Google Defies the Naysayers

Posted by: Rob Hof on April 17, 2008

The quick take on Google’s earnings, just out minutes ago: Never mind. All that talk about Google potentially turning in an awful quarter didn’t come to pass. Google’s shares were jumping almost 12% more than 17% in after-hours trading after the market close when the company released the report.

Earnings excluding stock compensation rose to $4.84 a share, considerably higher than Wall Street estimates of $4.52 a share. Gross sales were up 42% from a year ago, to $5.19 billion, while net sales after payments to Web sites providing traffic to Google totaled $3.7 billion, both a bit over expectations.

Closely watched paid clicks, the source of much controversy after reports from comScore showed dramatically slower growth of 1.8% in the first quarter, rose 20% from a year ago and 7% from the fourth quarter. Google measures paid clicks differently, but clearly the results were nowhere near the disaster comScore’s numbers had suggested.

Upate: On the conference call, still in progress, it’s hard to miss the evident satisfaction of CEO Eric Schmidt, who sounds like the cat who ate the canary.

Schmidt again throws cold water on the notion of the economy hurting Google: “We do not see an impact at this time. We’re well-positioned should economics change.”

Priceless quote from Schmidt, who was asked about the Yahoo search ad test: “It’s nice to be working with Yahoo. We like them very much.” No doubt. The enemy of my enemy is my friend….

The full story’s here. Text of the release after the jump:

Google's results for the quarter ended March 31, 2008, include the operations of DoubleClick Inc. from the date of acquisition, March 11, 2008, through the end of the quarter, and are compared to pre-acquisition results of prior periods. The overall impact of DoubleClick in the first quarter of 2008 was immaterial to revenue and only slightly dilutive to both GAAP and non-GAAP operating income, net income and earnings per share.

Google reported revenues of $5.19 billion for the quarter ended March 31, 2008, an increase of 42% compared to the first quarter of 2007 and an increase of 7% compared to the fourth quarter of 2007, though even that increase is slower than in the past. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the first quarter of 2008, TAC totaled $1.49 billion, or 29% of advertising revenues.

Google reports operating income, 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 for the first quarter of 2008 was $1.55 billion, or 30% of revenues. This compares to GAAP operating income of $1.44 billion, or 30% of revenues, in the fourth quarter of 2007. Non-GAAP operating income in the first quarter of 2008 was $1.83 billion, or 35% of revenues. This compares to non-GAAP operating income of $1.69 billion, or 35% of revenues, in the fourth quarter of 2007.
* GAAP net income for the first quarter of 2008 was $1.31 billion as compared to $1.21 billion in the fourth quarter of 2007. Non-GAAP net income in the first quarter of 2008 was $1.54 billion, compared to $1.41 billion in the fourth quarter of 2007.
* GAAP EPS for the first quarter of 2008 was $4.12 on 317 million diluted shares outstanding, compared to $3.79 for the fourth quarter of 2007 on 318 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2008 was $4.84, compared to $4.43 in the fourth quarter of 2007.
* Non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, and non-GAAP EPS are computed net of stock-based compensation (SBC). In the first quarter of 2008, the charge related to SBC was $281 million as compared to $245 million in the fourth quarter of 2007. Tax benefits related to SBC have also been excluded from these non-GAAP measures. The tax benefit related to SBC was $51 million in the first quarter of 2008 and $42 million in the fourth quarter of 2007. 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 $5.19 billion for the quarter ended March 31, 2008, representing a 42% increase over first quarter 2007 revenues of $3.66 billion and a 7% increase over fourth quarter 2007 revenues of $4.83 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues - Google-owned sites generated revenues of $3.40 billion, or 66% of total revenues, in the first quarter of 2008. This represents a 49% increase over first quarter 2007 revenues of $2.28 billion and a 9% increase over fourth quarter 2007 revenues of $3.12 billion.

Google Network Revenues - Google's partner sites generated revenues, through AdSense programs, of $1.69 billion, or 33% of total revenues, in the first quarter of 2008. This represents a 25% increase over network revenues of $1.35 billion generated in the first quarter of 2007 and a 3% increase over fourth quarter 2007 revenues of $1.64 billion.

International Revenues - Revenues from outside of the United States totaled $2.65 billion, representing 51% of total revenues in the first quarter of 2008, compared to 47% in the first quarter of 2007 and 48% in the fourth quarter of 2007. Had foreign exchange rates remained constant from the fourth quarter of 2007 through the first quarter of 2008, our revenues in the first quarter of 2008 would have been $18 million lower. Had foreign exchange rates remained constant from the first quarter of 2007 through the first quarter of 2008, our revenues in the first quarter of 2008 would have been $202 million lower.

