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Google Earnings Released (Officially This Time)

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Google Earnings Released (Officially This Time)
[ Business]

Google had an accident today. The company’s earnings report was accidentally released a few hours early, and due to lower than expected profits (with a big operating loss from Motorola), Google’s shares have been paying the price.

The company said in a statement that its financial printer had filed the company’s draft 8K statement without authorization, and that it had ceased trading on NASDAQ while it worked to finalize the document. It was missing the obligatory quote from the CEO.

Now, Google has released the official finalized report, complete with statement from Larry Page, who says, “We had a strong quarter. Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter. I am also really excited about the progress we’re making creating a beautifully simple, intuitive Google experience across all devices.”

Google will hold its earnings conference call at 4:30 Eastern.

Here’s the release in its entirety:

MOUNTAIN VIEW, Calif. – October 18, 2012 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended September 30, 2012.

“We had a strong quarter. Revenue was up 45 percent year-on-year, and, at just fourteen years old, we cleared our first $14 billion revenue quarter,” said Larry Page, CEO of Google. “I am also really excited about the progress we’re making creating a beautifully simple, intuitive Google experience across all devices.”

Q3 Financial Summary

Google Inc. reported consolidated revenues of $14.10 billion for the quarter ended September 30, 2012, an increase of 45% compared to the third quarter of 2011. Google Inc. reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the third quarter of 2012, TAC totaled $2.77 billion, or 26% of advertising revenues.

Operating income, operating margin, net income, and earnings per share (EPS) are reported 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 at the end of this release.

  • GAAP operating income in the third quarter of 2012 was $2.74 billion, or 19% of revenues. This compares to GAAP operating income of $3.06 billion, or 31% of revenues, in the third quarter of 2011. Non-GAAP operating income in the third quarter of 2012 was $3.80 billion, or 27% of revenues. This compares to non-GAAP operating income of $3.63 billion, or 37% of revenues, in the third quarter of 2011.
  • GAAP net income in the third quarter of 2012 was $2.18 billion, compared to $2.73 billion in the third quarter of 2011. Non-GAAP net income in the third quarter of 2012 was $3.01 billion, compared to $3.18 billion in the third quarter of 2011.
  • GAAP EPS in the third quarter of 2012 was $6.53 on 333 million diluted shares outstanding, compared to $8.33 in the third quarter of 2011 on 327 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2012 was $9.03, compared to $9.72 in the third quarter of 2011.
  • Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense, as well as restructuring and related charges recorded in our Motorola business.  Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits. In the third quarter of 2012, the expense related to SBC and the related tax benefits were $715 million and $155 million compared to $571 million and $116 million in the third quarter of 2011.  In the third quarter of 2012, restructuring and related charges recorded in our Motorola business were $349 million, and the related tax benefits were $76 million.

Q3 Financial Highlights

Revenues and other information – On a consolidated basis, Google Inc. revenues for the quarter ended September 30, 2012 was $14.10 billion, an increase of 45% compared to the third quarter of 2011.

  • Google Revenues (advertising and other) – Google revenues were $11.53 billion, or 82% of consolidated revenues, in the third quarter of 2012, representing a 19% increase over third quarter 2011 revenues of $9.72 billion.
    • Google Sites Revenues – Google-owned sites generated revenues of $7.73 billion, or 67% of total Google revenues, in the third quarter of 2012. This represents a 15% increase over third quarter 2011 Google sites revenues of $6.74 billion.
    • Google Network Revenues – Google’s partner sites generated revenues of $3.13 billion, or 27% of total Google revenues, in the third quarter of 2012. This represents a 21% increase from third quarter 2011 Google network revenues of $2.60 billion.

    Google International Revenues – Google revenues from outside of the United States totaled $6.11 billion, representing 53% of total Google revenues in the third quarter of 2012, compared to 54% in the second quarter of 2012 and 55% in the third quarter of 2011.

