Google Announces First Quarter 2011 Results

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EXPLANATORY NOTE:

WE HAVE MODIFIED THIS VERSION OF THE PRESS RELEASE.

In May 2011, in connection with a potential resolution of an investigation by the United States Department of Justice into the use of Google advertising by certain advertisers, we accrued $500 million for the three month period ended March 31, 2011. Although we cannot predict the ultimate outcome of this matter, we believe it will not have a material adverse effect on our business, consolidated financial position, results of operations, or cash flows.

As a result, we have updated the affected financial data in this release, as noted, as well as the accompanying financial tables.

MOUNTAIN VIEW, Calif. – April 14, 2011 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended March 31, 2011.

“We had a great quarter with 27% year-over-year revenue growth,” said Patrick Pichette, CFO of Google. “These results demonstrate the value of search and search ads to our users and customers, as well as the extraordinary potential of areas like display and mobile. It's clear that our past investments have been crucial to our success today—which is why we continue to invest for the long term.”

Q1 Financial Summary

Google reported revenues of $8.58 billion for the quarter ended March 31, 2011, an increase of 27% compared to the first quarter of 2010. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2011, TAC totaled $2.04 billion, or 25% of advertising revenues.

Google reports operating income, operating margin, 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 in the first quarter of 2011 was $2.30 billion, or 27% of revenues [updated from $2.80 billion, or 33% of revenues]. This compares to GAAP operating income of $2.49 billion, or 37% of revenues, in the first quarter of 2010. Non-GAAP operating income in the first quarter of 2011 was $3.23 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.78 billion, or 41% of revenues, in the first quarter of 2010.
  • GAAP net income in the first quarter of 2011 was $1.80 billion [updated from $2.30 billion], compared to $1.96 billion in the first quarter of 2010. Non-GAAP net income in the first quarter of 2011 was $2.64 billion, compared to $2.18 billion in the first quarter of 2010.
  • GAAP EPS in the first quarter of 2011 was $5.51 [updated from $7.04] on 326 million diluted shares outstanding, compared to $6.06 in the first quarter of 2010 on 323 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2011 was $8.08, compared to $6.76 in the first quarter of 2010.
  • Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC), and in the first quarter of 2011, the charge related to potential resolution of Department of Justice investigation. Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC and the charge related to potential resolution of Department of Justice investigation, and the related tax benefits. In the first quarter of 2011, the charge related to SBC was $432 million, compared to $291 million in the first quarter of 2010. The tax benefit related to SBC was $92 million in the first quarter of 2011 and $65 million in the first quarter of 2010. The charge related to potential resolution of Department of Justice investigation was $500 million. We recognized no tax benefit for the charge related to potential resolution of Department of Justice investigation.

Q1 Financial Highlights

Revenues – Google reported revenues of $8.58 billion in the first quarter of 2011, representing a 27% increase over first quarter 2010 revenues of $6.77 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues – Google-owned sites generated revenues of $5.88 billion, or 69% of total revenues, in the first quarter of 2011. This represents a 32% increase over first quarter 2010 revenues of $4.44 billion.

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $2.43 billion, or 28% of total revenues, in the first quarter of 2011. This represents a 19% increase from first quarter 2010 network revenues of $2.04 billion.

International Revenues – Revenues from outside of the United States totaled $4.57 billion, representing 53% of total revenues in the first quarter of 2011, compared to 52% in the fourth quarter of 2010 and 53% in the first quarter of 2010. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2010 through the first quarter of 2011, our revenues in the first quarter of 2011 would have been $19 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2010 through the first quarter of 2011, our revenues in the first quarter of 2011 would have been $23 million lower.

  • Revenues from the United Kingdom totaled $969 million, representing 11% of revenues in the first quarter of 2011, compared to 13% in the first quarter of 2010.
  • In the first quarter of 2011, we recognized a benefit of $14 million to revenues through our foreign exchange risk management program, compared to a benefit of $10 million in the first quarter of 2010.

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 first quarter of 2010 and increased approximately 4% over the fourth quarter of 2010.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 8% over the first quarter of 2010 and decreased approximately 1% over the fourth quarter of 2010.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $2.04 billion in the first quarter of 2011, compared to TAC of $1.71 billion in the first quarter of 2010. TAC as a percentage of advertising revenues was 25% in the first quarter of 2011, compared to 26% in the first quarter of 2010.

The majority of TAC is related to amounts ultimately paid to our AdSense partners, which totaled $1.70 billion in the first quarter of 2011. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $337 million in the first quarter of 2011.

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 $897 million, or 10% of revenues, in the first quarter of 2011, compared to $741 million, or 11% of revenues, in the first quarter of 2010.

Operating Expenses – Operating expenses, other than cost of revenues, were $3.34 billion [updated from $2.84 billion] in the first quarter of 2011, or 39% of revenues [updated from 33% of revenues], compared to $1.84 billion in the first quarter of 2010, or 27% of revenues.

