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Q4 2008
Quarterly Earnings
    Summary
Fourth Quarter 2008 Highlights
    โ€ข   Revenue growth of 18% Y/Y and 3% Q/Q
        โ€“   Google properties revenue growth of 22% Y/Y and 4% Q/Q
            G   l        ti               th f            d
        โ€“   Network revenues increased 4% Y/Y and 1% Q/Q
        โ€“   International revenue was $2.9 billion

    โ€ข   Operational Highlights
        โ€“   Traffic and revenue solid in Q4 despite difficult economic environment

        โ€“   Key investments continue in our core search and ads businesses

        โ€“   Increasing prioritization of our newer investments:

            โ€ข Display, Mobile and Enterprise

    โ€ข   Maintaining a clear focus on operational efficiency and cost
        containment, better positioning Google for long-term growth


2
Quarterly Revenue
                        $6,000                                                                                                 5,701
                                     Q4โ€™08 Y/Y Growth = 18%                                                            5,541
                                                                                                               5,367
                                                                                                               5 367
                                     Q4โ€™08 Q/Q Growth = 3%
                                     Q         G          %
                        $5,500
                                                                                                      5,186
                                                                                              4,827
                        $5,000
                                                                                                                               1,693
                                                                                                                       1,680
                        $4,500                                                       4,231                     1,655
                                                                                                      1,686
                                                                            3,872
                                                                            3 872
                        $4,000                                                                1,636
                                                                    3,664
        $ in millions




                        $3,500                             3,205                      1,455
                                                                             1,352
                        $3,000                                      1,345
                                                  2,690
                                         2,456
                                         2 456
                                                            1,198
                                 2,254
                        $2,500
                                                   1,037
                        $2,000            997                                                                                   3,811
                                                                                                                       3,672
                                                                                                               3,530
                                  928                                                                  3,400
                                                                                              3,122
                        $1,500
                                                                                      2,735
                                                                                      2 735
                                                                             2,486
                                                                             2 486
                                                                    2,282
                        $1,000                              1,977
                                                   1,626
                                          1,432
                                 1,297
                         $500

                           $0
                                 Q1'06   Q2'06     Q3'06   Q4'06    Q1'07   Q2'07    Q3'07    Q4'07   Q1'08    Q2'08   Q3'08   Q4'08

                                                  Google.com         Network         Licensing and Other
3
U.S. vs.
    U S vs International Revenue
                                                                                                                       5,701
                     $6,000
                                                                                                               5,541
                                                                                                       5,367
                                                                                                        ,
                     $5,500
                     $5 500
                                                                                               5,186
                                                                                       4,827
                     $5,000
                                                                                                                       50%
                                                                                                               51%
                     $4,500                                                    4,231
                                                                                                       52%
                                                                       3,872
                     $4,000
                     $4 000                                                                    51%
                                                              3,664
                                                                                       48%
     $ in millions




                     $3,500                           3,205
                                                                               48%
                                                                        48%
                     $3,000
                                              2,690           47%
                                      2,456
        n




                     $2,500   2,254                    44%
                                                                                                                       50%
                                              44%
                     $2,000
                                                                                       52%                     49%
                                      42%                                                      49%     48%
                                                                               52%
                               42%                            53%      52%
                     $1,500
                                                       56%
                     $1,000           58%      56%
                               58%
                      $500

                        $0
                              Q1 06
                              Q1'06   Q2 06
                                      Q2'06   Q3 06
                                              Q3'06   Q4 06
                                                      Q4'06   Q1 07
                                                              Q1'07    Q2 07
                                                                       Q2'07   Q3 07
                                                                               Q3'07   Q4 07
                                                                                       Q4'07   Q1 08
                                                                                               Q1'08   Q2 08
                                                                                                       Q2'08   Q3 08
                                                                                                               Q3'08   Q4 08
                                                                                                                       Q4'08

                                                              US      International

4
Traffic Acquisition Costs
                     $1,500                                                                                                 40%
                     $1,400
                     $1,300
                                                                                                                            35%
                     $1,200   32.5%   32.3%
                                              31.0% 30.7%   31.0%
                     $1,100                                                         30.3%
                                                                    29.9%
                                                                                            29.2%
                                                                            29.1%
                                                                                %
                     $1,000
                     $1 000                                                                                                 30%
                                                                                                    28.4%
                                                                                                            27.9%
                                                                                                                    26.9%
                      $900
     $ in millions




                      $800
                                                                                                                            25%
                                                                                                            1,495
                                                                                            1,486                   1,483
                                                                                                    1,474
                                                                                    1,440
                      $700
        n




