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Google Announces Third Quarter Results

Documents slight improvements, positive thoughts

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Google has released its third quarter results, and things are looking all right so far.  The company managed to bring in $5.54 billion in revenue, and this was up from both last quarter and the third quarter of last year.  Net income increased in a similar manner, reaching $1.35 billion.

Eric Schmidt wasn’t as positive as he’s been at other times, giving Google some wiggle room in terms of short-term performance, but seems to feel that things are solid and the company is heading in the right direction.

As of September 30, 2008, Google’s cash, cash equivalents, and marketable securities were $14.4 billion. That’s up $1.7 billion from last quarter.

The full press release is below.

 

* * * * *

MOUNTAIN VIEW, Calif. – October 16, 2008 – Google Inc. (NASDAQ: GOOG)
today announced financial results for the quarter ended September 30,
2008.

"We had a good third quarter with strong traffic and revenue growth
across all of our major geographies thanks to the underlying strength
of our core search and ads business.  The measurability and ROI of
search-based advertising remain key assets for Google," said Eric
Schmidt, CEO of Google.  "While we are realistic about the poor state
of the global economy, we will continue to manage Google for the long
term, driving improvements to search and ads, while also investing in
future growth areas such as enterprise, mobile, and display."

Q3 Financial Summary

Google reported revenues of $5.54 billion for the quarter ended
September 30, 2008, an increase of 31% compared to the third quarter
of 2007 and an increase of 3% compared to the second quarter of 2008.
Google reports its revenues, consistent with GAAP, on a gross basis
without deducting traffic acquisition costs (TAC).  In the third
quarter of 2008, TAC totaled $1.50 billion, or 28% 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 third quarter of 2008 was $1.74
billion, or 31% of revenues.  This compares to GAAP operating income
of $1.58 billion, or 29% of revenues, in the second quarter of 2008.
Non-GAAP operating income in the third quarter of 2008 was $2.02
billion, or 37% of revenues. This compares to non-GAAP operating
income of $1.85 billion, or 34% of revenues, in the second quarter of
2008.

?       GAAP net income for the third quarter of 2008 was $1.35 billion as
compared to $1.25 billion in the second quarter of 2008.  Non-GAAP net
income in the third quarter of 2008 was $1.56 billion, compared to
$1.47 billion in the second quarter of 2008.

?       GAAP EPS for the third quarter of 2008 was $4.24 on 318 million
diluted shares outstanding, compared to $3.92 for the second quarter
of 2008 on 318 million diluted shares outstanding.  Non-GAAP EPS in
the third quarter of 2008 was $4.92, compared to $4.63 in the second
quarter of 2008.

?       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 third quarter of 2008, the charge related to SBC was
$280 million as compared to $273 million in the second quarter of
2008.  Tax benefits related to SBC have also been excluded from non-
GAAP net income and non-GAAP EPS.  The tax benefit related to SBC was
$63 million in the third quarter of 2008 and $48 million in the second
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.

Q3 Financial Highlights

Revenues – Google reported revenues of $5.54 billion for the quarter
ended September 30, 2008, representing a 31% increase over third
quarter 2007 revenues of $4.23 billion and a 3% increase over second
quarter 2008 revenues of $5.37 billion.  Google reports its revenues,
consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues – Google-owned sites generated revenues of $3.67
billion, or 67% of total revenues, in the third quarter of 2008.  This
represents a 34% increase over third quarter 2007 revenues of $2.73
billion and a 4% increase over second quarter 2008 revenues of $3.53
billion.

Google Network Revenues – Google’s partner sites generated revenues,
through AdSense programs, of $1.68 billion, or 30% of total revenues,
in the third quarter of 2008.  This represents a 15% increase over
network revenues of $1.45 billion generated in the third quarter of
2007 and a 1% increase over second quarter 2008 revenues of $1.66
billion.

International Revenues – Revenues from outside of the United States
totaled $2.85 billion, representing 51% of total revenues in the third
quarter of 2008, compared to 48% in the third quarter of 2007 and 52%
in the second quarter of 2008.  Had foreign exchange rates remained
constant from the second quarter of 2008 through the third quarter of
2008, our revenues in the third quarter of 2008 would have been $59
million higher.  Had foreign exchange rates remained constant from the
third quarter of 2007 through the third quarter of 2008, our revenues
in the third quarter of 2008 would have been $168 million lower.

