Google Q3 2008 Quarterly Earnings Summary

Q3 2008 Quarterly Earnings Summary

Third Quarter 2008 Highlights •

•

Revenue growth of 31% Y/Y and 3% Q/Q –

G Google l properties ti revenue growth th off 34% Y/Y and d 4% Q/Q

–

Network revenues increased 15% Y/Y and 1% Q/Q

–

International revenue was $2.8 billion

Operational Highlights –

Traffic and revenue solid in Q3 despite difficult economic environment

–

Key investments in our core search and ads businesses

–

Increasing prioritization of our newer investments:

• Apps, Display, YouTube, and Geo

•

2

Maintaining a clear focus on operational efficiency and cost containment, better positioning Google for healthy long-term growth

Quarterly Revenue $5,500

5,186

Q3’08 Y/Y Growth = 31% Q Q3’08 Q/Q Growth G = 3% %

$5,000

4,231

$4,000

3,664

$ in millions

$3,500 $3,000

$1,500 1,257 1,384 $1,000 $500

3,122

799 1,977 885

737

657

1,198

675

630

584

1,352

997

928

1,578

1,636

1,037

1,919

$2,000

1,686

1,098

1,680

1,345

2,690 2,456

3,872

1,655

1,455

3,205

2,254

5,541

4,827

$4,500

$2,500

5,367

1,297

2,282 2,486

3,672 3,400 3,530

2,735

1,432 1,626

Google.com 3

Network

Licensing and Other

08 Q 3'

08 Q 2'

08 Q 1'

07 Q 4'

07 Q 3'

07 Q 2'

07 Q 1'

06 Q 4'

06 Q 3'

06 Q 2'

06 Q 1'

05 Q 4'

05 Q 3'

05 Q 2'

Q 1'

05

$0

U S vs U.S. vs. International Revenue $5,500

5,186 $5 000 $5,000

4,231

$4,000

3,664 $3,500

$ in n millions

5,541

4 827 4,827

$4,500

3,205

$3,000 $2,500

2,254 1,919

$2,000 $1,500

5,367

1,257

$1,000

1,384

1,578

39% 39%

$500

61%

61%

42%

42%

47%

62%

58%

3,872

48%

51% 48%

52%

48%

44%

44%

38%

39%

61%

2,456

2,690

51%

56%

58%

56%

53% 52%

52%

52%

49%

48%

49%

US 4

International

Q 3' 08

Q 2' 08

Q 1' 08

Q 4' 07

Q 3' 07

Q 2' 07

Q 1' 07

Q 4' 06

Q 3' 06

Q 2' 06

Q 1' 06

Q 4' 05

Q 3' 05

Q 2' 05

Q 1' 05

$0

Traffic Acquisition Costs $1,500 $1,400 $ ,

1,440 37.2% 36.1%

$1,300

34.0%

$1,200

1,221 1,125 1,148

33.2%32.5%32.3%

$1,100

$ in n millions

31 0% 30.7%31.0% 31.0% 31 0%

$900 $800

723

$700 $500

825

785

40%

35%

976

$1,000

$600

1,4861,4741,495

30% 29.9%

29.1%30.3% 29.2%

28.4%

27.9%

25%

629 462 494

530

20%

$400 $300

15%

$200 $100

5

TAC as % of Advertising Revenues

08

Q 3'

08

08

Q 2'

07

Q 1'

Q 4'

07

Q 3'

07

Q 2'

07

Q 1'

06

Q 4'

06

06

TAC

Q 3'

06

Q 2'

Q 1'

05

Q 4'

05

Q 3'

Q 2'

Q 1'

05

10%

05

$0

Costs and Expenses GAAP $Millions Cost of Revenues Percent of revenues

Research & Development Percent of revenues

Sales & Marketing Percent of revenues

General & Administrative Percent of revenues

Total Costs & Expenses Percent of revenues

Non-GAAP Non GAAP $Millions Cost of Revenues Percent of revenues

Research & Development Percent of revenues

Sales & Marketing Percent of revenues

General & Administrative Percent of revenues

Total Costs & Expenses Percent of revenues

Q3'07 $1,663

Q2'08 $2,148

$2,173

39%

40%

40%

$549

$682

$705

13%

13%

13%

$381

$485

$509

9%

9%

9%

$321

$474

$412

8%

9%

7%

$2,914

$3,789

$3,799

69%

71%

69%

Q3'07

Q2'08

Q3'08

$1,659

$2,139

$2,162

39%

40%

39%

$418

$495

$536

10%

10%

10%

$351

$442

$445

8%

8%

8%

$288

$440

$376

7%

8%

7%

$2,716

$3,516

$3,519

64%

66%

64%

Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and expenses to GAAP costs and expenses 6

Q3'08

Profitability GAAP $Millions Income from Operations Operating Margin Net Income EPS (diluted) Non-GAAP $Millions Income from Operations Operating Margin Net Income EPS (diluted)

Q3'07 $1,318 $ 31%

$1,070 $ $3.38

Q3'07 $1,516 $ 36%

Q2'08 1,578

Q3'08 $

1,743

29%

1,247

31%

$

$3.92

$4.24

Q2'08 1,851

1,346

Q3'08 $

2,023

34%

37%

$1,237 $

1,472

$

1,563

$3.91 $

4.63

$

4.92

Note: Please refer to supporting pp g Table 2 for reconciliations of non-GAAP results of operations p measures to the nearest comparable GAAP measures