                                                                            1,221
                      $600                                          1,148
                                                            1,125
                      $500                                                                                                  20%
                                                    976
                                              825
                      $400            785
                               723
                      $300
                                                                                                                            15%
                      $200
                      $100
                        $0                                                                                                  10%
                              Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08
                              Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08

                                                     TAC        TAC as % of Advertising Revenues

5
Costs and Expenses
         GAAP
         $Millions                                    Q4'07            Q3'08            Q4'08
         Cost of Revenues                                 $1,956
                                                          $1 956            $2,173
                                                                            $2 173           $2,190
                                                                                             $2 190
           Percent of revenues                                41%              39%                38%
         Research & Development                              $631             $705                $733
           Percent of revenues                                13%              13%                13%
         Sales & Marketing                                   $422             $509                $506
           Percent of revenues                                 9%               9%                 9%
         General & Administrative                            $377             $507                $412
           Percent of revenues                                 8%               9%                 7%
         Total Costs & Expenses                            $3,386           $3,894           $3,841
           Percent of revenues                                71%              70%                67%


         Non-GAAP
         $Millions                                    Q4'07            Q3'08            Q4'08
         Cost of Revenues                                  $1,950           $2,162           $2,178
           Percent of revenues                                40%              39%                38%
         Research & Development                              $470             $536                $551
           Percent of revenues                                10%              10%                10%
         Sales & Marketing                                   $384             $445                $450
           Percent of revenues                                 8%               8%                 8%
         General & Administrative                            $337             $376                $376
           Percent of revenues                                 7%               7%                 6%
         Total Costs & Expenses                            $3,141           $3,519           $3,555
           Percent of revenues                                65%              64%                62%
             Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and
             expenses to GAAP costs and expenses
6
Profitability
          GAAP
          $Millions                                         Q4'07              Q3'08              Q4'08
          Income from Operations                        $        1,441     $        1,648     $        1,860
          Operating Margin                                        30%                 30%                   33%
          Net Income                                    $        1,206     $        1,290     $             382
          EPS (diluted)                                 $         3.79     $         4.06     $         1.21


          Non-GAAP
          $Millions                                         Q4'07              Q3'08              Q4'08
          Income from Operations                        $        1,686     $        2,023     $        2,146
          Operating Margin                                        35%                 37%                   38%
          Net Income                                    $        1,409     $        1,563     $        1,616
          EPS (diluted)                                 $         4.43     $         4.92     $         5.10

           Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations
                                   pp     g                                                     p
           measures to the nearest comparable GAAP measures



7
Free Cash Flow



         $Millions                    Q4'07     Q3'08     Q4'08
         Net cash provided by
                  p           y
         operating activities          $1,693    $2,185    $2,122

         Less purchases of property
         and equipment                 ($678)    ($452)    ($368)



         Free cash flow (Non-GAAP)     $1,015    $1,733    $1,754




8
Google Exchange Offer
        g         g
 โ€ข     Offers employees the ability to participate in a voluntary one-for-one stock option
       exchange
 โ€ข     Designed t i
       Di        d to increase retention
                                 t ti
 โ€ข     The number of Google shares subject to outstanding options will not change as a result
       of the exchange offer
 โ€ข     Total options expected to be exchanged represents less than 3% of total shares
       currently outstanding
              tl     t t di
 โ€ข     New options are subject to an increased vesting schedule which adds 12 months to the
       original vesting schedule
 โ€ข     In addition, new options will vest no sooner than 6 months after the close of the offer
       period
           id
 โ€ข     We expect to take a modification charge estimated to be $460 million over the vesting
       periods of the new options. These vesting periods range from six months to
       approximately five years. This modification charge will be recorded as additional stock
       based compensation beginning in the first quarter of 2009
 โ€ข     This estimate assumes an exchange price of approximately $300 and
       that all eligible underwater options will be exchanged under the program. As a result, it
       is subject to change.
The option exchange described in this slide has not launched. When the option exchange begins, Google will provide
employees with written materials explaining the terms and timing. Eligible optionholders should read these materials
carefully when they become available because they will contain important information about the option exchange. When
the offer period begins, Google will file these materials with the Securities and Exchange Commission (SEC) as part of a
tender offer statement. You will be able to obtain these written materials and other documents filed by Google with the
SEC free of charge from the SEC's website at www.sec.gov.
Table 1 - Reconciliations of non-GAAP costs and expenses
     to GAAP costs and expenses
                                                                      As a % of                       As a % of                       As a % of
     $Millions                                            Q4'07      Revenues (1)     Q3'08          Revenues (1)    Q4'08           Revenues (1)
     Cost of Revenues (GAAP)                          $     1,956            41% $        2,173              39% $        2,190              38%
     Less: Stock-based
     Less Stock based compensation                             (6)                          (11)                            (12)
     Cost of Revenues (non-GAAP)                      $     1,950            40% $        2,162              39% $        2,178              38%

