2014 q2 google_earnings_slides

Google Confidential and Proprietary

Q2 2014Quarterly Earnings Summary

Financial Highlights:

Revenue growth of 22% Y/Y and 3% Q/Q.

Revenues were $15.96 billion.

• Google sites revenues increased 23% Y/Y and 4% Q/Q

• Network revenues increased 7% Y/Y and 1% Q/Q

• Other revenues increased 53% Y/Y and 3% Q/Q

• Consolidated international revenues were $9.33 billion.

Q2 2014 Highlights

Operational Highlights:

Strong financial metrics: revenue growth and cash flow.

Continuing to invest in three major areas of focus:

• Core ads: Search and Display advertising

• Businesses demonstrating high consumer success:

YouTube, Android/Play, and Chrome

• New businesses where we are investing to drive

adoption and innovation: Social, Commerce, and

Enterprise

Our infrastructure, real estate, and facilities continue to be

key strategic areas of investment.

2Please note: Results from Motorola Mobile are presented as net loss from discontinued operations on the consolidated statements of income, and are excluded from all other results unlessotherwise noted. Previously reported quarters have been adjusted to conform with current period presentation.

All references to share and per share amounts have been retroactively restated to reflect the stock-split which was effected in the form of a stock dividend on April 2, 2014.

($ in millions)

Revenues by Revenue Source

Other Google Sites Network

$20,000

$15,000

$10,000

$5,000

$0

Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

Quarterly Revenues

Q2'14 Y/Y Change = 22%Q2'14 Q/Q Change = 3%

($ in millions)

3,522

10,538

1,647

3,148

9,376

1,230

3,262

2,983

3,436

3,133

3,193

7,542 7,727

666439

8,6408,640

829 1,049 1,046

8,868

U.S. vs. International

US International

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

46% 47% 46% 45% 45% 44% 44% 43% 42%

54% 53% 54% 55% 55% 56% 56% 57% 58%

3

10,964

15,955

3,424

10,935

1,596

11,526

12,905 12,95113,754

15,707

13,107

15,95510,964 11,526 12,905 12,951 13,107 13,754 15,707

3,397

10,469

1,554

15,420

15,420

Paid Clicks (1)

Aggregated Network Google Sites

50%

40%

30%

20%

10%

0%

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

20%

23%

26%

31%

26%25%

20%

13%

5%

10%9% 9%

20%

29%

40%

44%

37%

33%

3


20%

15%

10%

5%

0%

-5%

-10%

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

3%

4%

8%

13%

-1%

2%

5%

-5%

3%

7%

4%

-5%

2%

9%

11%

16%

-3%

6%

Y/Y Paid Clicks Growth % Q/Q Paid Clicks Growth %

(1) Include clicks related to ads served on Google owned and operated properties across different geographies and form factors including search, YouTube engagement ads like TrueView, and otherowned and operated properties like Maps and Finance, as well as clicks related to ads served on non-Google properties participating in our AdSense for Search, AdSense for Content, and AdMobbusinesses.

Cost-Per-Click


0%

-5%

-10%

-15%

-20%

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

-4%

-6%

-8%

-11%

-9%

-6%

-9%

-5%

-6%

-11%

-12%

-13%

-2%

-8%

-13%

-15%

-11%

-7%

3


6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

-4%

-2%

-4%

-2%

0% 0%

-7%

4%

-7%

0%

-8%

3%

-2%

-6%

-5%

-4%

3%

-2%

Y/Y Cost-Per-Click Growth % Q/Q Cost-Per-Click Growth %

Traffic Acquisition Costs

TAC (in millions) TAC as % of Advertising Revenues

$3,500

$3,000

$2,500

$2,000

$1,500

$1,000

$500

$0

(inm

illio

ns)

30%

25%

20%

15%

Q2'12 Q3'12 Q4'12 Q1'13 Q2'13 Q3'13 Q4'13 Q1'14 Q2'14

2,6002,770

3,0762,962 3,013 2,972

3,3113,232 3,293

24.7%25.5% 25.5%

24.9% 25.0%

23.7% 23.5% 23.3%22.9%

4

Costs and Expenses GAAP

Q2 2013 Q1 2014 Q2 2014

$ in millions As % of revenues $ in millions As % of revenues $ in millions As % of revenues

