Google Announces First Quarter 2009 Results

If you’re always wondering ..what the hell is the profit of your preferred search engine in this world crisis situation …Google Inc. announced financial results for the quarter ended March 31, 2009.
“Google had a good quarter given the depth of the recession — while revenues were down quarter over quarter, they grew 6% year over year thanks to continued strong query growth. These results underline both the resilience of our business model and the ongoing potential of the web as users and advertisers shift online,” said Eric Schmidt, CEO of Google. “Going forward, our priority remains investing for the long term to drive future growth in our core and emerging businesses.”

Google Girl

Q1 Financial Summary

Google reported revenues of $5.51 billion for the quarter ended March 31, 2009, an increase of 6% compared to the first quarter of 2008 and a decrease of 3% compared to the fourth quarter of 2008. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2009, TAC totaled $1.44 billion, or 27% 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 first quarter of 2009 was $1.88 billion, or 34% of revenues. This compares to GAAP operating income of $1.86 billion, or 33% of revenues, in the fourth quarter of 2008. Non-GAAP operating income in the first quarter of 2009 was $2.16 billion, or 39% of revenues. This compares to non-GAAP operating income of $2.15 billion, or 38% of revenues, in the fourth quarter of 2008.
  • GAAP net income for the first quarter of 2009 was $1.42 billion as compared to $382 million in the fourth quarter of 2008. Non-GAAP net income in the first quarter of 2009 was $1.64 billion, compared to $1.62 billion in the fourth quarter of 2008.
  • GAAP EPS for the first quarter of 2009 was $4.49 on 317 million diluted shares outstanding, compared to $1.21 for the fourth quarter of 2008 on 317 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2009 was $5.16, compared to $5.10 in the fourth quarter of 2008.
  • Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC). Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC, the non-cash impairment charges primarily related to our investments in AOL and Clearwire, and related tax benefits. In the first quarter of 2009, the charge related to SBC was $277 million as compared to $286 million in the fourth quarter of 2008. Also, in the fourth quarter of 2008, we recognized $1.09 billion in asset impairment charges related primarily to our investments in AOL and Clearwire. The tax benefit related to SBC was $64 million in the first quarter of 2009 and $65 million in the fourth quarter of 2008. The tax benefit related to the impairment charges was $82 million in the fourth quarter of 2008. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release.

Q1 Financial Highlights

Revenues – Google reported revenues of $5.51 billion in the first quarter of 2009, representing a 6% increase over first quarter 2008 revenues of $5.19 billion and a 3% decrease from fourth quarter 2008 revenues of $5.70 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues Google-owned sites generated revenues of $3.70 billion, or 67% of total revenues, in the first quarter of 2009. This represents a 9% increase over first quarter 2008 revenues of $3.40 billion and a 3% decrease from fourth quarter 2008 revenues of $3.81 billion.

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $1.64 billion, or 30% of total revenues, in the first quarter of 2009. This represents a 3% decrease from first quarter 2008 network revenues of $1.69 billion and a 3% decrease from fourth quarter 2008 network revenues of $1.69 billion.

International Revenues – Revenues from outside of the United States totaled $2.88 billion, representing 52% of total revenues in the first quarter of 2009, compared to 51% in the first quarter of 2008 and 50% in the fourth quarter of 2008. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2008 through the first quarter of 2009, our revenues in the first quarter of 2009 would have been $120 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2008 through the first quarter of 2009, our revenues in the first quarter of 2009 would have been $429 million higher.

Revenues from the United Kingdom totaled $733 million, representing 13% of revenue in the first quarter of 2009, compared to 15% in the first quarter of 2008 and 12% in the fourth quarter of 2008.

In the first quarter of 2009, we recognized a benefit of $154 million to revenue through our foreign exchange risk management program.

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 17% over the first quarter of 2008 and increased approximately 3% over the fourth quarter of 2008.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, decreased to $1.44 billion in the first quarter of 2009. This compares to TAC of $1.48 billion in the fourth quarter of 2008. TAC as a percentage of advertising revenues was 27% in the first quarter of 2009, compared to 27% in the fourth quarter of 2008.

