Google on Thursday reported its results for the first quarter, topping Wall Street’s estimates. The Internet giant managed earnings of $10.08 per share on $10.65 billion in revenue, beating analysts EPS estimates of $9.64 and $8.1 billion in sales. Net revenue came in at $8.14 billion after $2.51 billion in traffic acquisition costs, in line with estimates. In the same quarter a year earlier, Google posted an adjusted profit of $8.08 per share $6.5 billion in sales. The company also plans to create a new class of non-voting capital stock that effectively creates a 2-for-1 stock split. The new class C shares will be traded under a separate ticker. “Google had another great quarter with revenues up 24% year on year,” Google CEO Larry Page said in a statement. “We also saw tremendous momentum from the big bets we’ve made in products like Android, Chrome and YouTube. We are still at the very early stages of what technology can do to improve people’s lives and we have enormous opportunities ahead. It is a very exciting time to be at Google.” A letter from Google co-founders Larry Page and Sergey Brin explaining the decision to split the company’s stock follows below along with the Google’s earnings release.
Introduction
Throughout our evolution, from privately held start-up to large, publicly listed company, we have managed Google for the long term—enjoying tremendous success as a result, especially since our IPO in 2004. Sergey and I hoped, though we did not expect, that Google would have such significant impact, and this progress has made us even more impatient to do important things that matter in the world. Our enduring love for Google comes from a strong desire to create technology products that enrich millions of people’s lives in deep and meaningful ways. To fulfill these dreams, we need to ensure that Google remains a successful, growing business that can generate significant returns for everyone involved.
Corporate Structure
When we went public, we created a dual-class voting structure. Our goal was to maintain the freedom to focus on the long term by ensuring that the management team, in particular Eric, Sergey and I, retained control over Google’s destiny. As we explained in our first founders’ letter:
“We are creating a corporate structure that is designed for stability over long time horizons. By investing in Google, you are placing an unusual long term bet on the team, especially Sergey and me, and on our innovative approach…
We want Google to become an important and significant institution. That takes time, stability and independence…
In the transition to public ownership, we have set up a corporate structure that will make it harder for outside parties to take over or influence Google. This structure will also make it easier for our management team to follow the long term, innovative approach emphasized earlier…
The main effect of this structure is likely to leave our team, especially Sergey and me, with increasingly significant control over the company’s decisions and fate, as Google shares change hands…
New investors will fully share in Google’s long term economic future but will have little ability to influence its strategic decisions through their voting rights…
Our colleagues will be able to trust that they themselves and their labors of hard work, love and creativity will be well cared for by a company focused on stability and the long term…
As an investor, you are placing a potentially risky long term bet on the team, especially Sergey and me. …. Sergey and I are committed to Google for the long term.”
I wanted to quote all that because these were the clear, well-publicized expectations we established for investors in 2004. While this decision was controversial at the time, we believe with hindsight it was absolutely the right thing to do. Eight years later, these statements are still remarkably accurate, and everyone involved has realized tremendous benefits as a result. Given Google’s success, it’s unsurprising that this type of dual-class governance structure is now somewhat standard among newer technology companies.
In our experience, success is more likely if you concentrate on the long term. Technology products often require significant investment over many years to fulfill their potential. For example, it took over three years just to ship our first Android handset, and then another three years on top of that before the operating system truly reached critical mass. These kinds of investments are not for the faint-hearted.
We have protected Google from outside pressures and the temptation to sacrifice future opportunities to meet short-term demands. Long-term product investments, like Chrome and YouTube, which now enjoy phenomenal usage, were made with a significant degree of independence.
We have a structure that prevents outside parties from taking over or unduly influencing our management decisions. However, day-to-day dilution from routine equity-based employee compensation and other possible dilution, such as stock-based acquisitions, will likely undermine this dual-class structure and our aspirations for Google over the very long term. We have put our hearts into Google and hope to do so for many more years to come. So we want to ensure that our corporate structure can sustain these efforts and our desire to improve the world.