Cost of Revenues $5,195 40% $5,961 39% $6,114 38%

Research & Development $1,766 13% $2,126 14% $2,238 14%

Sales & Marketing $1,583 12% $1,729 11% $1,941 12%

General & Administrative $1,098 9% $1,489 9% $1,404 9%

Total Costs & Expenses $9,642 74% $11,305 73% $11,697 73%

Non-GAAPQ2 2013 Q1 2014 Q2 2014

$ in millions As % of revenues $ in millions As % of revenues $ in millions As % of revenues

Cost of Revenues $5,085 39% $5,866 38% $6,014 38%

Research & Development $1,365 10% $1,670 11% $1,791 11%

Sales & Marketing $1,458 11% $1,582 10% $1,783 11%

General & Administrative $991 8% $1,348 9% $1,229 8%

Total Costs & Expenses $8,899 68% $10,466 68% $10,817 68%

Please refer to Table 1 for reconciliations of consolidated GAAP to non-GAAP costs and expenses.

5

Profitability

(1) Percentages based on revenues of $13,107 million in Q2 2013, $15,420 million in Q1 2014 and $15,955 million in Q2 2014.

Please refer to Table 2 for reconciliations of non-GAAP consolidated results of operations measures to the nearest comparable GAAPmeasures.

GAAP ($ in millions) Q2 2013 Q1 2014 Q2 2014

Income from Operations $3,465 $4,115 $4,258

Operating margin (1) 26% 27% 27%

Net Income from continuing operations $2,774 $3,650 $3,490

Net Income (loss) from discontinued operations $454 $(198) $(68)

Net Income $3,228 $3,452 $3,422

EPS (Diluted) - continuing operations $4.10 $5.33 $5.09

EPS (Diluted) - discontinued operations $0.67 $(0.29) $(0.10)

EPS (Diluted) $4.77 $5.04 $4.99

Non-GAAP ($ in millions) Q2 2013 Q1 2014 Q2 2014

Income from Operations $4,208 $4,954 $5,138

Operating margin (1) 32% 32% 32%

Net Income $3,357 $4,299 $4,175

EPS (Diluted) $4.96 $6.27 $6.08

6

Consolidated Free Cash Flow

(1) Including Motorola Home through the date of disposal (April 17, 2013). (2) Including Motorola Mobile.

Non-GAAP ($ in millions) Q2 2013 (1)(2) Q1 2014 (2) Q2 2014 (2)

Net cash provided by operating activities $4,705 $4,391 $5,627

Less: Purchases of property and equipment $(1,611) $(2,345) $(2,646)

Free Cash Flow $3,094 $2,046 $2,981

7

Overview of Q2 2014 OI&E and FX• In Q2, we recognized $145M of Interest and Other Income, net.

• In Q2, we recognized $169M of interest income earned on our investments, $48M of netrealized gains on marketable securities, $23M of realized gain on equity interests, $21Mof gains on non-marketable equity investments and $27M of interest expense on ourlong-term debt.

• We recognized $93M of foreign exchange loss, of which $67M related to the cost of ourFX cash flow hedging program.

• Excluding gains related to our foreign exchange risk management program, had foreignexchange rates remained constant from the first quarter of 2014 through the secondquarter of 2014, our revenues in the second quarter of 2014 would have been $77Mlower. Excluding gains related to our foreign exchange risk management program, hadforeign exchange rates remained constant from the second quarter of 2013 through thesecond quarter of 2014, our revenues in the second quarter of 2014 would have been$120M lower.

• Our FX cash flow hedging program allowed us to recognize a benefit of approximately$6M to international revenues this quarter.

