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SEO/SEM Journal - Google Revenue Up 98% in Q3 on Ad Sales

"Although this is typically a slower season for Internet properties, we had another exceptional quarter" said Google CEO Schmidt

Google Inc. (Nasdaq:GOOG - News) today announced financial results for the quarter ended September 30, 2005.

"Although this is typically a slower season for Internet properties, we had another exceptional quarter," said Eric Schmidt, Google chief executive officer. "Our focus on end users and on quality of information and advertising worldwide continues to work extremely well. We are very pleased with how well this is working at scale."

Financial Summary

Google reported record revenues of $1.578 billion for the quarter ended September 30, 2005, up 96% compared to the third quarter of 2004, and up 14% compared to last quarter. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. This quarter, TAC totaled $530 million, or 34% percent of advertising revenues.

We have reported operating income, net income and earnings per share (EPS) on a GAAP basis and have also provided related non-GAAP, or pro forma, results on a supplemental basis below. Please also refer to the section below titled "About non-GAAP financial measures."

  • GAAP operating income for the third quarter was $529 million. This compares to $476 million in the second quarter, an increase of 11%. Non-GAAP operating income was $596 million, compared to $523 million in the second quarter, an increase of 14%.
  • GAAP net income for the third quarter was $381 million as compared to $343 million in the second quarter, an increase of 11%. Non-GAAP net income was $437 million, compared to $381 million in the second quarter, an increase of 15%.
  • GAAP EPS for the third quarter was $1.32 on 290 million diluted shares outstanding, compared to $1.19 for the second quarter, on 287 million diluted shares outstanding. Non-GAAP EPS was $1.51, compared to $1.33 in the second quarter.
  • Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS are all pro forma measures, computed net of stock-based compensation (SBC) and in-process research and development (IPR&D) charges. This quarter, the SBC charge was $46 million as compared to $47 million in the second quarter. The IPR&D charge was $21 million this quarter, with no IPR&D charge in the second quarter. The IPR&D charge relates to an acquisition in the third quarter. Tax benefits related to SBC charges have been excluded from non-GAAP net income and non-GAAP EPS. The tax benefit related to SBC totaled $11 million in the third quarter and $9 million in the second quarter.
  • Reconciliations of non-GAAP measures to GAAP operating income, net income, EPS, and research and development (R&D) expenses are included at the end of this release.

Financial Highlights

Revenues -- Revenues in the third quarter totaled a record $1.578 billion, representing a 96% increase over third quarter 2004 revenues of $806 million, and a 14% increase over second quarter 2005 revenues of $1.384 billion. Growth since last quarter was driven by the continued expansion of our global advertiser base and partner network, as well as by product improvements, and more than offset the expected seasonal slowdown in traffic.

Google Sites Revenues -- Google-owned sites generated $885 million, or 56% of total revenues. This represents a 20% increase over the second quarter revenues of $737 million.

Google Network Revenues -- Revenues generated on Google's partner sites, through AdSense programs, contributed $675 million, or 43% of total revenues. This is a 7% increase over network revenues of $630 million generated in the second quarter.

International Revenues -- Revenues from outside of the United States contributed 39% of total revenue, compared to 39% in the second quarter and 35% in the third quarter of 2004.

TAC -- Traffic Acquisition Costs, the portion of revenues shared with Google's partners, increased to $530 million. This compares to total payments to partners of $494 million in the second quarter. TAC as a percentage of advertising revenues decreased to 34.0% in the third quarter from 36.1% in the second quarter, reflecting the continued shift in our revenue mix from Google network revenue to Google site revenue.

Operating Margins -- GAAP operating income in the third quarter was $529 million, or 33.5% of revenues. This compares to GAAP operating income of $476 million, or 34.4% of revenues, in the second quarter. Non-GAAP operating income in the third quarter was $596 million, or 37.8% of revenues. This compares to non-GAAP operating income of $523 million, also 37.8% of revenues, in the second quarter. Increases in research and development (R&D) and general and administrative (G&A) spending as a percentage of revenues were balanced by growth in higher margin Google site revenue, resulting in steady margins quarter over quarter.

Income Taxes -- Our effective tax rate remained steady at 31% this quarter and continues to reflect the mix of business generated in the U.S. and business generated through our Irish subsidiary. Our provision for income taxes was not materially affected by stock option activity, although we did realize a $105 million reduction to our income taxes payable as a result of this activity. We expect that the effective tax rate for the full year of 2005 will be approximately 30%. However, if future revenues recognized by Google's Irish subsidiary are not as proportionately great as expected, Google's effective tax rate will be higher than our expectations.

Cash Flow and Capital Expenditures -- Net cash provided by operating activities for the third quarter totaled $647 million as compared to $625 million for the second quarter. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as cash provided by operating activities less capital expenditures. This quarter we generated $354 million in free cash flow. Our capital expenditures in the quarter were $293 million as compared to $157 million last quarter, and primarily reflect acquisitions of additional land and office space to support our headquarters in Mountain View, California, and purchases of production servers and networking equipment. We are now estimating over $800 million in capital expenditures for 2005.

Adjusted EBITDA -- Adjusted EBITDA is defined as income before interest, taxes, depreciation, amortization, SBC, and IPR&D. It is another alternative non-GAAP measure of liquidity to GAAP net cash provided by operating activities. Adjusted EBITDA increased to approximately $672 million in the third quarter, or 43% of revenues, from $590 million, or 43% of revenues, in the second quarter.

Reconciliations of free cash flow and adjusted EBITDA to net cash provided by operating activities, the GAAP measure of liquidity, are included at the end of this release.

Cash -- As of September 30, 2005, Google had a cash, cash equivalents and marketable securities balance of just over $7.6 billion, of which $4.3 billion was raised during a follow-on equity offering that was completed this quarter.

On a worldwide basis, Google employed 4,989 full time employees as of September 30, 2005, up from 4,183 as of June 30, 2005.

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SYS-CON Media's Search Developer's Journal (search.sys-con.com), is the first and only global publication to present the hottest timely topics on the merging search engine companies, search optimization and search engine marketing industry, and all related articles, feature and news stories for search technology professionals.

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