Google Announces Q4 2008 Results
Posted by jonathan at 5:35pm EST on 01/22/2009
The full release is below, but in short, they went from $1.65 billion in Q3 to $1.48 billion in Q4, a slight drop in revenue.
MOUNTAIN VIEW, Calif. – January 22, 2009 –
Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter
and for the fiscal year ended December 31, 2008.“Google performed well in the fourth quarter, despite an increasingly
difficult economic environment. Search query growth was strong,
revenues were up in most verticals, and we successfully contained
costs,” said Eric Schmidt, CEO of Google. “It’s unclear how long the
global downturn will last, but our focus remains on the long term, and
we’ll continue to invest in Google’s core search and ads business as
well as in strategic growth areas such as display, mobile, and
enterprise.”Google also announced today that it is planning to offer employees a
voluntary, one-for-one stock option exchange. This program, intended
to create more incentives for employees to remain at Google and
contribute to achieving its business objectives, is currently
scheduled to begin on January 29, 2009 and end on March 3, 2009,
unless Google is required or opts to extend the offer period to a
later date. Please see the section “Employee Stock Option Exchange”
below for more details.Q4 Financial Summary
Google reported revenues of $5.70 billion for the quarter ended
December 31, 2008, an increase of 18% compared to the fourth quarter
of 2007 and an increase of 3% compared to the third quarter of 2008.
Google reports its revenues, consistent with GAAP, on a gross basis
without deducting traffic acquisition costs (TAC). In the fourth
quarter of 2008, TAC totaled $1.48 billion, or 27% 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 fourth quarter of 2008 was $1.86
billion, or 33% of revenues. This compares to GAAP operating income
of $1.65 billion, or 30% of revenues, in the third quarter of 2008.
Non-GAAP operating income in the fourth quarter of 2008 was $2.15
billion, or 38% of revenues. This compares to non-GAAP operating
income of $2.02 billion, or 37% of revenues, in the third quarter of
2008.GAAP net income for the fourth quarter of 2008 was $382 million as
compared to $1.29 billion in the third quarter of 2008. Non-GAAP net
income in the fourth quarter of 2008 was $1.62 billion, compared to
$1.56 billion in the third quarter of 2008.GAAP EPS for the fourth quarter of 2008 was $1.21 on 317 million
diluted shares outstanding, compared to $4.06 for the third quarter of
2008 on 318 million diluted shares outstanding. Non-GAAP EPS in the
fourth quarter of 2008 was $5.10, compared to $4.92 in the third
quarter of 2008.Non-GAAP operating income and non-GAAP operating margin exclude the
expenses related to stock-based compensation (SBC) and the settlement
agreement with the Authors Guild and the Association of American
Publishers (“AAP”). Non-GAAP effective tax rate, non-GAAP net income,
and non-GAAP EPS exclude the expenses and tax benefits related to SBC,
the settlement agreement with the Authors Guild and the AAP and the
non-cash impairment charges primarily related to our investments in
AOL and Clearwire. In the fourth quarter of 2008, the charge related
to SBC was $286 million as compared to $280 million in the third
quarter of 2008. Also, in the fourth quarter of 2008, we recognized
$1.09 billion in asset impairment charges related primarily to our
investments in AOL and Clearwire. In the third quarter of 2008, we
recognized $95 million of expense related to the settlement agreement
with the Authors Guild and the AAP. The tax benefit related to SBC was
$65 million in the fourth quarter of 2008 and $63 million in the third
quarter of 2008. The tax benefit related to the impairment charges was
$82 million in the fourth quarter of 2008. The tax benefit related to
the settlement agreement was $39 million in the third quarter of 2008.
Reconciliations of non-GAAP measures to GAAP operating income,
operating margin, effective tax rate, net income, and EPS are included
at the end of this release.
Q4 Financial HighlightsRevenues – Google reported revenues of $5.70 billion in the fourth
quarter of 2008, representing an 18% increase over fourth quarter 2007
revenues of $4.83 billion and a 3% increase over third quarter 2008
revenues of $5.54 billion. Google reports its revenues, consistent
with GAAP, on a gross basis without deducting TAC.
Google Sites Revenues – Google-owned sites generated revenues of $3.81
billion, or 67% of total revenues, in the fourth quarter of 2008.
This represents a 22% increase over fourth quarter 2007 revenues of
$3.12 billion and a 4% increase over third quarter 2008 revenues of
$3.67 billion.Google Network Revenues – Google’s partner sites generated revenues,
through AdSense programs, of $1.69 billion, or 30% of total revenues,
in the fourth quarter of 2008. This represents a 4% increase over
fourth quarter 2007 network revenues of $1.64 billion and a 1%
increase over third quarter 2008 network revenues of $1.68 billion.
