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GOOGLE ANNOUNCES SECOND QUARTER 2006 RESULTS
MOUNTAIN VIEW, Calif. – July 20, 2006 – Google Inc. (NASDAQ: GOOG)
today announced financial results for the quarter ended June 30, 2006.
„Google grew at an impressive pace during a seasonally slower quarter,”
said Eric Schmidt, CEO of Google. „We continue to deliver valuable new
products and services to users around the world through our
partnerships and investments in our business. Our strong performance
results from our clear focus on increasing the quality of user
experience, particularly in search and ads.”
Q2 Financial Summary
Google reported revenues of $2.46 billion for the quarter ended June
30, 2006, an increase of 77% compared to the second quarter of 2005 and
an increase of 9% compared to the first quarter of 2006. Google reports
its revenues, consistent with GAAP, on a gross basis without deducting
traffic acquisition costs, or TAC. In the second quarter of 2006, TAC
totaled $785 million, or 32% 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 in the section titled „About non-GAAP financial
measures” and are reconciled to the corresponding GAAP measure in the
accompanying financial tables.
· GAAP operating income for the second quarter of 2006 was $815
million, or 33% of revenues. This compares to GAAP operating income of
$743 million, or 33% of revenues, in the first quarter of 2006.
Non-GAAP operating income in the second quarter was $925 million, or
38% of revenues. This compares to non-GAAP operating income of $887
million, or 39% of revenues, in the first quarter.
· GAAP net income for the second quarter was $721 million as compared
to $592 million in the first quarter. Non-GAAP net income was $772
million, compared to $697 million in the first quarter.
· GAAP EPS for the second quarter was $2.33 on 310 million diluted
shares outstanding, compared to $1.95 for the first quarter, on 304
million diluted shares outstanding. Non-GAAP EPS was $2.49, compared
to $2.29 in the first quarter.
· In the second quarter of 2006, non-GAAP operating income is
computed net of stock-based compensation (SBC), and non-GAAP net income
and non-GAAP EPS are computed net of SBC and gains from the sale of our
investment in Baidu. In the second quarter, the charge related to
stock-based compensation was $109 million as compared to $115 million
in the first quarter. Investment gains related to the sale of the
investment in Baidu were $55 million in the second quarter. In the
first quarter, we excluded $30 million in plaintiffs’ attorneys’ fees
related to a legal settlement from the calculation of non-GAAP
operating income, non-GAAP net income and non-GAAP EPS. Tax effects
related to SBC charges, the sale of the investment in Baidu, and the
plaintiffs’ attorneys’ fees have also been excluded from non-GAAP
calculations. The tax benefit related to SBC was $26 million in the
second quarter and $27 million in the first quarter. The tax expense
related to the investment gains from the sale of the Baidu investment
in the second quarter was $23 million. The tax benefit related to
plaintiffs’ attorneys’ fees related to a legal settlement in the
first quarter was $12 million. Reconciliations of non-GAAP measures to
GAAP operating income, net income, and EPS are included at the end of
this release.
Q2 Financial Highlights
Revenues – Google reported revenues of $2.46 billion for the quarter
ended June 30, 2006, representing a 77% increase over second quarter
2005 revenues of $1.38 billion and a 9% increase over first quarter
2006 revenues of $2.25 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 $1.43
billion, or 58% of total revenues. This represents a 94% increase over
second quarter 2005 revenues of $737 million and a 10% increase over
first quarter 2006 revenues of $1.30 billion.
Google Network Revenues – Google’s partner sites generated revenues,
through AdSense programs, of $997 million, or 41% of total revenues.
This is a 58% increase over network revenues of $630 million generated
in the second quarter of 2005 and a 7% increase over first quarter 2006
revenues of $928 million.
International Revenues – Revenues from outside of the United States
contributed 42% of total revenues, compared to 42% in the first quarter
of 2006 and 39% in the second quarter of 2005. Had foreign exchange
rates remained constant from the first quarter through the second
quarter of 2006, our revenues would have been $26 million lower. Had
foreign exchange rates remained constant from the second quarter of
2005 through the second quarter of 2006, our revenues would have been
$18 million higher.
TAC – Traffic Acquisition Costs, the portion of revenues shared with
Google’s partners, increased to $785 million in the second quarter.
This compares to TAC of $723 million in the first quarter. TAC as a
percentage of advertising revenues remained flat at 32% from the first
quarter to the second quarter.
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 $204 million, or 8% of revenues, in
the second quarter, compared to $181 million, or 8% of revenues, in the
first quarter. Other cost of revenues also included stock-based
compensation of $2 million in the second quarter, compared to $2
million in the first quarter of 2006.