SBC – In the first quarter of 2011, the total charge related to SBC was $432 million, compared to $291 million in the first quarter of 2010.

We currently estimate SBC charges for grants to employees prior to April 1, 2011 to be approximately $1.7 billion for 2011. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2011 or non-employee stock awards that have been or may be granted.

Operating Income – – GAAP operating income in the first quarter of 2011 was $2.30 billion, or 27% of revenues [updated from $2.80 billion, or 33% of revenues]. This compares to GAAP operating income of $2.49 billion, or 37% of revenues, in the first quarter of 2010. Non-GAAP operating income in the first quarter of 2011 was $3.23 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.78 billion, or 41% of revenues, in the first quarter of 2010.

Interest and Other Income, Net – Interest and other income, net increased to $96 million in the first quarter of 2011, compared to $18 million in the first quarter of 2010.

Income Taxes – Our effective tax rate was 25% [updated from 21%] for the first quarter of 2011.

Net Income – GAAP net income in the first quarter of 2011 was $1.80 billion [updated from $2.30 billion], compared to $1.96 billion in the first quarter of 2010. Non-GAAP net income in the first quarter of 2011was $2.64 billion, compared to $2.18 billion in the first quarter of 2010. GAAP EPS in the first quarter of 2011 was $5.51 [updated from $7.04] on 326 million diluted shares outstanding, compared to $6.06 in the first quarter of 2010 on 323 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2011 was $8.08, compared to $6.76 in the first quarter of 2010.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the first quarter of 2011 totaled $3.17 billion, compared to $2.58 billion in the first quarter of 2010. In the first quarter of 2011, capital expenditures were $890 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 first quarter of 2011, free cash flow was $2.28 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 March 31, 2011, cash, cash equivalents, and marketable securities were $36.7 billion.

Headcount – On a worldwide basis, Google employed 26,316 full-time employees as of March 31, 2011, up from 24,400 full-time employees as of December 31, 2010.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Google’s first quarter 2011 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 plans to invest heavily in innovation, our expected stock-based compensation charges, our plans to make significant capital expenditures, and our potential resolution of a Department of Justice investigation. 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, 2010, which is on file with the SEC, and is 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 March 31, 2011, which we expect to file with the SEC in May 2011. All information provided in this release and in the attachments is as of April 14, 2011, and Google undertakes no duty to update this information.

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, and free cash flow. 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 non-GAAP results of operations measures to the nearest comparable GAAP measures" and "Reconciliation from net cash provided by operating activities to free cash flow" 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 stock-based compensation, but also discrete cash charges that are infrequent in nature, such as the charge related to potential resolution of Department of Justice investigation incurred as of March 31, 2011. 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 stock-based compensation and the charge related to potential resolution of Department of Justice investigation. 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 stock-based compensation and one-time events 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 ASC Topic 718, Google's management believes that providing a non-GAAP financial measure that excludes stock-based compensation 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, stock-based compensation, that are recurring. Stock-based compensation has been and will continue to be for the foreseeable future a significant recurring expense in Google's business. Second, stock-based compensation 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 stock-based compensation, plus the charge related to potential resolution of Department of Justice investigation, less the related tax effects. 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 stock-based compensation and the charge related to potential resolution of Department of Justice investigation. 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 minus 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 cash flow statement 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.

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

Investor Relations:
Jane Penner
650-214-1624

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Google Inc.
CONSOLIDATED BALANCE SHEETS
(In millions)

  As of
December 31,
2010*
As of
March 31,
2011
    (unaudited)
Assets    
Current assets:    
Cash and cash equivalents $13,630 $12,415
Marketable securities 21,345 24,260
Accounts receivable, net of allowance 4,252 4,216
Receivable under reverse repurchase agreements 750 575
Deferred income taxes, net 259 320
Income taxes receivable, net - 27
Prepaid revenue share, expenses and other assets 1,326 1,497
Total current assets 41,562 43,310
Prepaid revenue share, expenses and other assets, non-current 442 390
Deferred income taxes, net, non-current 265 21
Non-marketable equity securities 523 666
Property and equipment, net 7,759 8,249
Intangible assets, net 1,044 1,016
Goodwill 6,256 6,308
Total assets $57,851 $59,960
Liabilities and Stockholders' Equity    
Current liabilities:    
Accounts payable $483 $516
Short-term debt 3,465 3,216
Accrued compensation and benefits 1,410 945
Accrued expenses and other current liabilities 961 1,464
Accrued revenue share 885 871
Securities lending payable 2,361 1,880
Deferred revenue 394 440
Income taxes payable, net 37 -
Total current liabilities 9,996 9,332
Deferred revenue, non-current 35 32
Income taxes payable, non-current 1,200 1,322
Other long-term liabilities 379 423
Stockholders' equity:    
Common stock and additional paid-in capital 18,235 18,804
Accumulated other comprehensive income 138 381
Retained earnings 27,868 29,666
Total stockholders' equity 46,241 48,851
Total liabilities and stockholders' equity $57,851 $59,960

