Q3 2011 Quarterly Earnings Summary

Third Quarter 2011 Highlights

• Revenue growth of 33% Y/Y and 8% Q/Q
– – –
Google properties revenue increased 39% Y/Y and 8% Q/Q Network revenues increased 18% Y/Y and 4% Q/Q International revenues were $5.3 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, Enterprise, Commerce, Local

2

Quarterly Revenues
$10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 178 Q1'09
3

Q3’11 Y/Y Growth = 33% Q3’11 Q/Q Growth = 8% 9,026

9,720 8,440 8,575 7,286
2,495 2,199

2,595 2,484

($ in millions)

6,820 6,674 6,775 5,509 5,523
1,638 1,684

2,427

5,945
2,044 1,801 2,036 2,063

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

5,879

6,232

6,740

3,693

3,653

186 Q2'09

188 Q3'09

209 Q4'09

300 Q1'10

258 Q2'10

254 Q3'10

273 Q4'10
Network

269 Q1'11

310 Q2'11

385 Q3'11

Other

Google.com

U.S. vs. International Revenues
($ in millions) 5,509 5,523 5,945 6,674 6,775 6,820 7,286 8,440 8,575 9,026 9,720
100% 90% 80%

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

53%

53%

53%

53%

52%

52%

52%

53%

54%

55%

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

47%

47%

47%

47%

48%

48%

48%

47%

46%

45%

Q2'09

Q3'09

Q4'09

Q1'10 US

Q2'10

Q3'10

Q4'10

Q1'11

Q2'11

Q3'11

International

Traffic Acquisition Costs
$2,500 30%

$2,000

26.9%

27.2% 27.1%

26.6% 26.4% 26.4% 25.7% 25.3% 24.5% 24.2%

25%
23.7%

($ in millions)

$1,500

$1,000
1,436 1,453 1,559 1,721 1,711 1,732 1,805

2,069

2,038

2,110

2,210

20%

$500

$0
Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11
TAC TAC as % of Advertising Revenues

15%

5

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

Q3'10
$2,552
35%

Q2'11
$3,172
35%

Q3'11
$3,378
35%

Research & Development
Percent of revenues

$994
14%

$1,234
14%

$1,404
14%

Sales & Marketing
Percent of revenues

$661
9%

$1,091
12%

$1,204
12%

General & Administrative
Percent of revenues

$532
7%

$648
7%

$676
7%

Total Costs & Expenses
Percent of revenues

$4,739
65%

$6,145
68%

$6,662
69%

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

Q3'10
$2,544
35%

Q2'11
$3,121
35%

Q3'11
$3,306
34%

Research & Development
Percent of revenues

$750
10%

$987
11%

$1,093
11%

Sales & Marketing
Percent of revenues

$586
8%

$1,017
11%

$1,100
11%

General & Administrative
Percent of revenues

$479
7%

$585
6%

$592
6%

Total Costs & Expenses
Percent of revenues

$4,359
60%

$5,710
63%

$6,091
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) Non-GAAP ($ in millions except per share amounts) Income from Operations Operating Margin Net Income EPS (diluted)
$ $ $ $

Q3'10
$ 2,547 35% 2,167 6.72

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

Q3'11
$ 3,058 31% $ $ 2,729 8.33

Q3'10
$ 2,927 40% 2,462 7.64

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

Q3'11
$ 3,629 37% $ $ 3,184 9.72

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 Less purchases of property and equipment

Q3'10
$2,886

Q2'11
$3,519

Q3'11
$3,950

($757)

($917)

($680)

Free cash flow (non-GAAP)

$2,129

$2,602

$3,270

8

Overview of Q3 2011 OI&E and FX
In Interest and Other Income, Net, we recognized net income of $302M for Q3
• • • In Q3, we recognized $211M of interest income earned on our investments and $107M in realized gains. We expensed $18M 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 2011 through Q3 2011, our revenue in Q3 2011 would have been $53M lower. Excluding gains related to our FX cash flow hedging program, had foreign exchange rates remained constant from Q3 2010 through Q3 2011, our revenue in Q3 2011 would have been $483M lower. In addition, our FX cash flow hedging program allowed us to recognize a benefit of approximately $1M to international revenue this quarter.