Operating Expenses – Operating expenses, other than cost of revenues,
were $652 million in the second quarter. Operating expenses included
$342 million in headcount-related and facilities expenses, $107 million
in stock-based compensation, and $49 million in advertising and
promotional expenses, of which $24 million was related to certain
distribution deals. In addition, stock-based compensation is included
in operating expenses, but excluded from non-GAAP calculations.
Stock-Based Compensation – In the second quarter, the total charge
related to stock-based compensation was $109 million as compared to
$115 million in the first quarter.
For the full year, we expect stock-based compensation charges for
grants to employees prior to July 1, 2006 to be $375 million. This
does not include expenses to be recognized over the remainder of the
year related to employee stock awards that are granted after July 1,
2006 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 approximately 1% to 1.5% per year.
Operating Income – GAAP operating income in the second quarter was $815
million, or 33% of revenues. This compares to GAAP operating income of
$743 million, or 33% of revenues, in the first quarter. GAAP operating
income includes stock-based compensation in the first and second
quarters and plaintiffs’ attorneys’ fees related to a legal settlement
of $30 million in the first quarter. Non-GAAP operating income in the
second quarter was $925 million, or 38% of revenues. This compares to
non-GAAP operating income of $887 million, or 39% of revenues, in the
first quarter.
Net Income – GAAP net income for the second quarter was $721 million
as compared to $592 million in the first quarter. Non-GAAP net income
was $772 million, compared to $697 million in the first quarter. GAAP
EPS for the second quarter was $2.33 on 310 million diluted shares
outstanding, compared to $1.95 for the first quarter, on 304 million
diluted shares outstanding. Non-GAAP EPS for the second quarter was
$2.49, compared to $2.29 in the first quarter.
Income Taxes – Our effective tax rate was 26% for the second quarter
and the six months ended June 30, 2006. We currently anticipate that
our effective tax rate for the full year will be at or below 30%.
Cash Flow and Capital Expenditures – Net cash provided by operating
activities for the second quarter totaled $841 million as compared to
$825 million for the first quarter. In the second quarter of 2006,
capital expenditures were $699 million, including $319 million related
to real estate purchases in Mountain View, CA. 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, free cash flow was $142 million.
We expect that the growth rate in capital expenditures in 2006 will be
substantially greater than the revenue growth rate for the year. We
expect the majority of investment to be focused on IT infrastructure
including servers, networking equipment, and data centers, as well as
real estate and campus facilities.
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, 2006, cash, cash equivalents, and marketable
securities were $9.82 billion. This balance reflects the net proceeds
of $2.06 billion from the public offering that closed in early April as
well as the impact of the cash investment of $1 billion in AOL in early
April.
On a worldwide basis, Google employed 7,942 full-time employees as of
June 30, 2006, up from 6,790 full time employees as of March 31, 2006.
WEBCAST AND CONFERENCE CALL INFORMATION
A live audio webcast of Google’s second quarter 2006 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) today
through midnight Thursday, July 27, 2006 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 1066064.
FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements that involve
risks and uncertainties, including statements relating to our plans to
invest in our business, our expected stock-based compensation, the
expected dilution related to equity grants to our employees, our
anticipated tax rate for 2006, and our expectation that the growth rate
in our capital expenditures will be substantially greater than our
revenue growth rate for the year. 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 hiring
patterns, the amount of stock-based compensation we issue to our
service providers, the uncertain and complex nature of tax forecasting,
the fact that we may have exposure to greater than expected tax
liabilities, and our need to expend capital to accommodate the growth
of the business, as well as those risks and uncertainties included
under the captions „Risk Factors” and „Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” in
our report on Form 10-Q for the quarter ended March 31, 2006, 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 June 30, 2006, which will be filed
with the SEC in August 2006. All information provided in this release
and in the attachments is as of July 20, 2006, and Google undertakes no
duty to update this information.
ABOUT NON-GAAP FINANCIAL MEASURES
To supplement our consolidated financial statements presented in
accordance with GAAP, we use the following measures defined by the SEC
as non-GAAP financial measures: non-GAAP operating income, non-GAAP net
income, non-GAAP operating margins, non-GAAP EPS and free cash flow.
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” and „Reconciliation from
net cash provided by operating activities to free cash flow” included
at the end of this release.
We use these non-GAAP financial measures for financial and operational
decision making and as a means to evaluate period-to-period
comparisons. Our 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,” primarily meaning our operating performance from
a cash perspective. We believe that both management and investors
benefit from referring to these non-GAAP financial measures in
assessing our performance and when planning, forecasting and analyzing
future periods. These non-GAAP financial measures also facilitate
management’s internal comparisons to our historical performance and
liquidity as well as comparisons to our competitors’ operating
results. We believe these non-GAAP financial measures are useful to
investors in allowing for greater transparency with respect to
supplemental information used by management in its financial and
operational decision making.