    Foreign Exchange Impact on Google Revenues – Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the second quarter of 2012 through the third quarter of 2012, our Google revenues in the third quarter of 2012 would have been $136 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the third quarter of 2011 through the third quarter of 2012, our Google revenues in the third quarter of 2012 would have been $557 million higher.

    • Google revenues from the United Kingdom totaled $1.22 billion, representing 11% of Google revenues in the third quarter of 2012, compared to 11% in the third quarter of 2011.
    • In the third quarter of 2012, we recognized a benefit of $62 million to Google revenues through our foreign exchange risk management program, compared to $1 million in the third quarter of 2011.

    Reconciliations of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues are included at the end of this release.

    Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 33% over the third quarter of 2011 and increased approximately 6% over the second quarter of 2012.

    Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our Network members, decreased approximately 15% over the third quarter of 2011 and decreased approximately 3% over the second quarter of 2012.

    TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.77 billion in the third quarter of 2012, compared to $2.21 billion in the third quarter of 2011. TAC as a percentage of advertising revenues was 26% in the third quarter of 2012, compared to 24% in the third quarter of 2011.

    The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.21 billion in the third quarter of 2012. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $556 million in the third quarter of 2012.

  • Motorola Revenues (hardware and other) - Motorola revenues were $2.58 billion ($1.78 billion from the mobile segment and $797 million from the home segment), or 18% of consolidated revenues in the third quarter of 2012.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, credit card processing charges, and manufacturing and inventory-related costs, increased to $3.78 billion, or 27% of revenues, in the third quarter of 2012, compared to $1.17 billion, or 12% of revenues, in the third quarter of 2011.

Operating Expenses – Operating expenses, other than cost of revenues, were $4.81 billion in the third quarter of 2012, or 34% of revenues, compared to $3.28 billion in the third quarter of 2011, or 34% of revenues.

Amortization Expenses – Amortization expenses of acquisition related intangible assets were $317 million for the third quarter of 2012, compared to $126 million in the third quarter of 2011.  Of the $317 million, $182 million was as a result of the acquisition of Motorola, of which $109 million was allocated to Google and $73 million was allocated to Motorola.

Stock-Based Compensation (SBC) – In the third quarter of 2012, the total charge related to SBC was $762 million, of which $47 million was restructuring-related, compared to $571 million in the third quarter of 2011.

We currently estimate SBC charges for grants to employees prior to September 30, 2012 to be approximately $2.7 billion for 2012. This estimate does not include expenses to be recognized related to employee stock awards that are granted after September 30, 2012 or non-employee stock awards that have been or may be granted.

Operating Income – On a consolidated basis, GAAP operating income in the third quarter of 2012 was $2.74 billion, or 19% of revenues. This compares to GAAP operating income of $3.06 billion, or 31% of revenues, in the third quarter of 2011. Non-GAAP operating income in the third quarter of 2012 was $3.80 billion, or 27% of revenues. This compares to non-GAAP operating income of $3.63 billion, or 37% of revenues, in the third quarter of 2011.

  • Google Operating Income – GAAP operating income for Google was $3.26 billion, or 28% of Google revenues, in the third quarter of 2012. This compares to GAAP operating income of $3.06 billion, or 31% of Google revenues, in the third quarter of 2011. Non-GAAP operating income in the third quarter of 2012 was $3.95 billion, or 34% of Google revenues. This compares to non-GAAP operating income of $3.63 billion in the third quarter of 2011, or 37% of Google revenues.
  • Motorola Operating Loss – GAAP operating loss for Motorola was $527 million ($505 million for the mobile segment and $22 million for the home segment), or -20% of Motorola revenues in the third quarter of 2012. Non-GAAP operating loss for Motorola in the third quarter of 2012 was $151 million, or -6% of Motorola revenues.

Interest and Other Income, Net – Interest and other income, net, was $63 million in the third quarter of 2012, compared to $302 million in the third quarter of 2011.

