2008 Q3 Google Earnings Slides

1. Q3 2008
Quarterly EarningsQuarterly Earnings
Summary

2. Third Quarter 2008 HighlightsThird Quarter 2008 Highlights
• Revenue growth of 31% Y/Y and 3% Q/Q
G l ti th f 34% Y/Y d 4% Q/Q– Google properties revenue growth of 34% Y/Y and 4% Q/Q
– Network revenues increased 15% Y/Y and 1% Q/Q
– International revenue was $2.8 billion
• Operational Highlights
– Traffic and revenue solid in Q3 despite difficult economic environment
Key investments in our core search and ads businesses– Key investments in our core search and ads businesses
– Increasing prioritization of our newer investments:
• Apps, Display, YouTube, and Geo
• Maintaining a clear focus on operational efficiency and cost
containment, better positioning Google for healthy long-term
growth
2
growth

3. Quarterly RevenueQuarterly Revenue
$5,500
Q3’08 Y/Y Growth = 31%
Q Q/Q G %
5,186
5,367
5,541
1,636
1,686
1,655
1,680
$4,000
$4,500
$5,000 Q3’08 Q/Q Growth = 3%
3,664
3,872
4,231
4,827
millions
1,345
1,352
1,455
1,198
$2,500
$3,000
$3,500
2,456
2,690
3,664
3,205
$in
3,530 3,672
630
675
799
928
2,282 2,486
2,735
3,122
3,400
1,037
997
$1,500
$2,000
$2,500
1,384
1,578
1,919
2,254
1,257
737
584
630
1,098
657
1,297
1,626
1,977
885
1,432
$0
$500
$1,000
5
5
5
5
6
6
6
6
7
7
7
7
8
8
8
3
Q
1'05
Q
2'05
Q
3'05
Q
4'05
Q
1'06
Q
2'06
Q
3'06
Q
4'06
Q
1'07
Q
2'07
Q
3'07
Q
4'07
Q
1'08
Q
2'08
Q
3'08
Google.com Network Licensing and Other

4. U S vs International RevenueU.S. vs. International Revenue
$5 000
$5,500
4 827
5,186
5,367
5,541
$4,000
$4,500
$5,000
3,664
3,872
4,231
4,827
51%
51%
52%
nmillions
$2,500
$3,000
$3,500
2,254
2,456
2,690
44%
3,205
47%
48% 48%
48%
$in
$1,000
$1,500
$2,000
1,384
1,578
1,919
39%
39%
38%
42%
42%
58%
44%
56%
56%
1,257
39%
52%
52%
52%
49%
49%
48%53%
$0
$500
Q
1'05
Q
2'05
Q
3'05
Q
4'05
Q
1'06
Q
2'06
Q
3'06
Q
4'06
Q
1'07
Q
2'07
Q
3'07
Q
4'07
Q
1'08
Q
2'08
Q
3'08
61%
61%
62%
58%
58%
61%
4
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
US International

5. Traffic Acquisition Costs
1,440
1,4861,4741,495
36.1%
37.2%
$1,400
$1,500 40%
Traffic Acquisition Costs
976
1,221
1,1481,125
31 0%
33.2%32.5%32.3%
34.0%
31 0%$1,000
$1,100
$1,200
$1,300
$ ,
30%
35%
825
530
629
723
785 27.9%
28.4%
29.2%30.3%
30.7%31.0% 31.0%
29.9%
29.1%
$600
$700
$800
$900
$1,000
25%
30%
nmillions
462 494
530
$200
$300
$400
$500
$600
15%
20%
$in
$0
$100
$200
Q
1'05
Q
2'05
Q
3'05
Q
4'05
Q
1'06
Q
2'06
Q
3'06
Q
4'06
Q
1'07
Q
2'07
Q
3'07
Q
4'07
Q
1'08
Q
2'08
Q
3'08
10%
5
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
Q
TAC TAC as %of Advertising Revenues