International Revenues – Revenues from outside of the United States
totaled $2.86 billion, representing 50% of total revenues in the
fourth quarter of 2008, compared to 48% in the fourth quarter of 2007
and 51% in the third quarter of 2008. Had foreign exchange rates
remained constant from the third quarter of 2008 through the fourth
quarter of 2008, our revenues in the fourth quarter of 2008 would have
been $334 million higher. Had foreign exchange rates remained
constant from the fourth quarter of 2007 through the fourth quarter of
2008, our revenues in the fourth quarter of 2008 would have been $266
million higher.Revenues from the United Kingdom totaled $685 million, representing
12% of revenue in the fourth quarter of 2008, compared to 14% in the
fourth quarter of 2007 and 14% in the third quarter of 2008.
In the fourth quarter, we recognized a benefit of $129 million to
revenue through our foreign exchange risk management program.
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 fourth quarter of 2007 and
increased approximately 10% over the third quarter of 2008.
TAC – Traffic Acquisition Costs, the portion of revenues shared with
Google’s partners, decreased to $1.48 billion in the fourth quarter of
2008. This compares to TAC of $1.50 billion in the third quarter of
2008. TAC as a percentage of advertising revenues was 27% in the
fourth quarter, compared to 28% in the third quarter of 2008.
The majority of TAC expense is related to amounts ultimately paid to
our AdSense partners, which totaled $1.29 billion in the fourth
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 $190 million in the fourth 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 $707 million, or 12% of revenues, in
the fourth quarter of 2008, compared to $678 million, or 12% of
revenues, in the third quarter of 2008.Operating Expenses – Operating expenses, other than cost of revenues,
were $1.65 billion in the fourth quarter of 2008, or 29% of revenues,
compared to $1.72 billion in the third quarter of 2008, or 31% of
revenues. The operating expenses in the fourth quarter of 2008
included $890 million in payroll-related and facilities expenses,
compared to $859 million in the third quarter of 2008.
Stock-Based Compensation (SBC) – In the fourth quarter of 2008, the
total charge related to SBC was $286 million as compared to $280
million in the third quarter of 2008.Employee Stock Option Exchange – Our Board of Directors has approved
an exchange offer to allow employees the opportunity to exchange all
or a portion of their existing stock options for the same number of
new options. This program is currently scheduled to commence on
January 29, 2009 and end on March 3, 2009 at 6:00 a.m. Pacific Time,
unless Google is required or opts to extend the offer period to a
later date. Currently, we expect that new options will have an
exercise price equal to the closing price per share of our common
stock on March 2, 2009 and that stock options with exercise prices
above this closing price will be eligible for exchange, but this may
change. Generally, all employees with options are eligible to
participate in the program (Eric Schmidt, Sergey Brin, and Larry Page
do not hold options).The number of Google shares subject to outstanding options will not
change as a result of the exchange offer. We have designed the
program so that new options issued as part of this exchange offer will
be subject to a new vesting schedule which adds 12 months to the
original applicable vesting dates. In addition, new options will vest
no sooner than 6 months after the close of the offer period. The
expiration dates of the new options will remain the same as the
expiration dates of the options being exchanged.We expect to take a modification charge estimated to be $460 million
over the vesting periods of the new options. These vesting periods
range from six months to approximately five years. Assuming the offer
proceeds according to our planned timeline, this modification charge
will be recorded as additional stock based compensation beginning in
the first quarter of 2009. This estimate assumes an exchange price of
approximately $300 and that all eligible underwater options will be
exchanged under the program. As a result, the actual amount of the
modification charge is likely to change.We currently estimate stock-based compensation charges for grants to
employees prior to January 1, 2009 to be approximately $1.04 billion
for 2009. This estimate does not include expenses to be recognized
related to employee stock awards that are granted after January 1,
2009 or non-employee stock awards that have been or may be granted.
It also does not include the estimated $460 million modification
charge related to our employee stock option exchange.Operating Income – GAAP operating income in the fourth quarter of 2008
was $1.86 billion, or 33% of revenues. This compares to GAAP
operating income of $1.65 billion, or 30% of revenues, in the third
quarter of 2008. Non-GAAP operating income in the fourth quarter of
2008 was $2.15 billion, or 38% of revenues. This compares to non-GAAP
operating income of $2.02 billion, or 37% of revenues, in the third
quarter of 2008.Impairment on Equity Investments – We have determined that certain of
our assets are impaired and require us to recognize non-cash
impairment charges related to those investments. In the fourth
quarter of 2008, the impairment charge on these assets was $1.09
billion, including charges of $726 million and $355 million related to
our investments in AOL and Clearwire, respectively.
Interest Income and Other, Net – Interest income and other, net
increased to $70 million in the fourth quarter of 2008, compared with
interest income and other, net of $21 million in the third quarter of
2008.Income Taxes – Our GAAP effective tax rate was 54% for the fourth
quarter of 2008 and 28% for the year, which includes the effect of the
impairment on our equity investments of $1.09 billion in the fourth
quarter and the legal settlement of $95 million with the Authors Guild
and the AAP in the third quarter. Our non-GAAP effective tax rate,
defined as our income before income taxes adding back impairment
charges, legal settlement, and stock-based compensation divided into
the result obtained by subtracting the related tax benefits from our
provision for income taxes, for the fourth quarter and for the year
was 27% and 24%, respectively.Net Income – GAAP net income for the fourth quarter of 2008 was $382
million as compared to $1.29 billion in the third quarter of 2008.
