Fusion Corporate Partners

Google Inc. has announced financial results for the quarter ended March 31, 2011.

The announcement follows below.

Q1 Financial Summary

Google reported revenues of $8.58 billion for the quarter ended March 31, 2011, an increase of 27% compared to the first quarter of 2010. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2011, TAC totaled $2.04 billion, or 25% of advertising revenues.

Google reports operating income, operating margin, 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 in the first quarter of 2011 was $2.30 billion, or 27% of revenues [updated from $2.80 billion, or 33% of revenues]. This compares to GAAP operating income of $2.49 billion, or 37% of revenues, in the first quarter of 2010. Non-GAAP operating income in the first quarter of 2011 was $3.23 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.78 billion, or 41% of revenues, in the first quarter of 2010.
• GAAP net income in the first quarter of 2011 was $1.80 billion [updated from $2.30 billion], compared to $1.96 billion in the first quarter of 2010. Non-GAAP net income in the first quarter of 2011 was $2.64 billion, compared to $2.18 billion in the first quarter of 2010.
• GAAP EPS in the first quarter of 2011 was $5.51 [updated from $7.04] on 326 million diluted shares outstanding, compared to $6.06 in the first quarter of 2010 on 323 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2011 was $8.08, compared to $6.76 in the first quarter of 2010.
• Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC), and in the first quarter of 2011, the charge related to potential resolution of Department of Justice investigation. Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC and the charge related to potential resolution of Department of Justice investigation, and the related tax benefits. In the first quarter of 2011, the charge related to SBC was $432 million, compared to $291 million in the first quarter of 2010. The tax benefit related to SBC was $92 million in the first quarter of 2011 and $65 million in the first quarter of 2010. The charge related to potential resolution of Department of Justice investigation was $500 million. We recognized no tax benefit for the charge related to potential resolution of Department of Justice investigation.

Q1 Financial Highlights

Revenues – Google reported revenues of $8.58 billion in the first quarter of 2011, representing a 27% increase over first quarter 2010 revenues of $6.77 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC.

Google Sites Revenues – Google-owned sites generated revenues of $5.88 billion, or 69% of total revenues, in the first quarter of 2011. This represents a 32% increase over first quarter 2010 revenues of $4.44 billion.

Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $2.43 billion, or 28% of total revenues, in the first quarter of 2011. This represents a 19% increase from first quarter 2010 network revenues of $2.04 billion.

International Revenues – Revenues from outside of the United States totaled $4.57 billion, representing 53% of total revenues in the first quarter of 2011, compared to 52% in the fourth quarter of 2010 and 53% in the first quarter of 2010. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2010 through the first quarter of 2011, our revenues in the first quarter of 2011 would have been $19 million lower. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2010 through the first quarter of 2011, our revenues in the first quarter of 2011 would have been $23 million lower.

• Revenues from the United Kingdom totaled $969 million, representing 11% of revenues in the first quarter of 2011, compared to 13% in the first quarter of 2010.
• In the first quarter of 2011, we recognized a benefit of $14 million to revenues through our foreign exchange risk management program, compared to a benefit of $10 million in the first quarter of 2010.

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 18% over the first quarter of 2010 and increased approximately 4% over the fourth quarter of 2010.

Cost-Per-Click – Average cost-per-click, which includes clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 8% over the first quarter of 2010 and decreased approximately 1% over the fourth quarter of 2010.

TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $2.04 billion in the first quarter of 2011, compared to TAC of $1.71 billion in the first quarter of 2010. TAC as a percentage of advertising revenues was 25% in the first quarter of 2011, compared to 26% in the first quarter of 2010.

The majority of TAC is related to amounts ultimately paid to our AdSense partners, which totaled $1.70 billion in the first quarter of 2011. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $337 million in the first quarter of 2011.

Other Cost of Revenues – Other cost of revenues, which is comprised primarily of data center operational expenses, amortization of intangible assets, content acquisition costs as well as credit card processing charges, increased to $897 million, or 10% of revenues, in the first quarter of 2011, compared to $741 million, or 11% of revenues, in the first quarter of 2010.

Operating Expenses – Operating expenses, other than cost of revenues, were $3.34 billion [updated from $2.84 billion] in the first quarter of 2011, or 39% of revenues [updated from 33% of revenues], compared to $1.84 billion in the first quarter of 2010, or 27% of revenues.

SBC – In the first quarter of 2011, the total charge related to SBC was $432 million, compared to $291 million in the first quarter of 2010.

We currently estimate SBC charges for grants to employees prior to April 1, 2011 to be approximately $1.7 billion for 2011. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2011 or non-employee stock awards that have been or may be granted.

Operating Income – – GAAP operating income in the first quarter of 2011 was $2.30 billion, or 27% of revenues [updated from $2.80 billion, or 33% of revenues]. This compares to GAAP operating income of $2.49 billion, or 37% of revenues, in the first quarter of 2010. Non-GAAP operating income in the first quarter of 2011 was $3.23 billion, or 38% of revenues. This compares to non-GAAP operating income of $2.78 billion, or 41% of revenues, in the first quarter of 2010.

Interest and Other Income, Net – Interest and other income, net increased to $96 million in the first quarter of 2011, compared to $18 million in the first quarter of 2010.

Income Taxes – Our effective tax rate was 25% [updated from 21%] for the first quarter of 2011.

Net Income – GAAP net income in the first quarter of 2011 was $1.80 billion [updated from $2.30 billion], compared to $1.96 billion in the first quarter of 2010. Non-GAAP net income in the first quarter of 2011was $2.64 billion, compared to $2.18 billion in the first quarter of 2010. GAAP EPS in the first quarter of 2011 was $5.51 [updated from $7.04] on 326 million diluted shares outstanding, compared to $6.06 in the first quarter of 2010 on 323 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2011 was $8.08, compared to $6.76 in the first quarter of 2010.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the first quarter of 2011 totaled $3.17 billion, compared to $2.58 billion in the first quarter of 2010. In the first quarter of 2011, capital expenditures were $890 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 2011, free cash flow was $2.28 billion.

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, 2011, cash, cash equivalents, and marketable securities were $36.7 billion.

Headcount – On a worldwide basis, Google employed 26,316 full-time employees as of March 31, 2011, up from 24,400 full-time employees as of December 31, 2010.

USA, Mountain View, CA

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