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Revenues by Geography

($ in millions) Q2 2013 Q1 2014 Q2 2014

United States $5,896 $6,656 $6,630

United Kingdom 1,321 1,583 1,616

Rest of the world 5,890 7,181 7,709

Total Revenues $13,107 $15,420 $15,955

9

International Revenues excluding Hedging and FX Impact (Y/Y)

($ in millions) Q2 2013 Q2 2014

UK revenues (GAAP) $1,321 $1,616

exclude:

a) f/x impact on Q2'14 revenues using Q2'13 rates n/a (124)

b) hedging gains (24) 0

UK revenues excluding f/x and hedging impact (Non-GAAP) $1,297 $1,492

Y/Y% (Non-GAAP) 15%

($ in millions) Q2 2013 Q2 2014

ROW revenues (GAAP) $5,890 $7,709

exclude:

a) f/x impact on Q2'14 revenues using Q2'13 rates n/a 4

b) hedging gains (11) (6)

ROW revenues excluding f/x and hedging impact (Non-GAAP) $5,879 $7,707

Y/Y% (Non-GAAP) 31%

10

International Revenues excluding Hedging and FX Impact (Q/Q)

($ in millions) Q1 2014 Q2 2014

UK revenues (GAAP) $1,583 $1,616

exclude:


b) hedging gains 0 0

UK revenues excluding f/x and hedging impact (Non-GAAP) $1,583 $1,600

Q/Q% (Non-GAAP) 1%

($ in millions) Q1 2014 Q2 2014

ROW revenues (GAAP) $7,181 $7,709

exclude:


b) hedging gains (8) (6)

ROW revenues excluding f/x and hedging impact (Non-GAAP) $7,173 $7,642

Q/Q% (Non-GAAP) 7%

11

(1) Percentages based on revenues of $13,107 million in Q2 2013, $15,420 million in Q1 2014 and $15,955 million in Q2 2014.(2) Includes Google stock-based compensation expense.

Table 1 - Reconciliations of consolidated GAAP to non-GAAP costs and expenses

Q2 2013 Q1 2014 Q2 2014

$ in millions As a % of revenues (1) $ in millions As a % of revenues (1) $ in millions As a % of revenues (1)

Cost of Revenues (GAAP) $5,195 40% $5,961 39% $6,114 38%

Less: Non-GAAP adjustments (2) $(110) $(95) $(100)

Cost of Revenues (non-GAAP) $5,085 39% $5,866 38% $6,014 38%

Research & Development (GAAP) $1,766 13% $2,126 14% $2,238 14%


Research & Development (non-GAAP) $1,365 10% $1,670 11% $1,791 11%

Sales & Marketing (GAAP) $1,583 12% $1,729 11% $1,941 12%


Sales & Marketing (non-GAAP) $1,458 11% $1,582 10% $1,783 11%

General & Administrative (GAAP) $1,098 9% $1,489 9% $1,404 9%


General & Administrative (non-GAAP) $991 8% $1,348 9% $1,229 8%

Total Costs & Expenses (GAAP) $9,642 74% $11,305 73% $11,697 73%


Total Costs & Expenses (non- GAAP) $8,899 68% $10,466 68% $10,817 68%

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(1) Percentages based on revenues of $13,107 million in Q2 2013, $15,420 million in Q1 2014 and $15,955 million in Q2 2014.(2) Tax effect of SBC is calculated using tax-deductible portion of SBC and applying entity-specific tax rates.

($ in millions) Q2 2013 Q1 2014 Q2 2014

Income from Operations (GAAP)Operating margin (1)

$3,46526%

$4,11527%

$4,25827%

Add: Stock-based compensation expense (SBC) $743 $839 $880

Income from Operations (non-GAAP)Operating margin (1)

$4,20832%

$4,95432%

$5,13832%

Net Income (GAAP) $3,228 $3,452 $3,422

Add: Stock-based compensation expense (net of tax) (2) $583 $649 $685

Less: Net income (loss) from discontinued operations $(454) $198 $68

Net Income (non-GAAP) $3,357 $4,299 $4,175

Table 2 - Reconciliations of non-GAAP consolidated results of operationsmeasures to the nearest comparable GAAP measures

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2014 q2 google_earnings_slides

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