7

Free Cash Flow

$Millions

8

Q3'07

Q2'08

Q3'08

Net cash provided by operating activities

$1 633 $1,633

$1 766 $1,766

$2 185 $2,185

Less purchases of property and equipment q p

($553)) ($

($697)) ($

($452)) ($

Free cash flow (Non-GAAP)

$1,080

$1,069

$1,733

Cash Flow Hedging 101: Why does Google need cash flow hedging? • Over 50% of Google’s revenues are billed in currencies other than the U.S. dollar; however, we ultimately measure and report our financial results in U.S. dollars. • As a result, we are subject to the impact of foreign exchange fluctuations on our revenue, earnings, and cash flow. o If the USD strengthens, our revenues invoiced in other currencies become less when translated to USD, and vice versa. • In order to manage this risk, we have implemented a program g against g downside risk to our revenues and earnings g to hedge reported in USD.

Cash Flow Hedging 101: How does Google hedge? • We have a rolling program of foreign exchange options to hedge forecasted revenues over the next 18 months. • We hedge revenue, but the amount of options we purchase is computed based on our economic exposure to a currency (revenue less expenses) • In Q3 2008, we hedged revenues denominated in Euro, CAD, and GBP. o Note, however, that our GBP hedges were rolled out late in the quarter - so there was no benefit realized to revenues.

Cash Flow Hedging 101: SFAS 133 – How does the accounting work? •

SFAS 133 is the standard we use to account for our cash flow hedging program. o

Prior to maturity, an option’s unrealized gain or “intrinsic value” – the difference between the strike price of the option and the spot rate of the underlying currency – is recorded as Other Comprehensive Income (OCI) on our balance sheet on a tax effected basis.

o

At maturity, any unrealized gain is initially recorded to OCI and subsequently recognized as revenue – on a gross basis or before the tax effect - when the corresponding revenue (hedged item) is recognized.

o

During Q3, the amount reclassified to revenue from OCI was $34M.

o

The unrealized gain in OCI does not necessarily reflect the eventual benefit to revenue; the ultimate benefit will depend on exchange rates at the maturity of the option contracts. The benefit to revenue will be recognized when the corresponding revenue (hedged item) is recognized within the next 18 months.

Cash Flow Hedging 101: SFAS 133 – How does the accounting work? • Because we do not purchase in-the-money options (options with “intrinsic intrinsic value”) value ), the cost will always equal their “time time value value.”

• The cost or “time value” of the option is amortized over its term on a mark to market basis (not on a straight mark-to-market straight-lined lined basis) to Interest Income and Other, net.

• As a result, the amount of amortization expense p we recognize g in any y particular quarter is impacted by how much the option moves into or out of the money, as well as the underlying currency’s volatility.

• The more an option moves into or out off the money, generally the lower its “time value,” and the greater the amount of amortization expense we will recognize. This could result in a front end loading of expense. expense

Table 1 - Reconciliations of non-GAAP costs and expenses to GAAP costs and expenses $Millions Cost of Revenues (GAAP) Less: Stock-based compensation Cost of Revenues (non-GAAP)

$

Research and development (GAAP) Less: Stock Stock-based based compensation Research and development (non-GAAP)

$

Sales and marketing (GAAP) Less: Stock-based compensation Sales and marketing (non-GAAP)

13

Q3'07

$

$ $ $

General and administrative (GAAP) Less: Stock-based compensation General and administrative (non-GAAP)

$

Total costs and expenses (GAAP) Less: Stock-based Stock based compensation Total costs and expenses (non-GAAP)

As a % of Revenues (1)

1,663 (4) 1,659

39% $

549 (131) 418

13% $

381 (30) 351

9% $

39% $

10% $

8% $

As a % of Revenues (1)

Q2'08 2,148 (9) 2,139

40% $

682 (187) 495

13% $

485 (43) 442

9% $

10% $

8% $

2,173 (11) 2,162

40%

705 (169) 536

13%

509 (64) 445

9%

412 (36) 376

7%

39%

10%

8%

8% $

$

2,914 (198)

69% $

3,789 (273)

71% $

3,799 (280)

69%

$

2,716

64% $

3,516

66% $

3,519

64%

7% $

9% $

Q3'08

321 (33) 288

$

474 (34) 440

40% $

As a % of Revenues (1)

8% $

7%

Table 2 - Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures

Figures in millions except per share amounts

Q3'07

Operating Margin (1)

Q2'08

Q3'08

Operating Margin (1)

Income from operations (GAAP) Add: Stock-based Stock based compensation

$

1,318 198

31% $

1,578 273

29% $

1,743 280

31%

Income from operations (non-GAAP)

$

1,516

36% $

1,851

34% $

2,023

37%

Net income (GAAP) Add: Stock-based compensation (net of tax)

$

1,070 167

$

1,247 225

$

1,346 217

Net income (non-GAAP)

$

1,237

$

1,472

$

1,563

Net income per share - diluted (GAAP)

$

3.38

$

3.92

$

4.24

Net income per share - diluted (non-GAAP) Shares used in per share calculation - diluted

$

3.91 317

$

4.63 318

$

4.92

((1)) Percentages g based on GAAP revenues of $4,231 , million in Q3 '07,, $5,367 , million in Q2 '08 and $5,541 , million in Q3 '08.

14

Operating Margin (1)

Q3 2008 Quarterly Earnings Summary