Income Taxes – Our effective tax rate was 22% for the third quarter of 2012.

Net Income – GAAP net income in the third quarter of 2012 was $2.18 billion, compared to $2.73 billion in the third quarter of 2011. Non-GAAP net income was $3.01 billion in the third quarter of 2012, compared to $3.18 billion in the third quarter of 2011. GAAP EPS in the third quarter of 2012 was $6.53 on 333 million diluted shares outstanding, compared to $8.33 in the third quarter of 2011 on 327 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2012 was $9.03, compared to $9.72 in the third quarter of 2011.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the third quarter of 2012 totaled $4.0 billion, compared to $3.95 billion in the third quarter of 2011. In the third quarter of 2012, capital expenditures were $872 million, the majority of which was for production equipment and facilities-related purchases. 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 2012, free cash flow was $3.13 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, 2012, cash, cash equivalents, and short-term marketable securities were $45.7 billion.

Headcount – On a worldwide basis, we employed 53,546 full-time employees (36,118 in our Google business and 17,428 in our Motorola business) as of September 30, 2012, compared to 54,604 full-time employees as of June 30, 2012.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Google’s third quarter 2012 earnings release call will be available at http://investor.google.com/webcast.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 on that site.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and uncertainties. These statements include statements regarding our continued investments in our core areas of strategic focus, our expected SBC charges, and our plans to make significant capital expenditures. 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, unforeseen changes in our hiring patterns 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 Annual Report on Form 10-K for the year ended December 31, 2011 and our most recent Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, which are on file with the SEC and are available on our investor relations website at investor.google.com and on the SEC 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, 2012.  All information provided in this release and in the attachments is as of October 18, 2012, and we undertake no duty to update this information unless required by law.

ABOUT NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which statements are prepared and presented in accordance with GAAP, we use the following non-GAAP financial measures: non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP EPS, free cash flow, and non-GAAP international revenues. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, 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 selected non-GAAP financial measures to the nearest comparable GAAP financial measures,” “Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures,” “Reconciliation from net cash provided by operating activities to free cash flow,” and “Reconciliation from GAAP international revenues to non-GAAP international revenues” 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 “recurring core business operating results,” meaning our operating performance excluding not only non-cash charges, such as SBC, but also discrete cash charges that are infrequent in nature. 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 both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

Non-GAAP operating income and operating margin. We define non-GAAP operating income as operating income plus expenses related to SBC, and, as applicable, other special items. Non-GAAP operating margin is defined as non-GAAP operating income divided by revenues. Google considers these non-GAAP financial measures to be useful metrics for management and investors because they exclude the effect of SBC, and as applicable, other special items so that Google’s management and investors can compare Google’s recurring core business operating results over multiple periods. Because of varying available valuation methodologies, subjective assumptions and the variety of award types that companies can use under FASB ASC Topic 718, Google’s management believes that providing a non-GAAP financial measure that excludes SBC allows investors to make meaningful comparisons between Google’s recurring 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 recurring core business operating results over different periods of time. There are a number of limitations related to the use of non-GAAP operating income versus operating income calculated in accordance with GAAP. First, non-GAAP operating income excludes some costs, namely, SBC, that are recurring. SBC has been and will continue to be for the foreseeable future a significant recurring expense in Google’s business. Second, SBC is an important part of our employees’ compensation and impacts their performance. Third, the components of the costs that we exclude in our calculation of non-GAAP operating income may differ from the components that our peer companies exclude when they report their results of operations. Management compensates for these limitations 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 EPS. We define non-GAAP net income as net income plus expenses related to SBC and, as applicable, other special items less the related tax effects. The tax effects of SBC and, as applicable, other special items are calculated using the tax-deductible portion of SBC, and, as applicable, other special items, and applying the entity-specific, U.S. federal and blended state tax rates.  We define non-GAAP EPS as non-GAAP net income divided by the weighted average outstanding shares, on a fully-diluted basis. 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 recurring core business operating results, we exclude from non-GAAP net income and non-GAAP EPS the tax effects associated with SBC and, as applicable, other special items. Without excluding these tax effects, investors would only see the gross effect that excluding these expenses had on our operating results. The same limitations described above regarding Google’s use of non-GAAP operating income and non-GAAP operating margin apply to our use of non-GAAP net income and non-GAAP EPS. Management compensates for these limitations 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. We define free cash flow as net cash provided by operating activities less 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 the GAAP measure of 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 from operations for the period because 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 the statement of cash flows and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on Form 10-Q and Annual Report on Form 10-K. Google has computed free cash flow using the same consistent method from quarter to quarter and year to year.

