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Google Announces Fourth Quarter and Fiscal Year 2005 Results
1/31/2006 4:02:02 PM
MOUNTAIN VIEW, Calif., Jan 31, 2006 (BUSINESS WIRE) -- Google Inc. (GOOG) today announced financial results for the quarter and year ended December 31, 2005.
"We are very pleased with our results for the fourth quarter as we achieved excellent performance across our businesses," said Eric Schmidt, CEO of Google. "We generated significant revenue growth in our core search and advertising business, driven by continued strength in traffic and monetization. We will continue to invest significantly as we develop innovative new products and as we extend our core technologies to new user access points and to different channels."

Q4 Financial Summary

Google reported revenues of $1.919 billion for the quarter ended December 31, 2005, an increase of 86% compared to the fourth quarter of 2004 and an increase of 22% compared to the third quarter of 2005. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the fourth quarter, TAC totaled $629 million, or 33% percent 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 are described below and reconciled to the corresponding GAAP measure in the section below titled "About non-GAAP financial measures."

-- GAAP operating income for the fourth quarter was $570 million, or 29.7% of revenues. This compares to GAAP operating income of $529 million, or 33.5% of revenues, in the third quarter. Non-GAAP operating income in the fourth quarter was $718 million, or 37.4% of revenues. This compares to non-GAAP operating income of $596 million, or 37.8% of revenues, in the third quarter.

-- GAAP net income for the fourth quarter was $372 million as compared to $381 million in the third quarter. Non-GAAP net income was $469 million, compared to $437 million in the third quarter.

-- GAAP EPS for the fourth quarter was $1.22 on 304 million diluted shares outstanding, compared to $1.32 for the third quarter, on 290 million diluted shares outstanding. Non-GAAP EPS was $1.54, compared to $1.51 in the third quarter.

-- Our effective tax rate for the fourth quarter increased to 41.8% this quarter, and to 31.6% for the year, above our previously announced expectation of approximately 30% for the year. Primarily because the proportion of total expenses allocated to our international operations was greater than we anticipated, more of our profits were taxed at a higher domestic tax rate; this resulted in a greater effective tax rate compared to our expectations. We expect our effective tax rate for 2006 to be approximately 30%.

-- Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS are computed net of certain material items: stock-based compensation (SBC), in-process research and development (IPR&D) charges, and also Google's contribution to the Google Foundation of $90 million, which the company made in the fourth quarter of 2005. In the fourth quarter, the charge related to stock-based compensation was $58 million as compared to $46 million in the third quarter. IPR&D charges were immaterial in the fourth quarter of 2005, compared to $21 million in the third quarter. Tax benefits related to stock-based compensation charges and the contribution to the Google Foundation have been excluded from non-GAAP net income and non-GAAP EPS. The tax benefit related to SBC was $14 million in the fourth quarter and $11 million in the third quarter, and the tax benefit related to the contribution to the Google Foundation in the fourth quarter was $37 million. Google does not expect to make further donations to the Google Foundation for the foreseeable future. Reconciliations of non-GAAP measures to GAAP operating income, net income, and EPS are included at the end of this release.

Q4 Financial Highlights

Revenues -- Google reported revenues of $1.919 billion for the quarter ended December 31, 2005, representing an 86% increase over fourth quarter 2004 revenues of $1.032 billion, and a 22% increase over third quarter 2005 revenues of $1.578 billion. Growth over the third quarter was driven by expected seasonal strength in both traffic and monetization. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC.

Google Sites Revenues -- Google-owned sites generated revenues of $1.098 billion, or 57% of total revenues. This represents a 24% increase over the third quarter revenues of $885 million.

Google Network Revenues -- Google's partner sites generated revenues, through AdSense programs, of $799 million, or 42% of total revenues. This is an 18% increase over network revenues of $675 million generated in the third quarter.

International Revenues -- Revenues from outside of the United States contributed 38% of total revenues, compared to 39% in the third quarter of 2005 and 35% in the fourth quarter of 2004. International revenues reflected the unfavorable impact caused by the appreciation of the U.S. dollar and stronger seasonal trends in the U.S. relative to the international business. Had foreign exchange rates remained constant from the third quarter through the fourth quarter, our revenues would have been $12 million, or 0.6%, higher. Had foreign exchange rates remained constant from 2004 through 2005, our revenues would have been $40 million, or 2.1%, higher.

TAC -- Traffic Acquisition Costs, the portion of revenues shared with Google's partners, increased to $629 million in the fourth quarter. This compares to TAC of $530 million in the third quarter. TAC as a percentage of advertising revenues decreased to 33.2% in the fourth quarter from 34.0% in the third quarter, reflecting primarily the continued shift in our revenue mix from Google network revenue to Google-owned site revenue.