Effectively a Stock Split: And a New Class of Stock
Today we announced plans to create a new class of non-voting capital stock, which will be listed on NASDAQ. These shares will be distributed via a stock dividend to all existing stockholders: the owner of each existing share will receive one new share of the non-voting stock, giving investors twice the number of shares they had before. It’s effectively a two-for-one stock split—something many of our investors have long asked us for. These non-voting shares will be available for corporate uses, like equity-based employee compensation, that might otherwise dilute our governance structure.
We recognize that some people, particularly those who opposed this structure at the start, won’t support this change—and we understand that other companies have been very successful with more traditional governance models. But after careful consideration with our board of directors, we have decided that maintaining this founder-led approach is in the best interests of Google, our shareholders and our users. Having the flexibility to use stock without diluting our structure will help ensure we are set up for success for decades to come.
In November 2009, Sergey and I published plans to sell a modest percentage of our overall stock, ending in 2015. We are currently halfway through those plans and we don’t expect any changes to that, certainly not as the result of this new potential class. We both remain very much committed to Google for the long term.
It’s important to bear in mind that this proposal will only have an effect on governance over the very long term. In fact, there’s no particular urgency to make these changes now—we don’t have an unusually big acquisition planned, in case you were wondering. It’s just that since we know what we want to do, there’s no reason to delay the decision. Also note that there will be no immediate change in votes, because everyone will still have the same number. In addition, Eric, Sergey and I have all agreed to “stapling” arrangements so that, above set thresholds, if our economic interest in Google were to decline, our votes would as well. We also have provisions to ensure all shareholders are treated fairly from an economic perspective.
For more details on all of this, please see the postscript below from our Chief Legal Officer, David Drummond, and the preliminary proxy statement we will file with the SEC next week.
Conclusion
We have always managed Google for the long term, investing heavily in the big bets we hope will make a significant difference in the world. Some of these bets have been tremendous, funding our activities and generating significant gains for our shareholders. Others have been less successful. But the ability to take these kinds of risks has been crucial to Google’s overall success and we aim to maintain this pioneering culture going forward.
The proposal we announced today is consistent with the governance philosophy we articulated when we took the company public, as well as the trend for newer technology companies to adopt strong dual-class structures. We believe that it will provide great competitive strength—insulating Google from short-term pressures, whatever the source, for a long time to come, while also giving us more flexibility around equity grants.
Investors and others have always taken a big bet on us, the founders, and that bet will likely last longer as a result of these changes. We are honored that so many of you have put your trust in us and we recognize the tremendous responsibility that rests on our shoulders. We think this is a good thing because users rely on Google to produce and operate amazing technology products and to safely and responsibly store their data. This is our passion.
Sergey and I share a profound belief in the potential for technology to improve people’s lives and we are enormously excited about what lies ahead. I couldn’t write a better conclusion to this founder’s letter than what we wrote in 2004… so here goes: “We have a strong commitment to our users worldwide, their communities, the web sites in our network, our advertisers, our investors, and of course our employees. Sergey and I, and the team will do our best to make Google a long term success and the world a better place.”
Google Announces First Quarter 2012 Results and Proposal for New Class of Stock
Proposal Would Effectively Implement 2-for-1 Stock Split While Preserving Long-Term Governance Structure
MOUNTAIN VIEW, Calif. – April 12, 2012 – Google Inc. (NASDAQ: GOOG) today announced financial results for the quarter ended March 31, 2012.
“Google had another great quarter with revenues up 24% year on year,” said Larry Page, CEO of Google. “We also saw tremendous momentum from the big bets we’ve made in products like Android, Chrome and YouTube. We are still at the very early stages of what technology can do to improve people’s lives and we have enormous opportunities ahead. It is a very exciting time to be at Google.”
Google announced today that its Board of Directors unanimously approved a stock dividend proposal designed to preserve the corporate structure that has allowed Google to remain focused on the long term. More information is available on our Investor Relations site, including a letter from our founders Larry Page and Sergey Brin explaining the proposal, and in our forthcoming proxy statement.
Q1 Financial Summary
Google reported revenues of $10.65 billion for the quarter ended March 31, 2012, an increase of 24% compared to the first quarter of 2011. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2012, TAC totaled $2.51 billion, or 25% 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 at the end of this release.