Non-GAAP operating income and operating margin. Non-GAAP operating
income is defined as operating income minus stock-based compensation
and the plaintiffs’ attorneys’ fees related to a legal settlement of
$30 million in the first quarter of 2006. Non-GAAP operating margin is
defined as non-GAAP operating income divided by revenues. Google
considers these non-GAAP financial measures to be a useful metric for
management and investors because they exclude a one-time event (i.e.
the settlement of a legal matter) that is not part of our core business
operating results. By excluding these one-time events, management and
investors are better able to compare our core operating results over
multiple periods.
Similarly, these non-GAAP financial measures exclude the effect of
stock-based compensation so that Google’s management and investors
can compare Google’s core business operating results over multiple
periods in a manner that is not distorted by Google’s recent adoption
of FAS 123R in fiscal year 2006. Moreover, because of varying
available valuation methodologies, subjective assumptions and the
variety of award types that companies can use when adopting FAS 123R,
Google’s management believes that providing a non-GAAP financial
measure that excludes stock-based compensation allows investors to make
more meaningful comparisons between Google’s core business operating
results and those of other companies, as well as providing Google’s
management with an important tool for financial and operational
decision making and for evaluating Google’s own core business
operating results over different periods of time. A limitation of
using non-GAAP operating income versus operating income calculated in
accordance with GAAP is that non-GAAP operating income excludes some
costs, namely, stock-based compensation, that are recurring.
Stock-based compensation has been and will continue to be for the
foreseeable future a significant recurring expense in Google’s
business. Management compensates for this limitation by providing
specific information regarding the GAAP amounts excluded from non-GAAP
operating income and evaluating non-GAAP operating income together with
operating income calculated in accordance with GAAP.
Non-GAAP net income and non-GAAP EPS. Non-GAAP net income is defined
as net income minus stock-based compensation, the gains from the sale
of our investment in Baidu in the second quarter of 2006 and the
plaintiffs’ attorneys’ fees related to a legal settlement of $30
million in the first quarter of 2006. Non-GAAP EPS is defined as
non-GAAP net income divided by the weighted average shares outstanding
as of June 30, 2006. We consider these non-GAAP financial measures to
be a useful metric for management and investors for the same reasons
that Google uses non-GAAP operating income and non-GAAP operating
margin. However, in order to provide a complete picture of our core
business operating results, we exclude from non-GAAP net income and
non-GAAP EPS the tax effects associated with stock-based compensation,
the gains from the sale of our investment in Baidu in the second
quarter of 2006 and the plaintiffs’ attorneys’ fees related to a legal
settlement of $30 million in the first quarter of 2006. Without
excluding these tax effects, investors would only see the gross effect
that excluding these expenses and gains had on our operating results.
A limitation of these non-GAAP financial measures is that they do not
include all items that impact Google’s net income and net income per
share for the period. Management compensates for this limitation by
providing specific information regarding the GAAP amounts excluded from
non-GAAP net income and non-GAAP EPS and evaluating non-GAAP net income
and non-GAAP EPS together with net income and EPS calculated in
accordance with GAAP.
Free cash flow. Free cash flow is defined as net cash provided by
operating activities minus capital expenditures. We consider free cash
flow to be a liquidity measure that provides useful information to
management and investors about the amount of cash generated by the
business that, after the acquisition of property and equipment,
including information technology infrastructure and land and buildings,
can be used for strategic opportunities, including investing in our
business, making strategic acquisitions and strengthening the balance
sheet. Analysis of free cash flow also facilitates management’s
comparisons of our operating results to competitors’ operating
results. A limitation of using free cash flow versus net cash provided
by operating activities as a means for evaluating Google is that free
cash flow does not represent the total increase or decrease in the cash
balance for the period as it excludes cash used for capital
expenditures during the period. Our management compensates for this
limitation by providing information about our capital expenditures on
the face of its cash flow statement and under Management’s Discussion
and Analysis of Financial Condition and Results of Operations in its
Form 10-Q.
Google has computed free cash flow using the same consistent method
from quarter to quarter and year to year.
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.
Investor Contact:
Maria Shim
650-253-7663
[email protected]
Media Contact:
Jon Murchinson
650-253-4437
[email protected]
Note to Editors:
Video of CEO Eric Schmidt addressing the second quarter results,
capital investments, Google Checkout and other topics will be available
in Google’s multi media press room (www.google.com/press) and The News
Market (www.thenewsmarket.com/google) at 2:30 p.m. PDT in the following
formats: broadcast quality MPEG2, QuickTime and WMV.