Non-GAAP international revenues. We define non-GAAP international revenues as international revenues excluding the impact of foreign exchange and hedging. Non-GAAP international revenues are calculated by translating current quarter revenues using prior quarter and prior year exchange rates, as well as excluding any hedging gains realized in the current quarter. We consider non-GAAP international revenues as a useful metric as it facilitates management’s internal comparison to our historical performance.

The accompanying tables have more details on the non-GAAP financial measures that are most directly comparable to GAAP financial measures and the related reconciliations between these financial measures.

Contact

Willa Chalmers
Investor Relations
+1-650-214-3381
willa@google.com

Google Inc.
CONSOLIDATED BALANCE SHEETS
(In millions)

As of
December 31,
2011 *
As of
September 30,
2012
(unaudited)
Assets
Current assets:
Cash and cash equivalents $9,983 $16,260
Marketable securities 34,643 29,464
Accounts receivable, net of allowance 5,427 7,259
Inventories 35 618
Receivable under reverse repurchase agreements 745 550
Deferred income taxes, net 215 230
Prepaid revenue share, expenses and other assets 1,710 2,440
Total current assets 52,758 56,821
Prepaid revenue share, expenses and other assets, non-current 499 2,206
Non-marketable equity securities 790 1,063
Property and equipment, net 9,603 11,401
Intangible assets, net 1,578 7,754
Goodwill 7,346 10,485
Total assets $72,574 $89,730
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $588 $2,233
Short-term debt 1,218 3,218
Accrued compensation and benefits 1,818 1,926
Accrued expenses and other current liabilities 1,370 3,313
Accrued revenue share 1,168 1,108
Securities lending payable 2,007 1,686
Deferred revenue 547 905
Income taxes payable, net 197 45
Total current liabilities 8,913 14,434
Long-term debt 2,986 2,988
Deferred revenue, non-current 44 100
Income taxes payable, non-current 1,693 2,034
Deferred income taxes, net, non-current 287 1,461
Other long-term liabilities 506 685
Stockholders’ equity:
Common stock and additional paid-in capital 20,264 22,204
Accumulated other comprehensive income 276 368
Retained earnings 37,605 45,456
Total stockholders’ equity 58,145 68,028
Total liabilities and stockholders’ equity $72,574 $89,730

* Derived from audited financial statements.

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Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share amounts which are reflected in thousands and per share amounts)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2012 2011 2012
(unaudited) (unaudited)
Revenues:
Google (advertising and other) $9,720 $11,526 $27,322 $33,135
Motorola (hardware and other) - 2,575 - 3,825
Total revenues 9,720 14,101 27,322 36,960
Costs and expenses:
Cost of revenues – Google (advertising and other) Âą 3,378 4,440 9,485 12,213
Cost of revenues – Motorola (hardware and other) Âą - 2,114 - 3,143
Research and development Âą 1,404 2,009 3,861 5,035
Sales and marketing Âą 1,204 1,760 3,322 4,462
General and administrative Âą 676 1,042 1,919 2,779
Charge related to the resolution of Department of Justice Investigation - - 500 -
Total costs and expenses 6,662 11,365 19,087 27,632
Income from operations 3,058 2,736 8,235 9,328
Interest and other income, net 302 63 602 473
Income before income taxes 3,360 2,799 8,837 9,801
Provision for income taxes 631 623 1,804 1,950
Net income $2,729 $2,176 $7,033 $7,851
Net income per share – basic $8.44 $6.64 $21.82 $24.05
Net income per share – diluted $8.33 $6.53 $21.53 $23.69
Shares used in per share calculation – basic 323,155 327,785 322,304 326,452
Shares used in per share calculation – diluted 327,439 333,314 326,619 331,414
Âą Includes stock-based compensation expense as follows:
Cost of revenues – Google (advertising and other) $72 $103 $172 $259
Cost of revenues – Motorola (hardware and other) - 8 - 13
Research and development 311 378 795 968
Sales and marketing 104 155 256 372
General and administrative 84 118 214 364
$571 $762 $1,437 $1,976