- GAAP operating income in the first quarter of 2012 was $3.39 billion, or 32% of revenues. This compares to GAAP operating income of $2.30 billion, or 27% of revenues, in the first quarter of 2011. Non-GAAP operating income in the first quarter of 2012 was $3.94 billion, or 37% of revenues. This compares to non-GAAP operating income of $3.23 billion, or 38% of revenues, in the first quarter of 2011.
- GAAP net income in the first quarter of 2012 was $2.89 billion, compared to $1.80 billion in the first quarter of 2011. Non-GAAP net income in the first quarter of 2012 was $3.33 billion, compared to $2.64 billion in the first quarter of 2011.
- GAAP EPS in the first quarter of 2012 was $8.75 on 330 million diluted shares outstanding, compared to $5.51 in the first quarter of 2011 on 326 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2012 was $10.08, compared to $8.08 in the first quarter of 2011.
- Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC) and a charge related to the resolution of a Department of Justice investigation in the first quarter of 2011. Non-GAAP net income and non-GAAP EPS exclude the expenses noted above, net of the related tax benefits. In the first quarter of 2012, the charge related to SBC and related tax benefits were $556 million and $118 million compared to $432 million and $92 million in the first quarter of 2011. In the first quarter of 2011, the charge related to the resolution of the Department of Justice investigation was $500 million. We recognized no tax benefit for the charge related to the resolution of the Department of Justice investigation. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release.
Q1 Financial Highlights
Revenues – Google reported revenues of $10.65 billion in the first quarter of 2012, representing a 24% increase over first quarter 2011 revenues of $8.58 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.
Google Sites Revenues – Google-owned sites generated revenues of $7.31 billion, or 69% of total revenues, in the first quarter of 2012. This represents a 24% increase over first quarter 2011 revenues of $5.88 billion.
Google Network Revenues – Google’s partner sites generated revenues of $2.91 billion, or 27% of total revenues, in the first quarter of 2012. This represents a 20% increase from first quarter 2011 network revenues of $2.43 billion.
International Revenues – Revenues from outside of the United States totaled $5.77 billion, representing 54% of total revenues in the first quarter of 2012, compared to 53% in the fourth quarter of 2011 and 53% in the first quarter of 2011. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2011 through the first quarter of 2012, our revenues in the first quarter of 2012 would have been $79 million higher. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2011 through the first quarter of 2012, our revenues in the first quarter of 2012 would have been $67 million higher.
- Revenues from the United Kingdom totaled $1.15 billion, representing 11% of revenues in the first quarter of 2012, compared to 11% in the first quarter of 2011.
- In the first quarter of 2012, we recognized a benefit of $37 million to revenues through our foreign exchange risk management program, compared to $14 million in the first quarter of 2011.
A reconciliation of our non-GAAP international revenues excluding the impact of foreign exchange and hedging to GAAP international revenues is included at the end of this release.
Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our Network members, increased approximately 39% over the first quarter of 2011 and increased approximately 7% over the fourth 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 Network members, decreased approximately 12% over the first quarter of 2011 and decreased approximately 6% over the fourth quarter of 2011.
TAC – Traffic acquisition costs, the portion of revenues shared with Google’s partners, increased to $2.51 billion in the first quarter of 2012, compared to TAC of $2.04 billion in the first quarter of 2011. TAC as a percentage of advertising revenues was 25% in the first quarter of 2012, compared to 25% in the first quarter of 2011.
The majority of TAC is related to amounts ultimately paid to our Network members, which totaled $2.04 billion in the first quarter of 2012. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $468 million in the first quarter of 2012.
Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs, and credit card processing charges increased to $1.28 billion, or 12% of revenues, in the first quarter of 2012, compared to $897 million, or 10% of revenues, in the first quarter of 2011.
Operating Expenses – Operating expenses, other than cost of revenues, were $3.47 billion in the first quarter of 2012, or 33% of revenues, compared to $3.34 billion in the first quarter of 2011, or 39% of revenues.
