Q3 2010

Quarterly Earnings
Summary

Third Quarter 2010 Highlights

• Revenue growth of 23% Y/Y and 7% Q/Q

Google properties revenue increased 22% Y/Y and 7% Q/Q

Network revenues increased 22% Y/Y and 7% Q/Q

International revenues were $3.8 billion

• Operational Highlights

2

Strong financial metrics: revenue growth, profitability and cash flow

Continuing to invest heavily in our growth agenda

Investing in People -- to attract, retain, and reward the best talent

Investing in Products -- to leverage computer science to solve big problems

Quarterly Revenues
$7,500

Q3’10 Y/Y Growth = 23%
Q3’10 Q/Q Growth = 7%

7,286
6,820
6,674 6,775

$7,000
$6,500
$6,000

($ in millions)

$5,500

5,541 5,701 5,509 5,523
5,367
5,186

$5,000
$4,500

1,686

1,655

1,680

1,693

2,199

5,945
2,044

2,036

2,063

4,421

4,439

4,499

1,801
1,638

1,684

$4,000
$3,500
$3,000
$2,500
$2,000

$4,833

3,530

3,672

3,811

3,693

3,653

3,956

100

182

189

197

178

186

188

209

300

258

254

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

3,400

$1,500
$1,000
$500
$0

3

Other

Google.com

Network

U.S. vs. International Revenues
($ in millions)

5,186 5,367 5,541 5,701 5,509 5,523 5,945 6,674 6,775 6,820 7,286
100%
90%
80%

51%

52%

51%

50%

52%

53%

53%

53%

53%

52%

52%

49%

48%

49%

50%

48%

47%

47%

47%

47%

48%

48%

Q1'08

Q2'08

Q3'08

Q4'08

Q1'09

Q2'09

Q3'09

Q4'09

Q1'10

Q2'10

Q3'10

70%
60%
50%
40%
30%
20%
10%
0%

US
4

International

($ in millions)

Traffic Acquisition Costs
$1,900
$1,800
$1,700
$1,600
$1,500
$1,400
$1,300 29.2% 28.4%
27.9%
$1,200
26.9% 26.9% 27.2% 27.1% 26.6% 26.4% 26.4%
$1,100
25.7%
$1,000
1,805
$900
1,721 1,711 1,732
$800
1,559
1,486 1,474 1,495 1,483 1,436 1,453
$700
$600
$500
$400
$300
$200
$100
$0
Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10
TAC
5

TAC as % of Advertising Revenues

40%

35%

30%

25%

20%

15%

10%

Costs and Expenses
GAAP
($ in millions)
Cost of Revenues
Percent of revenues

Research & Development

Q3'09

Q2'10

Q3'10

$2,226

$2,467

$2,552

37%

36%

35%

$758

$898

$994

Percent of revenues

13%

13%

14%

Sales & Marketing

$498

$629

$661

8%

9%

9%

$389

$461

$532

7%

7%

7%

$3,871

$4,455

$4,739

65%

65%

65%

Percent of revenues

General & Administrative
Percent of revenues

Total Costs & Expenses
Percent of revenues

Non-GAAP
($ in millions)
Cost of Revenues
Percent of revenues

Research & Development

Q3'09

Q2'10

Q3'10

$2,211

$2,459

$2,544

37%

36%

35%

$562

$696

$750

Percent of revenues

10%

10%

10%

Sales & Marketing

$436

$573

$586

7%

8%

8%

$344

$418

$479

6%

7%

7%

$3,553

$4,146

$4,359

60%

61%

60%

Percent of revenues

General & Administrative
Percent of revenues

Total Costs & Expenses
Percent of revenues

Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and
expenses to GAAP costs and expenses
6

Profitability
GAAP
($ in millions except per share amounts)
Income from Operations

Q3'09
$

Operating Margin

2,074

Q2'10
$

35%

2,365

$

35%

2,547
35%

Net Income

$

1,639

$

1,840

$

2,167

EPS (diluted)