 

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Google Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)

Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2012 2011 2012
(unaudited) (unaudited)
Operating activities
Net income $2,729 $2,176 $7,033 $7,851
Adjustments:
Depreciation and amortization of property and equipment 363 507 1,011 1,358
Amortization of intangible and other assets 129 321 337 651
Stock-based compensation expense 571 762 1,437 1,976
Excess tax benefits from stock-based award activities (28) (58) (61) (113)
Deferred income taxes 62 (168) 526 23
Gain on divestiture of business - - - (188)
Other (52) 32 3 (24)
Changes in assets and liabilities, net of effects of acquisitions and divestiture:
Accounts receivable (223) (307) (247) (228)
Income taxes, net 366 167 268 1,336
Inventories (20) 18 (18) 188
Prepaid revenue share, expenses and other assets 22 (27) (128) (1,215)
Accounts payable (5) (194) 72 (274)
Accrued expenses and other liabilities (42) 727 255 484
Accrued revenue share 64 (80) 70 (57)
Deferred revenue 14 128 83 182
Net cash provided by operating activities 3,950 4,004 10,641 11,950
Investing activities
Purchases of property and equipment (680) (872) (2,487) (2,253)
Purchases of marketable securities (22,738) (8,704) (43,693) (24,246)
Maturities and sales of marketable securities 19,480 7,143 33,107 29,800
Investments in non-marketable equity securities (15) (44) (358) (246)
Cash collateral related to securities lending 1,119 (230) 694 (321)
Investments in reverse repurchase agreements (125) (75) (395) 195
Acquisitions, net of cash acquired and proceeds received from divestiture, and purchases of intangibles and other assets (488) (525) (1,350) (10,471)
Net cash used in investing activities (3,447) (3,307) (14,482) (7,542)
Financing activities
Net payments related to stock-based award activities (108) (5) (20) (189)
Excess tax benefits from stock-based award activities 28 58 61 113
Proceeds from issuance of debt, net of costs 750 4,374 8,780 12,125
Repayments of debt (750) (4,375) (8,054) (10,128)
Net cash provided by (used in) financing activities (80) 52 767 1,921
Effect of exchange rate changes on cash and cash equivalents (113) 74 74 (52)
Net increase (decrease) in cash and cash equivalents 310 823 (3,000) 6,277
Cash and cash equivalents at beginning of period 10,320 15,437 13,630 9,983
Cash and cash equivalents at end of period $10,630 $16,260 $10,630 $16,260

 

Reconciliations of selected non-GAAP financial measures to the nearest comparable GAAP financial measures

The following tables present reconciliations of selected non-GAAP financial measures to the nearest comparable GAAP financial measures (in millions, unaudited)