The majority of TAC is related to amounts ultimately paid to our AdSense partners, which totaled $1.23 billion in the first quarter of 2009. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $207 million in the first quarter of 2009.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs as well as credit card processing charges, decreased to $666 million, or 12% of revenues, in the first quarter of 2009, compared to $707 million, or 12% of revenues, in the fourth quarter of 2008.

Operating Expenses – Operating expenses, other than cost of revenues, were $1.52 billion in the first quarter of 2009, or 28% of revenues, compared to $1.65 billion in the fourth quarter of 2008, or 29% of revenues. The operating expenses in the first quarter of 2009 included $774 million in payroll-related and facilities expenses, compared to $890 million in the fourth quarter of 2008.

Stock-Based Compensation (SBC) – In the first quarter of 2009, the total charge related to SBC was $277 million as compared to $286 million in the fourth quarter of 2008.

In March 2009, Google completed an offer to exchange certain employee stock options issued under Google’s 2004 Stock Plan (Exchange Offer). Certain previously granted options were exchanged for new, lower-priced stock options granted on a one-for-one basis. Options for an aggregate of approximately 7.6 million shares of Google’s Class A common stock were exchanged. Options granted pursuant to the Exchange Offer have an exercise price of $308.57 per share, the closing price of Google’s Class A common stock as reported by The Nasdaq Global Select Market on March 6, 2009. Options granted pursuant to the Exchange Offer have a new vesting schedule determined by adding 12 months to each vesting date under the exchanged options’ vesting schedule. In addition, new options will vest no sooner than September 9, 2009. The Exchange Offer will result in a modification charge related to SBC of $360 million to be recognized over the vesting periods of the new options. These vesting periods range from six months to approximately five years. We recorded $11 million of this $360 million modification charge in the first quarter of 2009.

We currently estimate SBC charges for grants to employees prior to April 1, 2009 to be approximately $1.1 billion for 2009. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2009 or non-employee stock awards that have been or may be granted.

Operating Income – GAAP operating income in the first quarter of 2009 was $1.88 billion, or 34% of revenues. This compares to GAAP operating income of $1.86 billion, or 33% of revenues, in the fourth quarter of 2008. Non-GAAP operating income in the first quarter of 2009 was $2.16 billion, or 39% of revenues. This compares to non-GAAP operating income of $2.15 billion, or 38% of revenues, in the fourth quarter of 2008.

Interest Income and Other, Net – Interest income and other, net decreased to $6 million in the first quarter of 2009, compared with interest income and other, net of $70 million in the fourth quarter of 2008.

Income Taxes – Our effective tax rate was 25% for the first quarter of 2009.

Net Income – GAAP net income for the first quarter of 2009 was $1.42 billion as compared to $382 million in the fourth quarter of 2008. Non-GAAP net income was $1.64 billion in the first quarter of 2009, compared to $1.62 billion in the fourth quarter of 2008. GAAP EPS for the first quarter of 2009 was $4.49 on 317 million diluted shares outstanding, compared to $1.21 for the fourth quarter of 2008, on 317 million diluted shares outstanding. Non-GAAP EPS for the first quarter of 2009 was $5.16, compared to $5.10 in the fourth quarter of 2008.

Cash Flow and Capital Expenditures – Net cash provided by operating activities for the first quarter of 2009 totaled $2.25 billion as compared to $2.12 billion for the fourth quarter of 2008. In the first quarter of 2009, capital expenditures were $263 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 2009, free cash flow was $1.99 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 March 31, 2009, cash, cash equivalents, and short-term marketable securities were $17.8 billion.

Employees – On a worldwide basis, Google employed 20,164 full-time employees as of March 31, 2009, down from 20,222 full-time employees as of December 31, 2008.

