Google Posts 11% Revenue Increase At $17.7B

Chris CrumBusiness

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Google just reported its Q2 financial results, with revenue up 11% year-over-year at $17.7 billion.

“Our strong Q2 results reflect continued growth across the breadth of our products, most notably core search, where mobile stood out, as well as YouTube and programmatic advertising”, said CFO Ruth Porat. We are focused every day on developing big new opportunities across a wide range of businesses. We will do so with great care regarding resource allocation."

This is Porat's first quarter as CFO. She came over from Morgan Stanley to replace Patrick Pichette, who announced his retirement in March.

Google reported GAAP and non-GAAP operating income with 13% and 16% year-over-year growth respectively. GAAP diluted EPS for Class A and B common stock and Class C capital stock were $4.93 and $6.43, respectively, and non-GAAP diluted EPS were $6.99.

Aggregate paid clicks were up 18% year-over-year and 7% quarter-over-quarter. That's up 30% year-over-year on Google sites and 9% year-over-year on network members' sites. Aggregate CPCs were up 11% year-over-year and 4% quarter-over-quarter. CPC on Google sites was up 16% year-over-year and on network members' sites up just 3$ year-over-year.

Here's the full release:

MOUNTAIN VIEW, Calif. – July 16, 2015 – Google Inc. (NASDAQ: GOOG, GOOGL) today announced financial results for the quarter ended June 30, 2015.

“Our strong Q2 results reflect continued growth across the breadth of our products, most notably core search, where mobile stood out, as well as YouTube and programmatic advertising”, said Ruth Porat, CFO of Google. “We are focused every day on developing big new opportunities across a wide range of businesses. We will do so with great care regarding resource allocation.”

Q2 2015 Financial Highlights

The following summarizes our consolidated financial results for the quarters ended June 30, 2014 and 2015 (in millions, except for per share information; unaudited):

Three Months Ended
June 30, 2014
Three Months Ended
June 30, 2015
Revenues $ 15,955 $ 17,727
Increase in revenues year over year 22 % 11 %
Traffic acquisition costs (TAC) $ 3,293 $ 3,377
GAAP operating income $ 4,258 $ 4,825
GAAP operating margin 27 % 27 %
Non-GAAP operating income $ 5,138 $ 5,957
Non-GAAP operating margin 32 % 34 %
GAAP net income* $ 3,351 $ 3,931
Non-GAAP net income $ 4,104 $ 4,829
GAAP diluted EPS for Class A and B common stock* $ 4.88 $ 4.93
GAAP diluted EPS for Class C capital stock* $ 4.88 $ 6.43
Non-GAAP diluted EPS for Class A and B common stock and Class C capital stock 5.98 $ 6.99
*GAAP net income and diluted EPS include Net Loss from Discontinued Operations for the three months ended June 30, 2014.

Operating income, operating margin, net income, and earnings per share (EPS) are reported on a GAAP and non-GAAP basis. Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense from continuing operations. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense from continuing operations, net of the related tax benefits, as well as the impact from Net Loss from Discontinued Operations. Non-GAAP diluted EPS also excludes the impact from the adjustment payment to Class C capital stockholders. These non-GAAP measures, as well as free cash flow, an alternative non-GAAP measure of liquidity, and non-GAAP constant currency revenues and growth, are described and reconciled to the corresponding GAAP measures at the end of this release.

Adjustment Payment in Relation to Class C Capital Stock Distribution

In May 2015, we paid $522 million to the holders of Class C capital stock in the form of approximately 853 thousand shares of Class C capital stock and $47 million of cash in lieu of fractional shares of Class C capital stock, in accordance with the settlement of litigation involving the authorization to distribute Class C capital stock (the Adjustment Payment). The Adjustment Payment was allocated to the numerator for calculating net income per share of Class C capital stock from net income available to all stockholders and the remaining undistributed earnings were allocated on a pro rata basis to Class A and Class B common stock and Class C capital stock based on the number of shares used in the per share computation for each class of stock. The weighted-average share impact of the Adjustment Payment is included in the denominator of both basic and diluted net income per share computations for the three and six months ended June 30, 2015.

Q2 2015 Financial Summary

Revenues and Monetization

Revenues by source (in millions; unaudited):

Three Months Ended
June 30, 2015
Change from Q2 2014 to Q2 2015 (YoY) Change from Q1 2015 to Q2 2015 (QoQ)
Google websites $ 12,402 13 % 4 %
Google Network Members' websites 3,621 2 % 1 %
Total advertising revenues* 16,023 11 % 3 %
Other revenues 1,704 17 % (3) %
Revenues $ 17,727 11 % 3 %
*Advertising revenues are generally reported on a gross basis, consistent with GAAP, without deducting TAC.