Stock-Based Compensation (SBC) – In the first quarter of 2012, the total charge related to SBC was $556 million, compared to $432 million in the first quarter of 2011.
We currently estimate SBC charges for grants to employees prior to March 31, 2012 to be approximately $2 billion for 2012. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2012 or non-employee stock awards that have been or may be granted.
Operating Income – GAAP operating income in the first quarter of 2012 was $3.39 billion, or 32% of revenues. This compares to GAAP operating income of $2.30 billion, or 27% of revenues, in the first quarter of 2011. Non-GAAP operating income in the first quarter of 2012 was $3.94 billion, or 37% of revenues. This compares to non-GAAP operating income of $3.23 billion, or 38% of revenues, in the first quarter of 2011.
Interest and Other Income, Net – Interest and other income, net increased to $156 million in the first quarter of 2012, compared to $96 million in the first quarter of 2011.
Income Taxes – Our effective tax rate was 18% for the first quarter of 2012.
Net Income – GAAP net income in the first quarter of 2012 was $2.89 billion, compared to $1.80 billion in the first quarter of 2011. Non-GAAP net income was $3.33 billion in the first quarter of 2012, compared to $2.64 billion in the first quarter of 2011. GAAP EPS in the first quarter of 2012 was $8.75 on 330 million diluted shares outstanding, compared to $5.51 in the first quarter of 2011 on 326 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2012 was $10.08, compared to $8.08 in the first quarter of 2011.
Cash Flow and Capital Expenditures – Net cash provided by operating activities in the first quarter of 2012 totaled $3.69 billion, compared to $3.17 billion in the first quarter of 2011. In the first quarter of 2012, capital expenditures were $607 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 first quarter of 2012, free cash flow was $3.09 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 March 31, 2012, cash, cash equivalents, and short-term marketable securities were $49.3 billion.
Headcount – On a worldwide basis, Google employed 33,077 full-time employees as of March 31, 2012, up from 32,467 full-time employees as of December 31, 2011.
WEBCAST AND CONFERENCE CALL INFORMATION
A live audio webcast of Google’s first quarter 2012 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.
FORWARD-LOOKING STATEMENTS
This press release contains forward-looking statements that involve risks and uncertainties. These statements include statements regarding our continued investments in our core areas of strategic focus, our expected SBC charges, 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 Annual Report on Form 10-K for the year ended December 31, 2011, 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 http://www.sec.gov. Additional information will also be set forth in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. All information provided in this release and in the attachments is as of April 12, 2012, and we undertake no duty to update this information unless required by law.
ABOUT NON-GAAP FINANCIAL MEASURES
To 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 EPS, free cash flow, and non-GAAP international revenues. 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,” “Reconciliation from net cash provided by operating activities to free cash flow,” and “Reconciliation from GAAP international revenues to non-GAAP international revenues” 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 SBC, 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 expenses related to SBC, and, as applicable, other special items. 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 SBC and as applicable, other special items 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 FASB ASC Topic 718, Google’s management believes that providing a non-GAAP financial measure that excludes SBC 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, SBC, that are recurring. SBC has been and will continue to be for the foreseeable future a significant recurring expense in Google’s business. Second, SBC 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 expenses related to SBC, and, as applicable, other special items less the related tax effects. The tax effect of SBC is calculated using the tax-deductible portion of SBC and applying the entity-specific, U.S. federal and blended state tax rates. We define non-GAAP EPS as non-GAAP net income divided by the weighted average outstanding shares, on a fully-diluted basis. 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 SBC and, as applicable, other special items. 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.
Free cash flow. We define free cash flow as net cash provided by operating activities less 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 statement of cash flows and under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Quarterly Report on 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.
Non-GAAP international revenues. We define non-GAAP international revenues as international revenues excluding the impact of foreign exchange and hedging. Non-GAAP international revenues are calculated by translating current quarter revenues using prior quarter and prior year exchange rates, as well as excluding any hedging gains realized in the current quarter. We consider non-GAAP international revenues as a useful metric as it facilitates management’s internal comparison to our historical performance.
The accompanying tables have more details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures.