9

Revenues by Geography

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

Q3'10
$3,517 $840 $2,929 $7,286

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

Q3'11
$4,420 $1,047 $4,253 $9,720

10

International Revenues Excluding Hedging and FX Impact (Y/Y)
($ in millions) UK revenues (GAAP) exclude: a) f/x impact on Q3'11 revenues using Q3'10 rates (gains)/losses b) hedging gains UK revenues excluding f/x and hedging impact (NonGAAP) Y/Y % (Non-GAAP) n/a (11) $829 (56) $991 20% Q3'10 Q3'11 $840 $1,047 ($ in millions) UK revenues (GAAP) exclude: a) f/x impact on Q2'11 revenues using Q2'10 rates (gains)/losses b) hedging gains UK revenues excluding f/x and hedging impact (NonGAAP) Y/Y % (Non-GAAP) n/a (19) $751 (81) $895 19% Q2'10 Q2'11 $770 $976

($ in millions) ROW revenues (GAAP) exclude: a) f/x impact on Q3'11 revenues using Q3'10 rates (gains)/losses b) hedging gains ROW revenues excluding f/x and hedging impact (Non-GAAP) Y/Y % (Non-GAAP)

Q3'10 Q3'11 $2,929 $4,253

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

Q2'10 Q2'11 $2,762 $3,895

n/a (427) (78) (1)

a) f/x impact on Q2'11 revenues using Q2'10 rates (gains)/losses b) hedging gains ROW revenues excluding f/x and hedging impact (Non-GAAP) Y/Y % (Non-GAAP)

n/a (60)

(336) (4)

$2,851 $3,825 34%

$2,702 $3,555 32%

11

International Revenues Excluding Hedging and FX Impact (Q/Q)
($ in millions) UK revenues (GAAP) exclude: a) f/x impact on Q3'11 revenues using Q2'11 rates (gains)/losses b) hedging gains UK revenues excluding f/x and hedging impact (NonGAAP) Q/Q % (Non-GAAP) n/a 1 Q2'11 Q3'11 $976 $1,047 ($ in millions) UK revenues (GAAP) exclude: a) f/x impact on Q2'11 revenues using Q1'11 rates (gains)/losses b) hedging gains UK revenues excluding f/x and hedging impact (NonGAAP) Q/Q % (Non-GAAP) n/a (4) $965 (29) $947 -2% Q1'11 Q2'11 $969 $976

$976 $1,048 7%

($ in millions) ROW revenues (GAAP) exclude: a) f/x impact on Q3'11 revenues using Q2'11 rates (gains)/losses b) hedging gains ROW revenues excluding f/x and hedging impact (Non-GAAP) Q/Q % (Non-GAAP)

Q2'11 Q3'11 $3,895 $4,253

($ in millions) ROW revenues (GAAP) exclude: a) f/x impact on Q2'11 revenues using Q1'11 rates (gains)/losses b) hedging gains ROW revenues excluding f/x and hedging impact (Non-GAAP) Q/Q % (Non-GAAP)

Q1'11 Q2'11 $3,601 $3,895

n/a (4)

(54) (1)

n/a (10)

(138) (4)

$3,891 $4,198 8%

$3,591 $3,753 5%

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) Q3'10 $ $ 2,552 (8) 2,544 As a % of Revenues (1) 35% $ 35% $ Q2'11 3,172 (51) 3,121 As a % of Revenues (1) 35% $ 35% $ Q3'11 3,378 (72) 3,306 As a % of Revenues (1) 35% 34%

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

$ $

994 (244) 750

14% $ 10% $

1,234 (247) 987

14% $ 11% $

1,404 (311) 1,093

14% 11%

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

$ $

661 (75) 586

9% $ 8% $

1,091 (74) 1,017

12% $ 11% $

1,204 (104) 1,100

12% 11%

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

$ $

532 (53) 479

7% $ 7% $

648 (63) 585

7% $ 6% $

676 (84) 592

7% 6%

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

$ $

4,739 (380) 4,359

65% $ 60% $

6,145 (435) 5,710

68% $ 63% $

6,662 (571) 6,091

69% 63%

(1) Percentages based on revenues of $7,286 million in Q3'10, $9,026 million in Q2'11 and $9,720 million in Q3'11.

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 Income from operations (non-GAAP) Net income (GAAP) Add: Stock-based compensation expense (net of tax) Net income (non-GAAP) Net income per share - diluted (GAAP) Net income per share - diluted (non-GAAP) Shares used in per share calculation - diluted $ $ $ $ $ $

Q3'10 2,547 380 2,927 2,167 295 2,462 6.72 7.64 322

Operating Margin (1) 35% $ 40% $ $ $ $ $

Q2'11 2,881 435 3,316 2,505 344 2,849 7.68 8.74 326

Operating Margin (1) 32% $ 37% $ $ $ $ $

Q3'11 3,058 571 3,629 2,729 455 3,184 8.33 9.72 327

Operating Margin (1) 31% 37%

(1) Percentages based on revenues of $7,286 million in Q3'10, $9,026 million in Q2'11 and $9,720 million in Q3'11.

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Q3 2011 Quarterly Earnings Summary

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