Recent Developments – After ten years of building and managing our global sales and partnership operations, Omid Kordestani has decided to hand over the reins to Nikesh Arora, currently President of International Operations, and take on a new role as Senior Advisor, Office of the CEO and Founders. Continued growth is essential to our future success and no one is better placed to advise on new revenue opportunities than Omid, the business founder of Google. In his new role as President, Global Sales Operations and Business Development, Nikesh Arora will have responsibility for all Google’s revenue and customer operations, as well as marketing and partnerships. He has a proven track record at Google, having spent the last four and a half years building our European operations into a substantial business.

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Google Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31, March 31,
2008* 2009
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 8,656,672 $ 10,426,291
Marketable securities 7,189,099 7,358,642
Accounts receivable, net of allowance 2,642,192 2,543,105
Deferred income taxes, net 286,105 434,903
Prepaid revenue share, expenses and other assets 1,404,114 1,317,861
Total current assets 20,178,182 22,080,802
Prepaid revenue share, expenses and other assets, non-current 433,846 416,168
Deferred income taxes, net, non-current 52,296
Non-marketable equity securities 85,160 100,999
Property and equipment, net 5,233,843 5,122,105
Intangible assets, net 996,690 910,344
Goodwill 4,839,854 4,830,315
Total assets $ 31,767,575 $ 33,513,029
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 178,004 $ 196,220
Accrued compensation and benefits 811,643 464,899
Accrued expenses and other current liabilities 480,263 465,164
Accrued revenue share 532,547 522,835
Deferred revenue 218,084 216,937
Income taxes payable, net 81,549 317,799
Total current liabilities 2,302,090 2,183,854
Deferred revenue, non-current 29,818 30,146
Income taxes payable, net, non-current 890,115 1,160,158
Deferred income taxes, net, non-current 12,515
Other long-term liabilities 294,175 290,776
Stockholders’ equity:
Common stock 315 316
Additional paid-in capital 14,450,338 14,694,501
Accumulated other comprehensive income 226,579 168,820
Retained earnings 13,561,630 14,984,458
Total stockholders’ equity 28,238,862 29,848,095
Total liabilities and stockholders’ equity $ 31,767,575 $ 33,513,029
* Derived from audited financial statements.
Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
Three Months Ended
March 31,

2008

2009

(unaudited)
Revenues $ 5,186,043 $ 5,508,990
Costs and expenses:
Cost of revenues (including stock-based compensation expense of $9,148, $12,537) 2,110,536 2,101,504
Research and development (including stock-based compensation expense of $193,800, $168,561) 673,069 641,643
Sales and marketing (including stock-based compensation expense of $42,576, $59,026) 446,898 433,941
General and administrative (including stock-based compensation expense of $35,255, $37,359) 409,305 448,311
Total costs and expenses 3,639,808 3,625,399
Income from operations 1,546,235 1,883,591
Interest income and other, net 167,343 6,210
Income before income taxes 1,713,578 1,889,801
Provision for income taxes 406,492 466,973
Net income $ 1,307,086 $ 1,422,828
Net income per share – basic $ 4.17 $ 4.51
Net income per share – diluted $ 4.12 $ 4.49
Shares used in per share calculation – basic 313,129 315,252
Shares used in per share calculation – diluted 317,392 317,221
Google Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31,