$

5.13

$

5.71

$

6.72

Non-GAAP
($ in millions except per share amounts)
Income from Operations

Q3'09
$

Operating Margin

2,392

Q2'10
$

40%

2,674

Q3'10
$

39%

2,927
40%

Net Income

$

1,884

$

2,079

$

2,462

EPS (diluted)

$

5.89

$

6.45

$

7.64

Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations
measures to the nearest comparable GAAP measures

7

Q3'10

Free Cash Flow

($ in millions)
Net cash provided by
operating activities

8

Q3'09

Q2'10

Q3'10

$2,726

$2,085

$2,886

Less purchases of property
and equipment

($186)

($476)

($757)

Free cash flow (non-GAAP)

$2,540

$1,609

$2,129

Overview of Q3 2010 OI&E and FX
In Interest and Other Income (Expense), Net, we recognized net income of
$167M for Q3
• In Q3, we recognized $172M of interest income earned on our investments and $62M in
realized gains.
• We expensed $60M related to our FX cash flow hedging program.
• Excluding gains related to our FX cash flow hedging program, had foreign exchange rates
remained constant from Q2 2010 through Q3 2010, our revenue in Q3 2010 would have
been $9M lower. Excluding gains related to our FX cash flow hedging program, had foreign
exchange rates remained constant from Q3 2009 through Q3 2010, our revenue in Q3 2010
would have been $169M higher.
• In addition, our FX cash flow hedging program allowed us to recognize a benefit of
approximately $89M to international revenue this quarter.

9

Revenues by Geography

($ in millions)
United States

Q2'10

Q3'10

$2,802

$3,288

$3,517

$765

$770

$840

Rest of the World

$2,378

$2,762

$2,929

Total Revenues

$5,945

$6,820

$7,286

United Kingdom

10

Q3'09

International Revenues Excluding Hedging and FX Impact (Y/Y)
($ in millions)
UK revenues (GAAP)

Q3'09 Q3'10
$765

$840

exclude:
a) f/x impact on Q3'10 revenues using Q3'09 rates
(gains)/losses
b) hedging gains
UK revenues excluding f/x and hedging impact (NonGAAP)

UK revenues (GAAP)

Q2'09 Q2'10
$715

$770

n/a

5

(67)

(19)

$648

$756

exclude:
n/a

50

(25)

(11)

$740

Y/Y % (Non-GAAP)

a) f/x impact on Q2'10 revenues using Q2'09 rates
(gains)/losses
b) hedging gains

$879

UK revenues excluding f/x and hedging impact (NonGAAP)

19%

Y/Y % (Non-GAAP)

17%

($ in millions)

Q3'09 Q3'10

($ in millions)

Q2'09 Q2'10

ROW revenues (GAAP)

$2,378 $2,929

ROW revenues (GAAP)

$2,199 $2,762

exclude:

exclude:

a) f/x impact on Q3'10 revenues using Q3'09 rates
(gains)/losses

n/a

b) hedging gains

(14)

ROW revenues excluding f/x and hedging impact
(Non-GAAP)
Y/Y % (Non-GAAP)
11

($ in millions)

119

a) f/x impact on Q2'10 revenues using Q2'09 rates
(gains)/losses

n/a

(29)

(78)

b) hedging gains

(57)

(60)

$2,364 $2,970
26%

ROW revenues excluding f/x and hedging impact
(Non-GAAP)
Y/Y % (Non-GAAP)

$2,142 $2,673
25%

International Revenues Excluding Hedging and FX Impact (Q/Q)
($ in millions)
UK Revenues (GAAP)

Q2'10 Q3'10
$770

UK Revenues (GAAP)

exclude:

exclude:

a) f/x impact on Q3'10 revenues using Q2'10 rates
(gains)/losses
b) hedging gains
UK revenues excluding f/x and hedging impact (NonGAAP)

a) f/x impact on Q2'10 revenues using Q1'10 rates
(gains)/losses
b) hedging gains
UK revenues excluding f/x and hedging impact (NonGAAP)

n/a
(19)