Non-GAAP net income was $1.62 billion in the fourth quarter of 2008,
compared to $1.56 billion in the third quarter of 2008. GAAP EPS for
the fourth quarter of 2008 was $1.21 on 317 million diluted shares
outstanding, compared to $4.06 for the third quarter of 2008, on 318
million diluted shares outstanding. Non-GAAP EPS for the fourth
quarter of 2008 was $5.10, compared to $4.92 in the third quarter of
2008.Cash Flow and Capital Expenditures – Net cash provided by operating
activities for the fourth quarter of 2008 totaled $2.12 billion as
compared to $2.18 billion for the third quarter of 2008. In the
fourth quarter of 2008, capital expenditures were $368 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 fourth quarter of 2008, free cash flow was $1.75 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 December 31, 2008, cash, cash equivalents, and short-term
marketable securities were $15.85 billion.
On a worldwide basis, Google employed 20,222 full-time employees as of
December 31, 2008, up from 20,123 full-time employees as of September
30, 2008.WEBCAST AND CONFERENCE CALL INFORMATION
A live audio webcast of Google’s fourth quarter 2008 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. A replay of the call will be available beginning at 7:30 PM
(ET) today through midnight Thursday, January 29, 2009 by calling
888-203-1112 in the United States or 719-457-0820 for calls from
outside the United States. The required confirmation code for the
replay is 1287114.Following the earnings conference call, Google will host an additional
question-and-answer session to provide an opportunity for financial
analysts to ask more detailed product and financial questions. This
follow-up call will begin today at 3:00 PM (PT) / 6:00 PM (ET) and
also be webcast and available at http://investor.google.com/webcast.html.
A replay of the second call will be available beginning at 9:00 PM
(ET) today through midnight Thursday, January 29, 2009 by calling
888-203-1112 in the United States or 719-457-0820 for calls from
outside the United States. The required confirmation code for the
replay is 1040653.FORWARD LOOKING STATEMENTS
This press release contains forward-looking statements that involve
risks and uncertainties. These statements include statements
regarding our proposed option exchange program, our expected stock-
based compensation charges (including the expected modification charge
resulting from the option exchange program), 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 Quarterly Report on Form 10-Q for the quarter
ended September 30, 2008, 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 report on Form 10-K for the year ended December
31, 2008, which we expect to file with the SEC in February 2009. All
information provided in this release and in the attachments is as of
January 22, 2009 and Google undertakes no duty to update this
information.ABOUT THE OPTION EXCHANGE PROGRAM
The option exchange program described in this press release has not
commenced. At the time the option exchange begins, if at all, Google
will provide eligible employees with written materials explaining the
precise terms and timing of the option exchange. Holders of options to
buy Google’s Class A Common Stock that are eligible to participate in
this option exchange should read these materials carefully when they
become available because they will contain important information about
the option exchange. Upon commencement of the program, Google will
also file these written materials with the SEC as part of a tender
offer statement. Google’s stockholders and optionholders will be able
to obtain these written materials and other documents filed by Google
with the SEC free of charge from the SEC’s website at www.sec.gov.
ABOUT NON-GAAP FINANCIAL MEASURESTo 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 effective tax
rate, 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”, “Reconciliations of GAAP to non-
GAAP effective tax rate,” 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. 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, for the third quarter of 2008, the expense related to the
settlement agreement with the Authors Guild and the AAP. 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 FAS 123R, 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, and, for the third quarter of
2008, the expense related to the settlement agreement, and, for the
fourth quarter of 2008, non-cash impairment charges less the related
tax effects of such items. We define non-GAAP EPS as non-GAAP net
income divided by the weighted average shares, on a fully-diluted
basis, outstanding as of December 31, 2008. 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, the expense related to the settlement
agreement in the third quarter of 2008 and the impairment charges in
the fourth quarter of 2008. 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.Non-GAAP effective tax rates. We define the non-GAAP effective tax
rates as income before income taxes adding back the expense related to
the settlement agreement in the third quarter of 2008, the impairment
charges in the fourth quarter of 2008 and stock-based compensation
divided into the result obtained by subtracting the related tax
benefits from our provision for income taxes. We consider this non-
GAAP financial measure to be a useful metric for management and
investors because it excludes the effect of certain discrete items so
that Google’s management and investors can compare Google’s recurring
earnings results over multiple periods. The same limitations described
above regarding Google’s use of non-GAAP operating income and non-GAAP
operating margin apply to our use of the non-GAAP effective tax rates.
Management compensates for these limitations by providing specific
information regarding the GAAP amounts excluded from the non-GAAP
effective tax rates and evaluating the non-GAAP effective tax rates
together with the effective tax rates computed on a GAAP basis.
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 Management’s Discussion
and Analysis of Financial Condition and Results of Operations in our
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.