6. Costs and ExpensesCosts and Expenses
GAAP
$Millions Q3'07 Q2'08 Q3'08
Cost of Revenues $1 663 $2 148 $2 173Cost of Revenues $1,663 $2,148 $2,173
Percent of revenues 39% 40% 39%
Research & Development $549 $682 $705
Percent of revenues 13% 13% 13%
Sales & Marketing $381 $485 $509
Percent of revenues 9% 9% 9%
General & Administrative $321 $474 $507
Percent of revenues 8% 9% 9%
Total Costs & Expenses $2,914 $3,789 $3,894
Percent of revenues 69% 71% 70%
Non-GAAPNon GAAP
$Millions Q3'07 Q2'08 Q3'08
Cost of Revenues $1,659 $2,139 $2,162
Percent of revenues 39% 40% 39%
Research & Development $418 $495 $536
Percent of revenues 10% 10% 10%
Sales & Marketing $351 $442 $445
Percent of revenues 8% 8% 8%
General & Administrative $288 $440 $376
Percent of revenues 7% 8% 7%
Total Costs & Expenses $2,716 $3,516 $3,519
Percent of revenues 64% 66% 64%
6
Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and
expenses to GAAP costs and expenses
Percent of revenues 64% 66% 64%

7. ProfitabilityProfitability
GAAP
$Millions Q3'07 Q2'08 Q3'08
Income from Operations 1,318$ 1,578$ 1,648$
Operating Margin 31% 29% 30%
Net Income 1,070$ 1,247$ 1,290$
EPS (diluted) 3.38$ 3.92$ 4.06$
Non-GAAP
$$Millions Q3'07 Q2'08 Q3'08
Income from Operations 1,516$ 1,851$ 2,023$
Operating Margin 36% 34% 37%
Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations
Net Income 1,237$ 1,472$ 1,563$
EPS (diluted) 3.91$ 4.63$ 4.92$
7
pp g p
measures to the nearest comparable GAAP measures

8. Free Cash FlowFree Cash Flow
$Millions Q3'07 Q2'08 Q3'08
Net cash provided byp y
operating activities $1,633 $1,766 $2,185
Less purchases of property
and equipment ($553) ($697) ($452)and equipment ($553) ($697) ($452)
Free cash flow (Non-GAAP) $1,080 $1,069 $1,733
8

9. Cash Flow Hedging 101:
Why does Google need cash flow hedging?Why does Google need cash flow hedging?
• Over 50% of Google’s revenues are billed in currencies other
than the U.S. dollar; however, we ultimately measure and
report our financial results in U.S. dollars.
• As a result, we are subject to the impact of foreign exchange
fluctuations on our revenue, earnings, and cash flow.
o If the USD strengthens, our revenues invoiced in other
currencies become less when translated to USD, and vice
versa.
• In order to manage this risk, we have implemented a program
to hedge against downside risk to our revenues and earningsg g g
reported in USD.

10. Cash Flow Hedging 101:
How does Google hedge?How does Google hedge?
• We have a rolling program of foreign exchange options toWe have a rolling program of foreign exchange options to
hedge forecasted revenues over the next 18 months.
• We hedge revenue, but the amount of options we purchase is
computed based on our economic exposure to a currencycomputed based on our economic exposure to a currency
(revenue less expenses)
• In Q3 2008, we hedged revenues denominated in Euro, CAD,
and GBP.and GBP.
o Note, however, that our GBP hedges were rolled out late
in the quarter - so there was no benefit realized to
revenues.revenues.

11. Cash Flow Hedging 101:
SFAS 133 – How does the accounting work?SFAS 133 – How does the accounting work?
• SFAS 133 is the standard we use to account for our cash flow hedging program.
o Prior to maturity, an option’s unrealized gain or “intrinsic value” – the difference
between the strike price of the option and the spot rate of the underlying
currency – is recorded as Other Comprehensive Income (OCI) on our balance
sheet on a tax effected basis.sheet on a tax effected basis.
o At maturity, any unrealized gain is initially recorded to OCI and subsequently
recognized as revenue – on a gross basis or before the tax effect - when the
corresponding revenue (hedged item) is recognized.corresponding revenue (hedged item) is recognized.
o During Q3, the amount reclassified to revenue from OCI was $34M.
o The unrealized gain in OCI does not necessarily reflect the eventual benefit too The unrealized gain in OCI does not necessarily reflect the eventual benefit to
revenue; the ultimate benefit will depend on exchange rates at the maturity of
the option contracts. The benefit to revenue will be recognized when the
corresponding revenue (hedged item) is recognized within the next 18 months.

