Disecting Google's 3rd Quarter '07 Results

Okay - so I decided to whip whip on my mask and gloves and perform my own brand of Surgery on Google's '07 results. Frankly I'm amazed at how fast this company has grown in terms of revenue, profit and especially manpower - in 5 years. On a worldwide basis, Google employed 15,916 full-time employees as of September 30, 2007, up from 13,786 full time employees as of June 30, 2007. Third Quarter results were impressive - any which way you look.

Eric Schmidt, CEO of Google. "Our core search advertising business experienced continued momentum driven by growth in monetization and traffic, and we are creating a wider and deeper ads system through our focus on innovation, bringing more ad formats to our advertisers. Our efforts to offer more products and services in international markets as well as effectively grow our technology infrastructure and add to our deep talent base during the quarter helped to deliver growth by enabling Google to reach more users around the world." I'd say that's a mild understatement - let's get into the numbers.

Q3 Financial Summary Google reported Gross Revenues of $4.23 billion for the quarter ended September 30, 2007, an increase of 57% compared to the third quarter of 2006 and an increase of 9% compared to the second quarter of 2007 (including TAC). In the third quarter of 2007, TAC totaled $1.22 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.

Operating Income: GAAP operating income for the third quarter of 2007 was $1.32 billion, or 31% of revenues. This compares to GAAP operating income of $1.10 billion, or 29% of revenues, in the second quarter of 2007 Non-GAAP operating income in the third quarter of 2007 was $1.52 billion, or 36% of revenues. This compares to non-GAAP operating income of $1.35 billion, or 35% of revenues, in the second quarter of 2007

Net Income
GAAP net income for the third quarter of 2007 was $1.07 billion as compared to $925 million in the second quarter of 2007. Non-GAAP net income in the third quarter of 2007 was $1.24 billion, compared to $1.12 billion in the second quarter of 2007
GAAP EPS for the third quarter of 2007 was $3.38 on 317 million diluted shares outstanding, compared to $2.93 for the second quarter of 2007 on 315 million diluted shares outstanding. Non-GAAP EPS in the third quarter of 2007 was $3.91, compared to $3.56 in the second quarter of 2007.

Revenues Google reported revenues of $4.23 billion for the quarter ended September 30, 2007, representing a 57% increase over third quarter 2006 revenues of $2.69 billion and a 9% increase over second quarter 2007 revenues of $3.87 billion.
Google Sites Revenues Google-owned sites generated revenues of $2.73 billion, or 65% of total revenues, in the third quarter of 2007. This represents a 68% increase over third quarter 2006 revenues of $1.63 billion and a 10% increase over second quarter 2007 revenues of $2.49 billion.
Google Network Revenues: Google's partner sites generated revenues, through AdSense programs, of $1.45 billion, or 34% of total revenues, in the third quarter of 2007. This represents a 40% increase over network revenues of $1.04 billion generated in the third quarter of 2006 and an 8% increase over second quarter 2007 revenues of $1.35 billion.

International Revenues - from outside of the United States totaled $2.03 billion, representing 48% of total revenues in the third quarter of 2007, compared to 44% in the third quarter of 2006 and 48% in the second quarter of 2007. Had foreign exchange rates remained constant from the second quarter of 2007 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $24 million lower. Had foreign exchange rates remained constant from the third quarter of 2006 through the third quarter of 2007, our revenues in the third quarter of 2007 would have been $121 million lower. Revenues from the United Kingdom totaled $661 million, representing 16% of revenue in the third quarter of 2007, compared to 16% in the third quarter of 2006 and 15% in the second 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 45% over the third quarter of 2006 and approximately 5% over the second quarter of 2007.

TAC - Traffic Acquisition Costs, the portion of revenues shared with Google's partners, increased to $1.22 billion in the third quarter of 2007. This compares to TAC of $1.15 billion in the second quarter of 2007. TAC as a percentage of advertising revenues was 29% in the third quarter, compared to 30% in the second quarter of 2007.

The majority of TAC expense is related to amounts ultimately paid to our AdSense partners, which totaled $1.12 billion in the third quarter of 2007. TAC is also related to amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $105 million in the third quarter of 2007.

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 $441 million, or 10% of revenues, in the third quarter of 2007, compared to $412 million, or 11% of revenues, in the second quarter of 2007.

Operating Expenses - Operating expenses, other than cost of revenues, were $1.25 billion in the third quarter of 2007, or 30% of revenues, compared to $1.21 billion in the second quarter of 2007, or 31% of revenues. The operating expenses in the third quarter of 2007 included $659 million in payroll-related and facilities expenses, compared to $625 million in the second quarter of 2007.

So there you have it - very strong earnings all round. The only problem with a report like this one is that now the street will expect this type of performance - on the regular. I"m not so sure that's sustainable - but time will tell.....