Revenues from the United Kingdom totaled $803 million, representing 15% of revenue in the first quarter of 2008, compared to 16% in the first quarter of 2007 and 14% in the fourth quarter of 2007.

Paid Clicks - Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 20% over the first quarter of 2007 and approximately 4% over the fourth quarter of 2007.

TAC - Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $1.49 billion in the first quarter of 2008. This compares to TAC of $1.44 billion in the fourth quarter of 2007. TAC as a percentage of advertising revenues was 29% in the first quarter, compared to 30% in the fourth quarter of 2007.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.34 billion in the first quarter of 2008. TAC is also related to amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $143 million in the first quarter of 2008.

Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data center operational expenses, credit card processing charges as well as content acquisition costs, increased to $624 million, or 12% of revenues, in the first quarter of 2008, compared to $516 million, or 11% of revenues, in the fourth quarter of 2007.

Pursuant to our acquisition of DoubleClick, we allocated $862 million to identified intangible assets, which have a weighted average useful life of 6.3 years.

Operating Expenses - Operating expenses, other than cost of revenues, were $1.53 billion in the first quarter of 2008, or 30% of revenues, compared to $1.43 billion in the fourth quarter of 2007, or 30% of revenues. The operating expenses in the first quarter of 2008 included $809 million in payroll-related and facilities expenses, compared to $756 million in the fourth quarter of 2007.

Stock-Based Compensation (SBC) – In the first quarter of 2008, the total charge related to SBC was $281 million as compared to $245 million in the fourth quarter of 2007.

We currently estimate stock-based compensation charges for grants to employees prior to April 1, 2008 to be approximately $1.1 billion for 2008. This does not include expenses to be recognized related to employee stock awards that are granted after April 1, 2008 or non-employee stock awards that have been or may be granted. We currently anticipate that dilution related to all equity grants to employees will be at or below 2% this year.

Operating Income - GAAP operating income in the first quarter of 2008 was $1.55 billion, or 30% of revenues. This compares to GAAP operating income of $1.44 billion, or 30% of revenues, in the fourth quarter of 2007. Non-GAAP operating income in the first quarter of 2008 was $1.83 billion, or 35% of revenues. This compares to non-GAAP operating income of $1.69 billion, or 35% of revenues, in the fourth quarter of 2007.

Net Income – GAAP net income for the first quarter of 2008 was $1.31 billion as compared to $1.21 billion in the fourth quarter of 2007. Non-GAAP net income was $1.54 billion in the first quarter of 2008, compared to $1.41 billion in the fourth quarter of 2007. GAAP EPS for the first quarter of 2008 was $4.12 on 317 million diluted shares outstanding, compared to $3.79 for the fourth quarter of 2007, on 318 million diluted shares outstanding. Non-GAAP EPS for the first quarter of 2008 was $4.84, compared to $4.43 in the fourth quarter of 2007.

Income Taxes – Our effective tax rate was 24% for the first quarter of 2008.

Cash Flow and Capital Expenditures – Net cash provided by operating activities for the first quarter of 2008 totaled $1.78 billion as compared to $1.69 billion for the fourth quarter of 2007. In the first quarter of 2008, capital expenditures were $842 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 2008, free cash flow was $938 million.

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, 2008, cash, cash equivalents, and marketable securities were $12.1 billion.

On a worldwide basis, Google employed 19,156 full-time employees as of March 31, 2008, up from 16,805 full-time employees as of December 31, 2007. Of the 2,351 employees added in the first quarter of 2008, approximately 1,500 were associated with DoubleClick. Since the close of the acquisition, Google has conducted a review of its ongoing headcount requirements and approximately 10% of the DoubleClick workforce was laid off in the U.S. in early April.

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Reader Comments

Devin Serpa

April 17, 2008 09:43 PM

Yea Google keeps making money but Adsense payouts seem to suck recently... Hmm maybe they are keeping a larger share and that's why they staved off a bad Q1 report?

Bruce

April 17, 2008 11:37 PM

As an ordinary guy, I have benefited a lot from Google over the years. I just hope it does not all go to their head when they get too successful. So far, so good.

Sramana Mitra

April 18, 2008 01:18 PM

Rob,

Google is still not paying attention to verticals. Microsoft is. Have a look at this analysis:
http://sramanamitra.com/2008/04/18/google/

Sramana

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