Q2 2011 Quarterly Earnings Summary

Second Quarter 2011 Highlights

• Revenue growth of 32% Y/Y and 5% Q/Q
– – –
Google properties revenue increased 39% Y/Y and 6% Q/Q Network revenues increased 20% Y/Y and 2% Q/Q International revenues were $4.9 billion

• Operational Highlights
– –
Strong financial metrics: revenue growth, profitability, cash flow Continuing to invest in three major areas of focus:

• • •

Core ads business: search quality and monetization Businesses demonstrating high consumer success: YouTube, Android, Chrome New businesses where we’re investing to drive adoption and innovation: Social, Commerce, Local

2

Quarterly Revenues
$10,000 $9,000 $8,000 $7,000

Q2’11 Y/Y Growth = 32% Q2’11 Q/Q Growth = 5% 9,026 8,440 7,286
2,495 2,199 2,044 1,801 1,638 1,684 2,036 2,063

8,575
2,484 2,427

6,674 6,775 6,820 5,509 5,523 5,945

($ in millions)

$6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0

5,672 3,956 4,421 4,439 4,499 4,833

5,879

6,232

3,693

3,653

178 Q1'09

186 Q2'09

188 Q3'09

209 Q4'09

300 Q1'10
Other

258 Q2'10

254 Q3'10

273 Q4'10

269 Q1'11

310 Q2'11

3

Google.com

Network

U.S. vs. International Revenues
($ in millions) 5,509
100% 90% 80%

5,523 5,945

6,674 6,775 6,820

7,286 8,440

8,575

9,026

52%
70% 60% 50% 40% 30%

53%

53%

53%

53%

52%

52%

52%

53%

54%

48%
20% 10% 0% Q1'09
4

47%

47%

47%

47%

48%

48%

48%

47%

46%

Q2'09

Q3'09

Q4'09

Q1'10 US

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

International

Traffic Acquisition Costs
$2,200 $2,100 $2,000 $1,900 $1,800 $1,700 $1,600 $1,500 $1,400 $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 40%

35%

30%
26.9% 27.2% 27.1% 26.6% 26.4% 26.4% 25.7% 25.3%

($ in millions)

24.5%

24.2%

25%

1,436

1,453

1,559

1,721

1,711

1,732

1,805

2,069 2,038

2,110

20%

15%

10%
Q1'09 Q2'09 Q3'09 Q4'09
TAC

Q1'10

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

TAC as % of Advertising Revenues

5

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

Q2'10
$2,467
36%

Q1'11
$2,936
34%

Q2'11
$3,172
35%

Research & Development
Percent of revenues

$898
13%

$1,226
14%

$1,234
14%

Sales & Marketing
Percent of revenues

$629
9%

$1,026
12%

$1,091
12%

General & Administrative
Percent of revenues

$461
7%

$591
7%

$648
7%

Charge Related to Potential Resolution of Department of Justice Investigation
Percent of revenues

$0
0%

$500
6%

$0
0%

Total Costs & Expenses
Percent of revenues

$4,455
65%

$6,279
73%

$6,145
68%

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

Q2'10
$2,459
36%

Q1'11
$2,887
34%

Q2'11
$3,121
35%

Research & Development
Percent of revenues

$696
10%

$989
12%

$987
11%

Sales & Marketing
Percent of revenues

$573
8%

$948
11%

$1,017
11%

General & Administrative
Percent of revenues

$418
7%

$523
6%

$585
6%

Charge Related to Potential Resolution of Department of Justice Investigation
Percent of revenues

$0
0%

$0
0%

$0
0%

Total Costs & Expenses
Percent of revenues

$4,146
61%

$5,347
62%

$5,710
63%

6

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

Profitability
GAAP ($ in millions except per share amounts) Income from Operations Operating Margin Net Income EPS (diluted)
$ $

Q2'10
$ 2,365 35% 1,840 5.71

Q1'11
$ 2,296 27% $ $ 1,798 5.51

Q2'11
$ 2,881 32% $ $ 2,505 7.68

Non-GAAP ($ in millions except per share amounts) Income from Operations Operating Margin Net Income EPS (diluted)

Q2'10
$ 2,674 39% $ $ 2,079 6.45

Q1'11
$ 3,228 38% $ $ 2,638 8.08

Q2'11
$ 3,316 37% $ $ 2,849 8.74

7

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

Free Cash Flow

($ in millions) Net cash provided by operating activities

Q2'10
$2,085

Q1'11
$3,172

Q2'11
$3,519

Less purchases of property and equipment

($476)

($890)

($917)

Free cash flow (non-GAAP)

$1,609

$2,282

$2,602

8

Overview of Q2 2011 OI&E and FX
In Interest and Other Income, Net, we recognized net income of $204M for Q2
• • • In Q2, we recognized $212M of interest income earned on our investments and $75M in realized gains. We expensed $58M 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 Q1 2011 through Q2 2011, our revenue in Q2 2011 would have been $167M lower. Excluding gains related to our FX cash flow hedging program, had foreign exchange rates remained constant from Q2 2010 through Q2 2011, our revenue in Q2 2011 would have been $417M lower. In addition, our FX cash flow hedging program allowed us to recognize a benefit of approximately $4M to international revenue this quarter.