Three Months Ended September 30, 2011
Google
GAAP AdjustmentsÂą Non-GAAP
Revenues $9,720 $0 $9,720
Costs and expenses:
Cost of revenues 3,378 (72) 3,306
Research and development 1,404 (311) 1,093
Sales and marketing 1,204 (104) 1,100
General and administrative 676 (84) 592
Total costs and expenses 6,662 (571) 6,091
Income from operations $3,058 $3,629
Three Months Ended September 30, 2012
Google Motorola Consolidated
GAAP Adjustments¹ Non-GAAP GAAP Adjustments² Non-GAAP GAAP Adjustments² Non-GAAP
Revenues $11,526 $0 $11,526 $2,575 $0 $2,575 $14,101 $0 $14,101
Costs and expenses:
Cost of revenues 4,440 (103) 4,337 2,114 (91) 2,023 6,554 (194) 6,360
Research and development 1,540 (350) 1,190 469 (132) 337 2,009 (482) 1,527
Sales and marketing 1,385 (126) 1,259 375 (113) 262 1,760 (239) 1,521
General and administrative 898 (109) 789 144 (40) 104 1,042 (149) 893
Total costs and expenses 8,263 (688) 7,575 3,102 (376) 2,726 11,365 (1,064) 10,301
Income (loss) from operations $3,263 $3,951 ($527) ($151) $2,736 $3,800
(1) To eliminate stock-based compensation expense.
(2) To eliminate stock-based compensation expense, as well as restructuring and related charges recorded in our Motorola business.

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 millions, except share amounts which are reflected in thousands and per share amounts, unaudited):

Consolidated Three Months Ended September 30, 2011 Three Months Ended September 30, 2012
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)
$571 (c) $715 (d)
$349 (e)
Income from operations $3,058 31.5% $571 $3,629 37.3% $2,736 19.4% $1,064 $3,800 26.9%
$571 (c) $715 (d)
(116) (f) (155) (f)
349 (e)
(76) (g)
Net income $2,729 $455 $3,184 $2,176 $833 $3,009
Net income per share – diluted $8.33 $9.72 $6.53 $9.03
Shares used in per share calculation – diluted 327,439 327,439 333,314 333,314
(a) Operating margin is defined as consolidated income from operations divided by consolidated revenues.
(b) Non-GAAP operating margin is defined as non-GAAP consolidated income from operations divided by consolidated revenues.
(c) To eliminate $571 million of stock-based compensation expense recorded in the third quarter of 2011.
(d) To eliminate $715 million of stock-based compensation expense recorded in the third quarter of 2012.
(e) To eliminate $349 million of restructuring and related charges recorded in our Motorola business, of which $47 million was related to stock-based compensation.
(f) To eliminate income tax effects related to expenses noted in (c) and (d).
(g) To eliminate income tax effects related to expense noted in (e).

The following tables present certain non-GAAP results before certain material items by business (in millions, unaudited):

Google Three Months Ended September 30, 2011 Three Months Ended September 30, 2012
GAAP Actual Operating Margin (h) Adjustments Non-GAAP Results Non-GAAP Operating Margin (i) GAAP Actual Operating Margin (h) Adjustments Non-GAAP Results Non-GAAP Operating Margin (i)
$571 (j) $688 (k)
Income from operations $3,058 31.5% $571 $3,629 37.3% $3,263 28.3% $688 $3,951 34.3%
(h) Operating margin is defined as Google income from operations divided by Google revenues.
(i) Non-GAAP operating margin is defined as non-GAAP Google income from operations divided by Google revenues.
(j) To eliminate $571 million of stock-based compensation expense recorded in the third quarter of 2011.
(k) To eliminate $688 million of stock-based compensation expense recorded in the third quarter of 2012.
Motorola Three Months Ended September 30, 2012
GAAP Actual Operating Margin (l) Adjustments Non-GAAP Results Non-GAAP Operating Margin (m)
$27 (n)
349 (o)
Loss from operations ($527) -20.5% $376 ($151) -5.9%
(l) Operating margin is defined as Motorola income from operations divided by Motorola revenues.
(m) Non-GAAP operating margin is defined as non-GAAP Motorola income from operations divided by Motorola revenues.
(n) To eliminate $27 million of stock-based compensation expense recorded in the third quarter of 2012.
(o) To eliminate $349 million of restructuring and related charges recorded in our Motorola business, of which $47 million was related to stock-based compensation.

