Form 10-Q

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 000-50726

Google Inc.

(Exact name of registrant as specified in its charter)

Delaware

77-0493581

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

1600 Amphitheatre Parkway

Mountain View, CA 94043

(Address of principal executive offices)

(Zip Code)

(650) 253-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

At July 31, 2006, the number of shares outstanding of Google’s Class A common stock was 219,193,569 shares and the number of shares outstanding of Google’s Class B common stock was 85,167,040 shares.

GOOGLE INC.

INDEX


		Page No.
	PART I. FINANCIAL INFORMATION

Item 1	Financial Statements

	Condensed Consolidated Balance Sheets—December 31, 2005 and June 30, 2006 (unaudited)	3

	Condensed Consolidated Statements of Income—Three and Six Months Ended June 30, 2005 and 2006 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2005 and 2006 (unaudited)	5

	Notes to Unaudited Condensed Consolidated Financial Statements	6

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3	Quantitative and Qualitative Disclosures About Market Risk	37

Item 4	Controls and Procedures	38

	PART II. OTHER INFORMATION

Item 1	Legal Proceedings	40

Item 1A	Risk Factors	40

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 4	Submission of Matters to a Vote of Security Holders	57

Item 6	Exhibits	58

	Signatures	59

	Exhibit Index

	Certifications

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GOOGLE INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value)


	As of December 31, 2005			As of June 30, 2006
				(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,877,174		$	4,015,922
Marketable securities		4,157,073			5,805,710
Accounts receivable, net of allowance of $14,852 and $13,891		687,976			885,088
Deferred income taxes, net		49,341			55,513
Prepaid revenue share, expenses and other assets		229,507			295,874

Total current assets		9,001,071			11,058,107
Deferred income taxes, net, non-current		—			34,768
Prepaid revenue share, expenses and other assets, non-current		16,941			19,576
Non-marketable equity securities		14,369			1,018,591
Property and equipment, net		961,749			1,799,766
Intangible assets, net		82,783			146,601
Goodwill		194,900			318,597

Total assets	$	10,271,813		$	14,396,006

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	115,575		$	179,441
Accrued compensation and benefits		198,788			150,526
Accrued expenses and other current liabilities		114,377			183,163
Accrued revenue share		215,771			272,731
Deferred revenue		73,099			83,286
Income taxes payable		27,774			108,283

Total current liabilities		745,384			977,430
Deferred revenue, long-term		10,468			15,904
Deferred income taxes, net		35,419			—
Other long-term liabilities		61,585			45,664
Stockholders’ equity:
Common stock, $0.001 par value: 9,000,000 shares authorized and 293,027 and 302,588 shares issued and outstanding, excluding 3,303 and 1,522 shares subject to repurchase at December 31, 2005 and June 30, 2006		293			303
Additional paid-in capital		7,477,792			10,014,393
Deferred stock-based compensation		(119,015	)		—
Accumulated other comprehensive income (loss)		4,019			(26,924	)
Retained earnings		2,055,868			3,369,236

Total stockholders’ equity		9,418,957			13,357,008

Total liabilities and stockholders’ equity	$	10,271,813		$	14,396,006

See accompanying notes.

GOOGLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006
	(unaudited)
Revenues	$	1,384,495	$	2,455,991	$	2,641,011	$	4,709,746
Costs and expenses:
Cost of revenues (including stock-based compensation expense of $1,024, $2,322, $2,597 and $4,606)(1)		598,119		989,032		1,144,900		1,893,151
Research and development (including stock-based compensation expense of $27,362, $70,564, $56,661 and $143,650) (1)		123,134		282,552		231,845		529,151
Sales and marketing (including stock-based compensation expense of $7,522, $14,285, $14,058 and $30,214) (1)		104,546		196,397		194,034		387,340
General and administrative (including stock-based compensation expense of $11,430, $21,978, $22,930 and $45,343) (1)		82,998		172,638		151,764		342,033

Total costs and expenses		908,797		1,640,619		1,722,543		3,151,675

Income from operations		475,698		815,372		918,468		1,558,071
Interest income and other, net		19,722		160,805		33,408		228,724

Income before income taxes		495,420		976,177		951,876		1,786,795
Provision for income taxes		152,606		255,100		239,869		473,427

Net income	$	342,814	$	721,077	$	712,007	$	1,313,368

Net income per share:
Basic	$	1.27	$	2.39	$	2.65	$	4.41

Diluted	$	1.19	$	2.33	$	2.48	$	4.28

Number of shares used in per share calculations:
Basic		270,729		301,410		268,418		297,653

Diluted		287,238		310,038		286,926		307,080

(1)

Stock-based compensation recognized in the three and six months ended June 30, 2005, accounted for under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, has been reclassified to these expense lines to conform with the presentation in the three and six months ended June 30, 2006. As discussed in Note 1 of the accompanying notes, stock-based compensation for the three and six months ended June 30, 2006, is presented in conformity with Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment.