9

Revenues by Geography

($ in millions) United States United Kingdom Rest of the world Total Revenues

Q2'10
$3,288 $770 $2,762 $6,820

Q1'11
$4,005 $969 $3,601 $8,575

Q2'11
$4,155 $976 $3,895 $9,026

10

International Revenues Excluding Hedging and FX Impact (Y/Y)
($ in millions) UK revenues (GAAP) exclude: Q2'10 $770 Q2'11 $976 ($ in millions) UK revenues (GAAP) exclude: Q1'10 $842 Q1'11 $969

a) f/x impact on Q2'11 revenues using Q2'10 rates (gains)/losses b) hedging gains

n/a (19)

(81) -

a) f/x impact on Q1'11 revenues using Q1'10 rates (gains)/losses b) hedging gains

n/a (10)

5 (4)

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

$751

$895 19%

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

$832

$970 17%

($ in millions) ROW revenues (GAAP) exclude:

Q2'10 $2,762

Q2'11 $3,895

($ in millions) ROW revenues (GAAP) exclude:

Q1'10 $2,737

Q1'11 $3,601

a) f/x impact on Q2'11 revenues using Q2'10 rates (gains)/losses b) hedging gains

n/a (60)

(336) (4)

a) f/x impact on Q1'11 revenues using Q1'10 rates (gains)/losses b) hedging gains

n/a -

(28) (10)

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

$2,702

$3,555 32%

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

$2,737

$3,563 30%

11

International Revenues Excluding Hedging and FX Impact (Q/Q)

($ in millions) UK revenues (GAAP) exclude:

Q1'11 $969

Q2'11 $976

($ in millions) UK revenues (GAAP) exclude:

Q4'10 $878

Q1'11 $969

a) f/x impact on Q2'11 revenues using Q1'11 rates (gains)/losses b) hedging gains

n/a (4)

(29) -

a) f/x impact on Q1'11 revenues using Q4'10 rates (gains)/losses b) hedging gains

n/a (2)

1 (4)

UK revenues excluding f/x and hedging impact (Non-GAAP)

$965

$947

UK revenues excluding f/x and hedging impact (Non-GAAP)

$876

$966

Q/Q % (Non-GAAP)

-2%

Q/Q % (Non-GAAP)

10%

($ in millions) ROW revenues (GAAP) exclude:

Q1'11 $3,601

Q2'11 $3,895

($ in millions) ROW revenues (GAAP) exclude:

Q4'10 $3,507

Q1'11 $3,601

a) f/x impact on Q2'11 revenues using Q1'11 rates (gains)/losses b) hedging gains

n/a (10)

(138) (4)

a) f/x impact on Q1'11 revenues using Q4'10 rates (gains)/losses b) hedging gains

n/a (23)

(20) (10)

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

$3,591

$3,753

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

$3,484

$3,571

Q/Q % (Non-GAAP)

5%

Q/Q % (Non-GAAP)

2%

12

Table 1 - Reconciliations of non-GAAP costs and expenses to GAAP costs and expenses
($ in millions) 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) $ $ $ $ $ $ $ Q2'10 $ 2,467 (8) 2,459 898 (202) 696 629 (56) 573 461 (43) 418 7% $ 8% 7% $ $ 10% 9% $ $ 36% 13% $ $ As a % of Revenues (1) 36% Q1'11 $ 2,936 (49) 2,887 1,226 (237) 989 1,026 (78) 948 591 (68) 523 6% $ 11% 7% $ $ 12% 12% $ $ 34% 14% $ $ As a % of Revenues (1) 34% Q2'11 $ 3,172 (51) 3,121 1,234 (247) 987 1,091 (74) 1,017 648 (63) 585 6% 11% 7% 11% 12% 35% 14% As a % of Revenues (1) 35%

Charge related to potential resolution of Department of Justice investigation (GAAP) Less: Charge related to potential resolution of Department of Justice investigation Charge related to potential resolution of Department of Justice investigation (nonGAAP) Total costs and expenses (GAAP) Less: Stock-based compensation expense and charge related to potential resolution of Department of Justice investigation Total costs and expenses (non-GAAP)

$

-

-

$

500 (500)

6%

$

-

-

$ $

4,455

65%

$ $

6,279

0% 73%

$ $

6,145

68%

(309) $ 4,146 61% $

(932) 5,347 62% $

(435) 5,710 63%

(1) Percentages based on revenues of $6,820 million in Q2'10, $8,575 million in Q1'11 and $9,026 million in Q2'11.

13

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

($ in millions except per share amounts) Income from operations (GAAP) Add: Stock-based compensation expense $

Q2'10 2,365 309

Operating Margin (1) 35% $

Q1'11 2,296 432

Operating Margin (1) 27% $

Q2'11 2,881 435

Operating Margin (1) 32%

Add: Charge related to potential resolution of Department of Justice investigation Income from operations (non-GAAP) $

2,674 39% $

500 3,228 38% $

3,316 37%

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

$

1,840 239

$

1,798 340

$

2,505 344

Add: Charge related to potential resolution of Department of Justice investigation Net income (non-GAAP) $

2,079 $

500 2,638 $

2,849

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

$ $

5.71 6.45 322

$ $

5.51 8.08 326

$ $

7.68 8.74 326

(1) Percentages based on revenues of $6,820 million in Q2'10, $8,575 million in Q1'11 and $9,026 million in Q2'11.

14

Q2 2011 Quarterly Earnings Summary

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