Operating Income -- GAAP operating income in the fourth quarter was $570 million, or 29.7% of revenues. This compares to GAAP operating income of $529 million, or 33.5% of revenues, in the third quarter. GAAP operating income in the fourth quarter includes a contribution of $90 million to the Google Foundation. Non-GAAP operating income in the fourth quarter was $718 million, or 37.4% of revenues. This compares to non-GAAP operating income of $596 million, or 37.8% of revenues, in the third quarter. The favorable shift in the mix of revenues to a higher proportion of revenues from Google-owned sites was offset by significant investments in all areas of the business.

Stock-Based Compensation -- In the fourth quarter, the charge related to stock-based compensation was $58 million as compared to $46 million in the third quarter. The increase in stock-based compensation was primarily related to Google stock units issued in 2005.

Stock-based compensation in 2006 will be significantly greater than it was in 2005 as a result of our adoption of SFAS 123R effective January 1, 2006. We currently anticipate that dilution related to all equity grants to employees will be approximately 1% to 1.5% per year.

Net Income -- GAAP net income for the fourth quarter was $372 million as compared to $381 million in the third quarter. Non-GAAP net income was $469 million, compared to $437 million in the third quarter. GAAP EPS for the fourth quarter was $1.22 on 304 million diluted shares outstanding, compared to $1.32 for the third quarter, on 290 million diluted shares outstanding. Non-GAAP EPS was $1.54, compared to $1.51 in the third quarter.

Income Taxes -- Our effective tax rate for the fourth quarter increased to 41.8% this quarter, and to 31.6% for the year, above our previously announced expectation of approximately 30% for the year. Because the proportion of total expenses allocated to our international operations was greater than we anticipated, more of our profits were taxed at a higher domestic tax rate; this resulted in a greater effective tax rate compared to our expectations. We expect our effective tax rate for 2006 to be approximately 30%.

Cash Flow and Capital Expenditures -- Net cash provided by operating activities for the fourth quarter totaled $658 million as compared to $647 million for the third quarter. Free cash flow, an alternative non-GAAP measure of liquidity, is defined as net cash provided by operating activities less capital expenditures. In the fourth quarter we generated $413 million in free cash flow. Capital expenditures in the quarter were $245 million as compared to $293 million in the third quarter, and primarily reflect purchases of production servers and networking equipment and acquisitions of additional office space.

We will continue to invest significantly in capital expenditures in 2006. We expect the majority of the investment to be focused on IT infrastructure including servers, networking equipment, and data centers, as well as real estate and campus facilities.

Adjusted EBITDA -- Adjusted EBITDA is another non-GAAP measure of liquidity and is defined as income before interest, taxes, depreciation, amortization, SBC, IPR&D, and the contribution to the Google Foundation. Adjusted EBITDA increased to approximately $814 million in the fourth quarter from $672 million in the third quarter, or 43% of revenues for both periods.

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.

Fiscal Year 2005 Financial Highlights

Revenue -- For the year ended December 31, 2005, Google reported total revenues of $6.139 billion, an increase of 92.5% over revenues of $3.189 billion in 2004. Revenue growth was attributable to both Google sites and Google network sites.

Google Sites Revenues -- Revenue from Google sites increased 112.5% in 2005 to $3.377 billion as traffic to Google sites continued to grow and monetization improved.

Google Network Revenues -- Revenue from the Google network increased 72.9% in 2005 to $2.688 billion due primarily to increased contribution from existing partners as well as the addition of many new partners to the AdSense for Search and AdSense for Content programs.

International Revenues -- Revenues from outside of the United States contributed 39% to total revenues for the year compared to 34% in 2004.

Operating Income -- GAAP operating income in 2005 was $2.017 billion, compared to $640 million in 2004.

Net Income -- GAAP net income for 2005 increased to $1.465 billion, from $399 million in 2004.

Cash Flow and Capital Expenditures -- Net cash provided by operating activities was $2.459 billion, compared to $977 million in 2004. Capital expenditures in 2005 were $838 million, an increase of 163% from $319 million in 2004. Free cash flow was $1.621 billion, an increase from $658 million in 2004.

Adjusted EBITDA -- Adjusted EBITDA increased to $2.624 billion in 2005 from $1.280 billion in 2004.

Cash -- As of December 31, 2005, Google had cash, cash equivalents and marketable securities of $8.0 billion.

On a worldwide basis, Google employed 5,680 full time employees as of December 31, 2005, up from 4,989 as of September 30, 2005 and 3,021 as of December 31, 2004.

Webcast and conference call information

A live audio webcast of Google's fourth-quarter and fiscal year 2005 earnings release call will be available at http://investor.google.com/news.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 at that site. A replay of the call will be available beginning at 7:30 PM (ET) through midnight Tuesday, February 7, 2006 by calling 888-203-1112 in the United States or 719-457-0820 for calls from outside the United States. The required confirmation code for the replay is 4135040.
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