See accompanying notes.

GOOGLE INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,
	2005			2006
	(unaudited)
Operating activities
Net income	$	712,007		$	1,313,368
Adjustments:
Depreciation of property and equipment		103,445			206,079
Amortization of intangibles and warrants		19,677			31,300
In-process research and development		—			4,000
Stock-based compensation		96,246			223,813
Excess tax benefits from stock-based award activity		196,163			(258,087	)
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable		(104,587	)		(193,211	)
Income taxes, net		37,270			265,384
Prepaid revenue share, expenses and other assets		(22,942	)		(67,974	)
Accounts payable		72,779			63,879
Accrued expenses and other liabilities		(829	)		14,782
Accrued revenue share		31,064			56,984
Deferred revenue		13,948			5,073

Net cash provided by operating activities		1,154,241			1,665,390

Investing activities
Purchases of property and equipment		(299,854	)		(1,043,938	)
Purchases of marketable securities		(1,853,666	)		(17,576,067	)
Maturities and sales of marketable securities		1,361,895			15,856,478
Investments in non-marketable equity securities		(10,000	)		(1,004,222	)
Acquisitions, net of cash acquired, and purchases of intangible and other assets		(19,202	)		(188,506	)

Net cash used in investing activities		(820,827	)		(3,956,255	)

Financing activities
Proceeds from exercise of stock options, net		13,072			97,088
Net proceeds from a public stock offering		—			2,063,777
Excess tax benefits from stock-based award activity		—			258,087
Payments of principal on capital leases and equipment loans		(1,611	)		—

Net cash provided by financing activities		11,461			2,418,952

Effect of exchange rate changes on cash and cash equivalents		(18,276	)		10,661

Net increase in cash and cash equivalents		326,599			138,748
Cash and cash equivalents at beginning of year		426,873			3,877,174

Cash and cash equivalents at end of period	$	753,472		$	4,015,922

Supplemental disclosures of cash flow information
Cash paid for interest	$	94		$	185

Cash paid for income taxes	$	2,360		$	208,380

Acquisition related activities:
Issuance of equity in connection with acquisitions, net of deferred stock-based compensation	$	15,237		$	—

See accompanying notes.

GOOGLE INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Google Inc. and Summary of Accounting Policies

Nature of Operations

We were incorporated in California in September 1998. We were re-incorporated in the State of Delaware in August 2003. We provide highly targeted advertising and global Internet search solutions as well as intranet solutions via an enterprise search appliance.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of Google and our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of June 30, 2006, the condensed consolidated statements of income for the three and six months ended June 30, 2005 and 2006, and the condensed consolidated statements of cash flows for the six months ended June 30, 2005 and 2006 are unaudited. These unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In our opinion, the unaudited interim condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for the fair presentation of our financial position as of June 30, 2006, our results of operations for the three and six months ended June 30, 2005 and 2006, and our cash flows for the six months ended June 30, 2005 and 2006. The results of operations for the three and six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006.

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2005 Annual Report on Form 10-K filed on March 16, 2006.

Use of Estimates

The preparation of interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate our estimates, including those related to the accounts receivable and sales allowances, fair values of marketable and non-marketable securities, fair values of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, fair values of options to purchase our common stock, and income taxes, among others. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Revenue Recognition

The following table presents our revenues (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2006		2005		2006
	(unaudited)
Advertising revenues:
Google web sites	$	737,172	$	1,432,461	$	1,394,169	$	2,729,778
Google Network web sites		630,242		996,567		1,214,357		1,924,942

Total advertising revenues		1,367,414		2,429,028		2,608,526		4,654,720
Licensing and other revenues		17,081		26,963		32,485		55,026

Revenues	$	1,384,495

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