In the third quarter, we recognized a benefit of $34 million to
revenue through our foreign exchange risk management program.

Revenues from the United Kingdom totaled $776 million, representing
14% of revenue in the third quarter of 2008, compared to 16% in the
third quarter of 2007 and 14% in the second quarter of 2008.

Paid Clicks – Aggregate paid clicks, which include clicks related to
ads served on Google sites and the sites of our AdSense partners,
increased approximately 18% over the third quarter of 2007 and
increased approximately 4% over the second quarter of 2008.

TAC – Traffic Acquisition Costs, the portion of revenues shared with
Google’s partners, increased to $1.50 billion in the third quarter of
2008.  This compares to TAC of $1.47 billion in the second quarter of
2008.  TAC as a percentage of advertising revenues was 28% in the
third quarter, compared to 28% in the second quarter of 2008.

The majority of TAC expense is related to amounts ultimately paid to
our AdSense partners, which totaled $1.33 billion in the third quarter
of 2008.  TAC is also related to amounts ultimately paid to certain
distribution partners and others who direct traffic to our website,
which totaled $167 million in the third quarter of 2008.

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, increased to $678 million, or 12% of revenues, in
the third quarter of 2008, compared to $674 million, or 13% of
revenues, in the second quarter of 2008.

Operating Expenses – Operating expenses, other than cost of revenues,
were $1.63 billion in the third quarter of 2008, or 29% of revenues,
compared to $1.64 billion in the second quarter of 2008, or 31% of
revenues.  The operating expenses in the third quarter of 2008
included $859 million in payroll-related and facilities expenses,
compared to $810 million in the second quarter of 2008.

Stock-Based Compensation (SBC) – In the third quarter of 2008, the
total charge related to SBC was $280 million as compared to $273
million in the second quarter of 2008.

We currently estimate stock-based compensation charges for grants to
employees prior to October 1, 2008 to be approximately $1.1 billion
for 2008.  This does not include expenses to be recognized related to
employee stock awards that are granted after October 1, 2008 or non-
employee stock awards that have been or may be granted.

Operating Income – GAAP operating income in the third quarter of 2008
was $1.74 billion, or 31% of revenues.  This compares to GAAP
operating income of $1.58 billion, or 29% of revenues, in the second
quarter of 2008.  Non-GAAP operating income in the third quarter of
2008 was $2.02 billion, or 37% of revenues.  This compares to non-GAAP
operating income of $1.85 billion, or 34% of revenues, in the second
quarter of 2008.

Interest Income and Other, Net – Interest income and other was $21
million in the third quarter of 2008, compared with $58 million in the
second quarter of 2008.  The decrease was primarily related to an
increase in expenses substantially due to more activity under our
foreign exchange risk management program. The cost of the options used
to manage our foreign exchange risk is amortized on a mark-to-market
basis.  As a result, the amount of amortization expense we recognize
in any particular quarter is impacted by how much the option moves
into or out of the money, as well as the underlying currency’s
volatility.

Net Income – GAAP net income for the third quarter of 2008 was $1.35
billion as compared to $1.25 billion in the second quarter of 2008.
Non-GAAP net income was $1.56 billion in the third quarter of 2008,
compared to $1.47 billion in the second quarter of 2008.  GAAP EPS for
the third quarter of 2008 was $4.24 on 318 million diluted shares
outstanding, compared to $3.92 for the second quarter of 2008, on 318
million diluted shares outstanding.  Non-GAAP EPS for the third
quarter of 2008 was $4.92, compared to $4.63 in the second quarter of
2008.

Income Taxes – Our effective tax rate was 24% for the third quarter of
2008.

Cash Flow and Capital Expenditures – Net cash provided by operating
activities for the third quarter of 2008 totaled $2.18 billion as
compared to $1.77 billion for the second quarter of 2008.  In the
third quarter of 2008, capital expenditures were $452 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 third quarter of 2008, free cash flow was $1.73 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 September 30, 2008, cash, cash equivalents, and
marketable securities were $14.4 billion.

On a worldwide basis, Google employed 20,123 full-time employees as of
September 30, 2008, up from 19,604 full-time employees as of June 30,
2008.

Google Announces Third Quarter Results
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