* 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
March 31,
  2010 2011
  (unaudited)
Revenues $6,775 $8,575
Costs and expenses:    
Cost of revenues (including stock-based compensation expense of $6, $49) 2,452 2,936
Research and development (including stock-based compensation expense of $191, $237) 818 1,226
Sales and marketing (including stock-based compensation expense of $54, $78) 607 1,026
General and administrative (including stock-based compensation expense of $40, $68) 410 591
Charge related to potential resolution of Department of Justice investigation - 500
Total costs and expenses 4,287 6,279
Income from operations 2,488 2,296
Interest and other income, net 18 96
Income before income taxes 2,506 2,392
Provision for income taxes 551 594
Net income $1,955 $1,798
Net income per share - basic $6.15 $5.59
Net income per share - diluted $6.06 $5.51
Shares used in per share calculation - basic 317,895 321,527
Shares used in per share calculation - diluted 322,608 326,383

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

  Three Months Ended
March 31,
  2010 2011
  (unaudited)
Operating activities    
Net income $1,955 $1,798
Adjustments:    
Depreciation and amortization of property and equipment 264 301
Amortization of intangible and other assets 67 100
Stock-based compensation expense 291 432
Excess tax benefits from stock-based award activities (12) (24)
Deferred income taxes (13) 289
Other 2 36
Changes in assets and liabilities, net of effects of acquisitions:    
Accounts receivable 46 181
Income taxes, net 381 73
Prepaid revenue share, expenses and other assets (157) (78)
Accounts payable 120 27
Accrued expenses and other liabilities (394) 37
Accrued revenue share 23 (33)
Deferred revenue 11 33
Net cash provided by operating activities 2,584 3,172
Investing activities    
Purchases of property and equipment (239) (890)
Purchases of marketable securities (12,487) (7,591)
Maturities and sales of marketable securities 9,495 4,645
Investments in non-marketable equity securities (3) (131)
Cash collateral returned related to securities lending - (481)
Maturities of reverse repurchase agreements - 175
Acquisitions, net of cash acquired, and purchases of intangible and other assets (190) (148)
Net cash used in investing activities (3,424) (4,421)
Financing activities    
Net proceeds (payments) related to stock-based award activities (38) 116
Excess tax benefits from stock-based award activities 12 24
Repurchase of common stock in connection with an acquisition (97) -
Proceeds from issuance of short-term debt - 2,184
Repayments of short-term debt - (2,435)
Net cash used in financing activities (123) (111)
Effect of exchange rate changes on cash and cash equivalents (43) 145
Net decrease in cash and cash equivalents (1,006) (1,215)
Cash and cash equivalents at beginning of period 10,198 13,630
Cash and cash equivalents at end of period $9,192 $12,415

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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):

  Three Months Ended March 31, 2010 Three Months Ended March 31, 2011
  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)
      $291 (c)         $432 (d)    
                  500 (e)    
Income from operations $2,488 36.7% $291   $2,779 41.0% $2,296 26.8% $932   $3,228 37.6%
      $291 (c)         $432 (d)    
      (65) (f)         (92) (f)    
                  500 (e)    
Net income $1,955   $226   $2,181   $1,798   $840   $2,638  
Net income per share - diluted $6.06       $6.76   $5.51       $8.08  
Shares used in per share calculation - diluted 322,608       322,608   326,383       326,383  
(a) Operating margin is defined as income from operations divided by revenues.
(b) Non-GAAP operating margin is defined as non-GAAP income from operations divided by revenues.
(c) To eliminate $291 million of stock-based compensation expense recorded in the first quarter of 2010.
(d) To eliminate $432 million of stock-based compensation expense recorded in the first quarter of 2011.
(e) To eliminate $500 million of the charge related to potential resolution of Department of Justice investigation.
(f) To eliminate income tax effects related to expenses noted in (c) and (d).

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

  Three Months Ended
March 31, 2011
Net cash provided by operating activities $3,172
Less purchases of property and equipment (890)
Free cash flow $2,282
Net cash used in investing activities* (4,421)
Net cash used in financing activities (111)

* Includes purchases of property and equipment.

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

  Three Months Ended
March 31,
  2010 2011
Advertising revenues:    
Google websites $4,439 $5,879
Google Network Members' websites 2,036 2,427
Total advertising revenues 6,475 8,306
Other revenues 300 269
Revenues $6,775 $8,575

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

  Three Months Ended
March 31,
  2010 2011
Advertising revenues:    
Google websites 66% 69%
Google Network Members' websites 30% 28%
Total advertising revenues 96% 97%
Other revenues 4% 3%
Revenues 100% 100%

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