2008

2009

(unaudited)
Operating activities
Net income $ 1,307,086 $ 1,422,828
Adjustments:
Depreciation and amortization of property and equipment 280,564 321,129
Amortization of intangibles and other 55,960 82,093
Stock-based compensation 280,779 277,483
Excess tax benefits from stock-based award activity (51,101 ) (31,844 )
Deferred income taxes (38,214 ) (12,847 )
Other, net (44,903 ) (21,409 )
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable (223,493 ) 97,390
Income taxes, net 438,175 324,753
Prepaid revenue share, expenses and other assets (41,584 ) 77,457
Accounts payable 53,784 21,879
Accrued expenses and other liabilities (234,277 ) (322,339 )
Accrued revenue share (10,124 ) 4,264
Deferred revenue 6,794 8,675
Net cash provided by operating activities 1,779,446 2,249,512
Investing activities
Purchases of property and equipment (841,597 ) (262,755 )
Purchases of marketable securities (2,819,512 ) (5,244,845 )
Maturities and sales of marketable securities 5,379,228 5,109,590
Investments in non-marketable equity securities (18,750 )
Acquisitions, net of cash acquired, and purchases of intangible and other assets (3,125,113 ) (2,072 )
Net cash used in investing activities (1,406,994 ) (418,832 )
Financing activities
Net payments related to stock-based award activity (22,445 ) (36,736 )
Excess tax benefits from stock-based award activity 51,101 31,844
Net cash provided by (used in) financing activities 28,656 (4,892 )
Effect of exchange rate changes on cash and cash equivalents 37,048 (56,169 )
Net increase in cash and cash equivalents 438,156 1,769,619
Cash and cash equivalents at beginning of period 6,081,593 8,656,672
Cash and cash equivalents at end of period $ 6,519,749 $ 10,426,291
Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures
The following table presents certain non-GAAP results before certain material items (in thousands, except per share amounts, unaudited):

Three Months Ended December 31, 2008

Three Months Ended March 31, 2009

GAAP Actual

Operating
Margin (a)

Adjustments

Non-GAAP
Results

Non-GAAP
Operating
Margin (b)

GAAP Actual

Operating
Margin (a)

Adjustments

Non-GAAP
Results

Non-GAAP
Operating
Margin (b)

286,172 (c) 277,483 (d)
Income from operations $ 1,860,204 32.6 % $ 286,172 $ 2,146,376 37.6 % $ 1,883,591 34.2 % $ 277,483 $ 2,161,074 39.2 %
286,172 (c) 277,483 (d)
(65,161 ) (e) (64,016 ) (e)
1,094,757 (f)
(82,275 ) (g)
Net income $ 382,442 $ 1,233,493 $ 1,615,935 $ 1,422,828 $ 213,467 $ 1,636,295
Net income per share – diluted $ 1.21 $ 5.10 $ 4.49 $ 5.16
Shares used in per share calculation – diluted 316,864 316,864 317,221 317,221
(a) Operating margin is defined as income from operations divided by revenues.
(b) Non-GAAP operating margin is defined as non-GAAP income from operations divided by revenues.
(c) To eliminate $286.2 million of stock-based compensation recorded in the fourth quarter of 2008.
(d) To eliminate $277.5 million of stock-based compensation recorded in the first quarter of 2009.
(e) To eliminate income tax effects related to items noted in (c) and (d).
(f) To eliminate $1,094.8 million of impairment charges related to certain equity investments.
(g) To eliminate income tax effects related to the charges noted in (f).
Reconciliation from net cash provided by operating activities to free cash flow (in thousands, unaudited):

Three Months Ended
March 31, 2009

Net cash provided by operating activities $ 2,249,512
Less purchases of property and equipment (262,755 )
Free cash flow $ 1,986,757
Net cash used in investing activities* $ (418,832 )
Net cash used in financing activities $ (4,892 )
*includes purchases of property and equipment.

The following table presents our revenues by revenue source (in thousands, unaudited):

Three Months Ended
March 31,

2008

2009

Advertising revenues:
Google web sites $ 3,400,405 $ 3,692,823
Google Network web sites 1,686,141 1,638,042
Total advertising revenues 5,086,546 5,330,865
Licensing and other revenues 99,497 178,125
Revenues $ 5,186,043 $ 5,508,990

The following table presents our revenues by revenue source, as a percentage of total revenues (unaudited):

Three Months Ended
March 31,

2008

2009

Advertising revenues:
Google web sites 66 % 67 %
Google Network web sites 32 % 30 %
Total advertising revenues 98 % 97 %
Licensing and other revenues 2 % 3 %
Revenues 100 % 100 %

Source: Press Relase

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