12. Cash Flow Hedging 101:
SFAS 133 – How does the accounting work?
• Because we do not purchase in-the-money options (options with
“intrinsic value”) the cost will always equal their “time value ”
SFAS 133 – How does the accounting work?
intrinsic value ), the cost will always equal their time value.
• The cost or “time value” of the option is amortized over its term on a
mark-to-market basis (not on a straight-lined basis) to Interestmark to market basis (not on a straight lined basis) to Interest
Income and Other, net.
• As a result, the amount of amortization expense we recognize in anyp g y
particular quarter is impacted by how much the option moves into or
out of the money, as well as the underlying currency’s volatility.
f• The more an option moves into or out of the money, generally the
lower its “time value,” and the greater the amount of amortization
expense we will recognize. This could result in a front end loading of
expenseexpense.

13. Table 1 - Reconciliations of non-GAAP costs and expenses
to GAAP costs and expensesto GAAP costs and expenses
$Millions Q3'07
As a % of
Revenues (1) Q2'08
As a % of
Revenues (1) Q3'08
As a % of
Revenues (1)
Cost of Revenues (GAAP) 1,663$ 39% 2,148$ 40% 2,173$ 39%( ) ,$ % ,$ % ,$ %
Less: Stock-based compensation (4) (9) (11)
Cost of Revenues (non-GAAP) 1,659$ 39% 2,139$ 40% 2,162$ 39%
Research and development (GAAP) 549$ 13% 682$ 13% 705$ 13%
Less: Stock-based compensation (131) (187) (169)
Research and development (non-GAAP) 418$ 10% 495$ 10% 536$ 10%Research and development (non-GAAP) 418$ 10% 495$ 10% 536$ 10%
Sales and marketing (GAAP) 381$ 9% 485$ 9% 509$ 9%
Less: Stock-based compensation (30) (43) (64)
Sales and marketing (non-GAAP) 351$ 8% 442$ 8% 445$ 8%
General and administrative (GAAP) 321$ 8% 474$ 9% 507$ 9%General and administrative (GAAP) 321$ 8% 474$ 9% 507$ 9%
Less: Stock-based compensation (33) (34) (36)
Less: Settlement agreement with the Authors
Guild and the Association of American Publishers
("AAP")
- - (95)
General and administrative (non-GAAP) 288$ 7% 440$ 8% 376$ 7%
Total costs and expenses (GAAP) 2,914$ 69% 3,789$ 71% 3,894$ 70%
Less: Stock-based compensation and settlement
agreement with the Authors Guild and the AAP
(198) (273) (375)
Total costs and expenses (non-GAAP) 2,716$ 64% 3,516$ 66% 3,519$ 64%
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(1) Percentages based on GAAP revenues of $4,231 million in Q3 '07, $5,367 million in Q2 '08 and $5,541 million in Q3 '08.

14. Table 2 - Reconciliations of non-GAAP results of operations
measures to the nearest comparable GAAP measuresmeasures to the nearest comparable GAAP measures
Figures in millions except per share amounts Q3'07
Operating
Margin
(1) Q2'08
Operating
Margin
(1) Q3'08
Operating
Margin
(1)
Income from operations (GAAP) 1,318$ 31% 1,578$ 29% 1,648$ 30%
Add: Stock-based compensation 198 273 280
Add S ttl t t ith th A th G ild d th AAP 95Add: Settlement agreement with the Authors Guild and the AAP - - 95
Income from operations (non-GAAP) 1,516$ 36% 1,851$ 34% 2,023$ 37%
Net income (GAAP) 1,070$ 1,247$ 1,290$
Add: Stock-based compensation (net of tax) 167 225 217
Add: Settlement agreement with the Authors Guild and the AAP (net of tax) - - 56
Net income (non-GAAP) 1,237$ 1,472$ 1,563$
Net income per share - diluted (GAAP) 3.38$ 3.92$ 4.06$
Net income per share - diluted (non-GAAP) 3.91$ 4.63$ 4.92$
Shares used in per share calculation - diluted 317 318 318
(1) Percentages based on GAAP revenues of $4,231 million in Q3 '07, $5,367 million in Q2 '08 and $5,541 million in Q3 '08.
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15. Q3 2008
Quarterly EarningsQuarterly Earnings
Summary