenues
of $1.384 billion. Growth since last quarter was driven by the
continued expansion of our global advertiser base and partner network,
as well as by product improvements, and more than offset the expected
seasonal slowdown in traffic.Google Sites Revenues – Google-owned sites generated $885 million, or
56% of total revenues. This represents a 20% increase over the second
quarter revenues of $737 million.Google Network Revenues – Revenues generated on Google’s partner
sites, through AdSense programs, contributed $675 million, or 43% of
total revenues. This is a 7% increase over network revenues of $630
million generated in the second quarter.International Revenues – Revenues from outside of the United States
contributed 39% of total revenue, compared to 39% in the second quarter
and 35% in the third quarter of 2004.TAC – Traffic Acquisition Costs, the portion of revenues shared with
Google’s partners, increased to $530 million. This compares to total
payments to partners of $494 million in the second quarter. TAC as a
percentage of advertising revenues decreased to 34.0% in the third
quarter from 36.1% in the second quarter, reflecting the continued
shift in our revenue mix from Google network revenue to Google site
revenue.Operating Margins – GAAP operating income in the third quarter was $529
million, or 33.5% of revenues. This compares to GAAP operating income
of $476 million, or 34.4% of revenues, in the second quarter. Non-GAAP
operating income in the third quarter was $596 million, or 37.8% of
revenues. This compares to non-GAAP operating income of $523 million,
also 37.8% of revenues, in the second quarter. Increases in research
and development (R&D) and general and administrative (G&A) spending as
a percentage of revenues were balanced by growth in higher margin
Google site revenue, resulting in steady margins quarter over quarter.Income Taxes – Our effective tax rate remained steady at 31% this
quarter and continues to reflect the mix of business generated in the
U.S. and business generated through our Irish subsidiary. Our
provision for income taxes was not materially affected by stock option
activity, although we did realize a $105 million reduction to our
income taxes payable as a result of this activity. We expect that the
effective tax rate for the full year of 2005 will be approximately 30%.
However, if future revenues recognized by Google’s Irish subsidiary
are not as proportionately great as expected, Google’s effective tax
rate will be higher than our expectations.Cash Flow and Capital Expenditures – Net cash provided by operating
activities for the third quarter totaled $647 million as compared to
$625 million for the second quarter. Free cash flow, an alternative
non-GAAP measure of liquidity, is defined as cash provided by operating
activities less capital expenditures. This quarter we generated $354
million in free cash flow. Our capital expenditures in the quarter
were $293 million as compared to $157 million last quarter, and
primarily reflect acquisitions of additional land and office space to
support our headquarters in Mountain View, California, and purchases of
production servers and networking equipment. We are now estimating
over $800 million in capital expenditures for 2005.Adjusted EBITDA – Adjusted EBITDA is defined as income before interest,
taxes, depreciation, amortization, SBC, and IPR&D. It is another
alternative non-GAAP measure of liquidity to GAAP net cash provided by
operating activities. Adjusted EBITDA increased to approximately $672
million in the third quarter, or 43% of revenues, from $590 million, or
43% of revenues, in the second quarter.Reconciliations of free cash flow and adjusted EBITDA to net cash
provided by operating activities, the GAAP measure of liquidity, are
included at the end of this release.Cash – As of September 30, 2005, Google had a cash, cash equivalents
and marketable securities balance of just over $7.6 billion, of which
$4.3 billion was raised during a follow-on equity offering that was
completed this quarter.On a worldwide basis, Google employed 4,989 full time employees as of
September 30, 2005, up from 4,183 as of June 30, 2005.Webcast and conference call information
A live audio webcast of Google’s third-quarter earnings release call
will be available at http://investor.google.com/news.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) through midnight
Thursday, November 3, 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 7995844.Forward looking statements
This press release contains forward-looking statements that involve
risks and uncertainties, including statements relating to our
anticipated effective tax rate and our expected capital expenditures
for 2005. 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 international operations,
the mix of our US revenue as compared to our non-US revenue, the fact
that we may have exposure to greater than expected tax liabilities, and
our need to expend capital to accommodate the growth of our business,
as well as those risks and uncertainties included under the captions
„Factors That Could Affect Future Results” and „Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” in our report on Form 10-Q for the quarter ended June
30, 2005, which is on file with the SEC and is available on our
investor relations website at investor.google.com and on the SEC’s
website at www.sec.gov. Additional information will also be set forth
in our quarterly report on Form 10-Q for the quarter ended September
30, 2005, which will be filed with the SEC in November 2005. All
information provided in this release and in the attachments is as of
October 20, 2005 and Google undertakes no duty to update this
information.About non-GAAP financial measures
To supplement Google’s consolidated financial statements presented in
accordance with GAAP, Google uses the following measures defined as
non-GAAP financial measures by the SEC: non-GAAP operating income,
non-GAAP net income, non-GAAP EPS, free cash flow, adjusted EBITDA, and
non-GAAP R&D expenses. The presentation of this financial information
is not intended to be considered in isolation or as a substitute for
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,”
„Reconciliations of non-GAAP liquidity measures to the nearest
comparable GAAP measures,” and „Reconciliation of non-GAAP research
and development expenses to GAAP research and development expenses”
included at the end of this release.Google’s 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 core business operating results. Google
believes that both management and investors benefit from referring to
these non-GAAP financial measures in assessing Google’s performance
and when planning, forecasting and analyzing future periods. These
non-GAAP financial measures also facilitate management’s internal
comparisons to Google’s historical performance and liquidity and our
competitors’ operating results. We include these non-GAAP financial
measures because we believe they are useful to investors in allowing
for greater transparency with respect to supplemental information used
by management in its financial and operational decision making.Google has computed its non-GAAP liquidity measures using the same
consistent method from quarter to quarter and year to year. Google
expects to use consistent methods for computation of other non-GAAP
financial measures introduced this quarter, including non-GAAP
operating income, non-GAAP net income, non-GAAP EPS, and non-GAAP R&D
expenses. 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.