Had foreign exchange rates remained constant from the second quarter of 2014 through the second quarter of 2015, our revenues in the second quarter of 2015 would have been $1,103 million higher with a constant currency growth rate of 18% year over year. This includes a foreign exchange rate impact of $1,574 million, offset by hedging gains of $471 million related to our foreign exchange risk management program. Our constant currency revenues are presented in the financial tables following this release as well as in the accompanying materials on the Investor Relations website.

Paid clicks and cost-per-click information (unaudited):

Change from Q2 2014 to Q2 2015 (YoY) Change from Q1 2015 to Q2 2015 (QoQ)
Aggregate paid clicks 18 % 7 %
Paid clicks on Google websites 30 % 10 %
Paid clicks on Google Network Members' websites (9) % (2) %
Aggregate cost-per-click (11) % (4) %
Cost-per-click on Google websites (16) % (5) %
Cost-per-click on Google Network Members' websites (3) % (3) %

Costs and Expenses

Traffic acquisition costs (TAC), other cost of revenues, operating expenses, stock-based compensation expense, and depreciation and amortization expense (in millions; unaudited):

Three Months Ended
June 30, 2014
Three Months Ended
June 30, 2015
TAC to Google Network Members $ 2,400 $ 2,432
TAC to distribution partners $ 893 $ 945
Total TAC $ 3,293 $ 3,377
TAC to Google Network Members as % of Google Network Members' revenues 67 % 67 %
TAC to distribution partners as % of Google Website revenues 8 % 8 %
Total TAC as % of advertising revenues 23 % 21 %
Other cost of revenues $ 2,821 $ 3,206
Other cost of revenue as % of revenues 18 % 18 %
Operating expenses (other than cost of revenues) $ 5,583 $ 6,319
Operating expenses as % of revenues 35 % 36 %
Stock-based compensation expense* $ 880 $ 1,132
Tax benefit related to stock-based compensation expense $ (195) $ (234)
Depreciation, amortization, and impairment charges* $ 1,079 $ 1,234
*Included in Cost of revenues and Operating expenses. Excludes impact from discontinued operations for the three months ended June 30, 2014.

Supplemental Information (in millions except for headcount data; unaudited)

Three Months Ended
June 30, 2014
Three Months Ended
June 30, 2015
Cash, cash equivalents, and marketable securities $ 61,204 $ 69,780
Net cash provided by operating activities $ 5,627 $ 6,985
Capital expenditures* $ 2,646 $ 2,515
Free cash flow $ 2,981 $ 4,470
Effective tax rate 22 % 21 %
Headcount 48,584 57,148
*For Q2 2015, our capital expenditures are primarily related to production equipment and data center construction.

Adjustments to Previously Reported Financial Information

In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015 in the cumulative amount of $711 million. The income tax amount is not material to the periods impacted and consolidated revenues are not impacted. We have elected to revise previously issued consolidated financial statements in our upcoming filings to correct prior periods. Please refer to the supplementary slides posted on our Investor Relations website for revised historical financial information.

In the first quarter of 2015, we reclassified revenues primarily related to DoubleClick ad serving software revenues from Other revenues to Advertising revenues from Google Network Members' Websites. Prior period amounts have been adjusted to conform with our current period presentation.

Webcast and Conference Call Information

A live audio webcast of Google’s second quarter 2015 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.

We also announce investor information, including news and commentary about our business and financial performance, SEC filings, notices of investor events and our press and earnings releases, on our investor relations website (http://investor.google.com).

Forward-Looking Statements

This press release may contain forward-looking statements that involve risks and uncertainties. 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, 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, 2014 and our most recent Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, which are on file with the SEC and are available on our investor relations website at investor.google.com and on the SEC website atwww.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2015. All information provided in this release and in the attachments is as of July 16, 2015, 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 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 diluted EPS, free cash flow, non-GAAP constant currency revenues, and non-GAAP constant currency revenue growth. 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.

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, such as our revenues excluding the impact for foreign currency fluctuations or 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.

For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP results of operations to the nearest comparable GAAP measures," "Reconciliation from net cash provided by operating activities to free cash flow," and "Reconciliation from GAAP revenues to non-GAAP constant currency revenues" included at the end of this release.

Image via Wikimedia Commons

Chris Crum
Chris Crum has been a part of the WebProNews team and the iEntry Network of B2B Publications since 2003. Follow Chris on Twitter, on StumbleUpon, on Pinterest and/or on Google: +Chris Crum.