(24)
(11)

$751

$805

Q/Q % (Non-GAAP)

($ in millions)
ROW Revenues (GAAP)
exclude:
a) f/x impact on Q3'10 revenues using Q2'10 rates
(gains)/losses
b) hedging gains
ROW revenues excluding f/x and hedging impact
(Non-GAAP)
Q/Q % (Non-GAAP)
12

$840

($ in millions)

7%

Q2'10 Q3'10
$2,762 $2,929

n/a
(60)

15
(78)

$2,702 $2,866
6%

Q1'10 Q2'10
$842

$770

n/a
(10)

47
(19)

$832

$798

Q/Q % (Non-GAAP)

($ in millions)
ROW Revenues (GAAP)
exclude:
a) f/x impact on Q2'10 revenues using Q1'10 rates
(gains)/losses
b) hedging gains
ROW revenues excluding f/x and hedging impact
(Non-GAAP)
Q/Q % (Non-GAAP)

-4%

Q1'10 Q2'10
$2,737 $2,762

n/a
-

129
(60)

$2,737 $2,831
3%

Table 1 - Reconciliations of non-GAAP costs and expenses
to GAAP costs and expenses
($ in millions)

Q3'09

Cost of revenues (GAAP)
Less: Stock-based compensation expense
Cost of revenues (non-GAAP)

$

Research and development (GAAP)
Less: Stock-based compensation expense
Research and development (non-GAAP)

$

Sales and marketing (GAAP)
Less: Stock-based compensation expense
Sales and marketing (non-GAAP)

$

General and administrative (GAAP)
Less: Stock-based compensation expense
General and administrative (non-GAAP)

$

Total costs and expenses (GAAP)
Less: Stock-based compensation expense
Total costs and expenses (non-GAAP)

$

$

$

$

$

$

As a % of
Revenues (1)

2,226
(15)
2,211

37% $

758
(196)
562

13% $

498
(62)
436

8% $

389
(45)
344

7% $

3,871
(318)
3,553

65% $

37% $

10% $

7% $

6% $

60% $

Q2'10

As a % of
Revenues (1)

2,467
(8)
2,459

36% $

898
(202)
696

13% $

629
(56)
573

9% $

461
(43)
418

7% $

4,455
(309)
4,146

65% $

36% $

10% $

8% $

7% $

61% $

(1) Percentages based on revenues of $5,945 million in Q3'09, $6,820 million in Q2'10 and $7,286 million in Q3'10.

13

Q3'10

As a % of
Revenues (1)

2,552
(8)
2,544

35%

994
(244)
750

14%

661
(75)
586

9%

532
(53)
479

7%

4,739
(380)
4,359

65%

35%

10%

8%

7%

60%

Table 2 - Reconciliations of non-GAAP results of operations
measures to the nearest comparable GAAP measures

($ in millions except per share amounts)

Q3'09

Operating
Margin (1)

Q2'10

Operating
Margin (1)

Q3'10

Operating
Margin (1)

Income from operations (GAAP)
Add: Stock-based compensation expense

$

2,074
318

35% $

2,365
309

35% $

2,547
380

35%

Income from operations (non-GAAP)

$

2,392

40% $

2,674

39% $

2,927

40%

Net income (GAAP)
Add: Stock-based compensation expense (net of tax)

$

1,639
245

$

1,840
239

$

2,167
295

Net income (non-GAAP)

$

1,884

$

2,079

$

2,462

Net income per share - diluted (GAAP)
Net income per share - diluted (non-GAAP)
Shares used in per share calculation - diluted

$
$

5.13
5.89
320

$
$

5.71
6.45
322

$
$

6.72
7.64
322

(1) Percentages based on revenues of $5,945 million in Q3'09, $6,820 million in Q2'10 and $7,286 million in Q3'10.

14

Q3 2010
Quarterly Earnings
Summary