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Reconciliation from net cash provided by operating activities to free cash flow (in millions, unaudited):

Three Months Ended
September 30, 2012
Net cash provided by operating activities $4,004
Less purchases of property and equipment ($872)
Free cash flow $3,132
Net cash used in investing activities* ($3,307)
Net cash provided by financing activities $52

* Includes purchases of property and equipment.

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Reconciliation from GAAP international revenues to non-GAAP international revenues (in millions, unaudited):

Three Months Ended
September 30,
2012
Three Months Ended
September 30,
2012
Consolidated (using Q3’11′s FX rates) (using Q2’12′s FX rates)
United Kingdom revenues (GAAP) $1,226 $1,226
Exclude foreign exchange impact on Q3’12 revenues using Q3’11 rates 48 -
Exclude foreign exchange impact on Q3’12 revenues using Q2’12 rates - 17
Exclude hedging gains recognized in Q3’12 (6) (6)
United Kingdom revenues excluding foreign exchange and hedging impact (Non-GAAP) $1,268 $1,237
Rest of the world revenues (GAAP) $5,876 $5,876
Exclude foreign exchange impact on Q3’12 revenues using Q3’11 rates 584 -
Exclude foreign exchange impact on Q3’12 revenues using Q2’12 rates - 140
Exclude hedging gains recognized in Q3’12 (56) (56)
Rest of the world revenues excluding foreign exchange and hedging impact (Non-GAAP) $6,404 $5,960
Three Months Ended
September 30,
2012
Three Months Ended
September 30,
2012
Google (using Q3’11′s FX rates) (using Q2’12′s FX rates)
United Kingdom revenues (GAAP) $1,216 $1,216
Exclude foreign exchange impact on Q3’12 revenues using Q3’11 rates 47 -
Exclude foreign exchange impact on Q3’12 revenues using Q2’12 rates - 17
Exclude hedging gains recognized in Q3’12 (6) (6)
United Kingdom revenues excluding foreign exchange and hedging impact (Non-GAAP) $1,257 $1,227
Rest of the world revenues (GAAP) $4,894 $4,894
Exclude foreign exchange impact on Q3’12 revenues using Q3’11 rates 510 -
Exclude foreign exchange impact on Q3’12 revenues using Q2’12 rates - 119
Exclude hedging gains recognized in Q3’12 (56) (56)
Rest of the world revenues excluding foreign exchange and hedging impact (Non-GAAP) $5,348 $4,957

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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2012 2011 2012
Advertising revenues:
Google websites $6,740 $7,727 $18,851 $22,581
Google Network Members’ websites 2,595 3,133 7,506 9,029
Total advertising revenues 9,335 10,860 26,357 31,610
Other revenues 385 666 965 1,525
Total Google revenues (advertising and other) 9,720 11,526 27,322 33,135
Total Motorola revenues (hardware and other) - 2,575 - 3,825
Consolidated Revenues $9,720 $14,101 $27,322 $36,960

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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2011 2012 2011 2012
Advertising revenues:
Google websites 69% 67% 69% 68%
Google Network Members’ websites 27 27 27 27
Total advertising revenues 96 94 96 95
Other revenues 4 6 4 5
Google Revenues 100% 100% 100% 100%

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  • Steven G

    If you really dig into their earnings you’ll see that the real growth came from their own websites. Meaning more income they do not have to share. So basically screwing over website traffic is paying off big time for Google. Remember, every ad click that doesn’t occur on a site other than Google, Google either gets nothing (if there isn’t Adsense ads on the site) or a percentage of the amount paid for that click by the Advertiser (32% if there is Adsense ads). So there is incentive for Google to game their index to favor their own sites, because that means more money for them and less money for anybody else.

  • Polo M

    Shhh……….

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