Google reports Q2 earnings; stock soars as revenue, EPS crushes the Street

Shares of Google stock jumped more than 10% in after-hours trading following the Internet giant’s second-quarter earnings report. “We had a great quarter, with revenue up 32% year on year for a record breaking over $9 billion of revenue,” said Google CEO Larry Page in a statement. “I’m super excited about the amazing response to Google+ which lets you share just like in real life.” Google reported revenue of $9.03 billion in its June quarter, up 32% over the same quarter last year and well above the Street’s $6.5 billion consensus. EPS came in at $8.76, also well above Wall Street’s consensus of $7.86, and Google’s net income for the quarter totalled#2.85 billion, up from $2.08 billion in the second quarter last hear. Google also noted that Android activations are currently up to 550,000 devices per day, and its invite-only Google+ social network now has more than 10 million members. Google’s full press release follows below.

Google Announces Second Quarter 2011 Financial Results

MOUNTAIN VIEW, Calif. – July 14, 2011 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended June 30, 2011.

“We had a great quarter, with revenue up 32% year on year for a record breaking over $9 billion of revenue,” said Larry Page, CEO of Google. “I’m super excited about the amazing response to Google+ which lets you share just like in real life.”

Q2 Financial Summary

Google reported revenues of $9.03 billion for the quarter ended June 30, 2011, an increase of 32% compared to the second quarter of 2010. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the second quarter of 2011, TAC totaled $2.11 billion, or 24% 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 second quarter of 2011 was $2.88 billion, or 32% of revenues. This compares to GAAP operating income of $2.37 billion, or 35% of revenues, in the second quarter of 2010. Non-GAAP operating income in the second quarter of 2011 was $3.32 billion, or 37% of revenues. This compares to non-GAAP operating income of $2.67 billion, or 39% of revenues, in the second quarter of 2010.
  • GAAP net income in the second quarter of 2011 was $2.51 billion, compared to $1.84 billion in the second quarter of 2010. Non-GAAP net income in the second quarter of 2011 was $2.85 billion, compared to $2.08 billion in the second quarter of 2010.
  • GAAP EPS in the second quarter of 2011 was $7.68 on 326 million diluted shares outstanding, compared to $5.71 in the second quarter of 2010 on 322 million diluted shares outstanding. Non-GAAP EPS in the second quarter of 2011 was $8.74, compared to $6.45 in the second quarter of 2010.
  • Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC). Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC and the related tax benefits. In the second quarter of 2011, the charge related to SBC was $435 million, compared to $309 million in the second quarter of 2010. The tax benefit related to SBC was $91 million in the second quarter of 2011 and $70 million in the second quarter of 2010.

Q2 Financial Highlights

Revenues – Google reported revenues of $9.03 billion in the second quarter of 2011, representing a 32% increase over second quarter 2010 revenues of $6.82 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues – Google-owned sites generated revenues of $6.23 billion, or 69% of total revenues, in the second quarter of 2011. This represents a 39% increase over second quarter 2010 revenues of $4.50 billion.

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $2.48 billion, or 28% of total revenues, in the second quarter of 2011. This represents a 20% increase from second quarter 2010 network revenues of $2.06 billion.

International Revenues – Revenues from outside of the United States totaled $4.87 billion, representing 54% of total revenues in the second quarter of 2011, compared to 53% in the first quarter of 2011 and 52% in the second quarter of 2010. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2011 through the second quarter of 2011, our revenues in the second quarter of 2011 would have been $167 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the second quarter of 2010 through the second quarter of 2011, our revenues in the second quarter of 2011 would have been $417 million lower.

  • Revenues from the United Kingdom totaled $976 million, representing 11% of revenues in the second quarter of 2011, compared to 11% in the second quarter of 2010.
  • In the second quarter of 2011, we recognized a benefit of $4 million to revenues through our foreign exchange risk management program, compared to $79 million in the second quarter of 2010.

A reconciliation of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues is included in the accompanying financial tables.

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 second quarter of 2010 and decreased approximately 2% over the first quarter of 2011.

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 12% over the second quarter of 2010 and increased approximately 6% over the first quarter of 2011.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $2.11 billion in the second quarter of 2011, compared to TAC of $1.73 billion in the second quarter of 2010. TAC as a percentage of advertising revenues was 24% in the second quarter of 2011, compared to 26% in the second quarter of 2010.

The majority of TAC is related to amounts ultimately paid to our AdSense partners, which totaled $1.75 billion in the second quarter of 2011. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $355 million in the second 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 $1.06 billion, or 12% of revenues, in the second quarter of 2011, compared to $735 million, or 11% of revenues, in the second quarter of 2010.

Operating Expenses – Operating expenses, other than cost of revenues, were $2.97 billion in the second quarter of 2011, or 33% of revenues, compared to $1.99 billion in the second quarter of 2010, or 29% of revenues.

SBC – In the second quarter of 2011, the total charge related to SBC was $435 million, compared to $309 million in the second quarter of 2010.

We currently estimate SBC charges for grants to employees prior to July 1, 2011 to be approximately $1.9 billion for 2011. This estimate does not include expenses to be recognized related to employee stock awards that are granted after June 30, 2011 or non-employee stock awards that have been or may be granted.

Operating Income – GAAP operating income in the second quarter of 2011 was $2.88 billion, or 32% of revenues. This compares to GAAP operating income of $2.37 billion, or 35% of revenues, in the second quarter of 2010. Non-GAAP operating income in the second quarter of 2011 was $3.32 billion, or 37% of revenues. This compares to non-GAAP operating income of $2.67 billion, or 39% of revenues, in the second quarter of 2010.

Interest and Other Income, Net – Interest and other income, net increased to $204 million in the second quarter of 2011, compared to $69 million in the second quarter of 2010.

Income Taxes – Our effective tax rate was 19% for the second quarter of 2011.

Net Income – GAAP net income in the second quarter of 2011 was $2.51 billion, compared to $1.84 billion in the second quarter of 2010. Non-GAAP net income was $2.85 billion in the second quarter of 2011, compared to $2.08 billion in the second quarter of 2010. GAAP EPS in the second quarter of 2011 was $7.68 on 326 million diluted shares outstanding, compared to $5.71 in the second quarter of 2010 on 322 million diluted shares outstanding. Non-GAAP EPS in the second quarter of 2011 was $8.74, compared to $6.45 in the second quarter of 2010.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the second quarter of 2011 totaled $3.52 billion, compared to $2.09 billion in the second quarter of 2010. In the second quarter of 2011, capital expenditures were $917 million, the majority of which was related to land and building purchases, and 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 second quarter of 2011, free cash flow was $2.60 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 in the accompanying financial tables.

Cash – As of June 30, 2011, cash, cash equivalents, and marketable securities were $39.1 billion.

Headcount – On a worldwide basis, Google employed 28,768 full-time employees as of June 30, 2011, up from 26,316 full-time employees as of March 31, 2011. Net headcount growth (excluding approximately 450 employees hired as part of the acquisition of ITA Software) was similar to the first quarter of 2011.

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