     Research and development (GAAP)                  $       631            13% $          705              13% $          733              13%
     Less: Stock-based compensation                          (161)                         (169)                           (182)
     Research and development (non-GAAP)              $       470            10% $          536              10% $          551              10%

     Sales and marketing (GAAP)                       $      422              9% $            509             9% $           506              9%
     Less: Stock-based compensation                          (38)                             (64)                           (56)
     Sales and marketing (non-GAAP)                   $      384              8% $            445             8% $           450              8%

     General and administrative (GAAP)                $      377              8% $            507             9% $           412              7%
     Less: Stock-based compensation                          (40)                             (36)                           (36)
     Less: Settlement agreement with the Authors
     Guild and the Association of American                    -                               (95)                               -
     Publishers (quot;AAPquot;)
     General and administrative (non-GAAP)            $      337              7% $            376             7% $           376              6%

     Total costs and expenses (GAAP)                  $     3,386            71% $        3,894              70% $        3,841              67%
     Less: Stock-based compensation and settlement
                                                             (245)                         (375)                           (286)
     agreement with the Authors Guild and the AAP

     Total costs and expenses (non-GAAP)              $     3,141            65% $        3,519              64% $        3,555              62%

     (1) Percentages based on GAAP revenues of $4,827 million in Q4'07, $5,541 million in Q3 '08 and $5,701 million in Q4 '08.




10
Table 2 - Reconciliations of non-GAAP results of operations
         measures to the nearest comparable GAAP measures


                                                                                                         Operating                    Operating                  Operating
                                                                                                          Margin                       Margin                     Margin
Figures in millions except per share amounts                                                  Q4'07         (1)             Q3'08        (1)          Q4'08         (1)
Income from operations (GAAP)                                                             $     1,441             30% $       1,648          30% $       1,860          33%
Add: Stock-based compensation                                                                     245                           280                        286
Add: Settlement agreement with the Authors Guild and the AAP                                       -                             95                         -
Income from operations (non-GAAP)                                                         $     1,686             35% $       2,023          37% $       2,146          38%

Net income (GAAP)                                                                         $     1,206                   $     1,290               $        382
Add: Stock-based compensation (net of tax)                                                        203                           217                        221
Add: Settlement agreement with the Authors Guild and the AAP (net of tax)                          -                             56                         -
Add: Impairment charges related to certain equity investments (net of tax)
                                                                      tax).                        -                             -                       1,013
                                                                                                                                                         1 013
Net income (non-GAAP)                                                                     $     1,409                   $     1,563               $      1,616

Net income per share - diluted (GAAP)                                                     $      3.79                   $      4.06               $       1.21
Net income per share - diluted (non-GAAP)                                                 $      4.43                   $      4.92               $       5.10
Shares used in per share calculation - diluted
               p                                                                                 318                            318                        317

(1) Percentages based on GAAP revenues of $4,827 million in Q4'07, $5,541 million in Q3 '08 and $5,701 million in Q4 '08.




  11
Q4 2008
Quarterly Earnings
    Summary

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2008Q4_google_earnings_slides

  • 2. Fourth Quarter 2008 Highlights โ€ข Revenue growth of 18% Y/Y and 3% Q/Q โ€“ Google properties revenue growth of 22% Y/Y and 4% Q/Q G l ti th f d โ€“ Network revenues increased 4% Y/Y and 1% Q/Q โ€“ International revenue was $2.9 billion โ€ข Operational Highlights โ€“ Traffic and revenue solid in Q4 despite difficult economic environment โ€“ Key investments continue in our core search and ads businesses โ€“ Increasing prioritization of our newer investments: โ€ข Display, Mobile and Enterprise โ€ข Maintaining a clear focus on operational efficiency and cost containment, better positioning Google for long-term growth 2
  • 3. Quarterly Revenue $6,000 5,701 Q4โ€™08 Y/Y Growth = 18% 5,541 5,367 5 367 Q4โ€™08 Q/Q Growth = 3% Q G % $5,500 5,186 4,827 $5,000 1,693 1,680 $4,500 4,231 1,655 1,686 3,872 3 872 $4,000 1,636 3,664 $ in millions $3,500 3,205 1,455 1,352 $3,000 1,345 2,690 2,456 2 456 1,198 2,254 $2,500 1,037 $2,000 997 3,811 3,672 3,530 928 3,400 3,122 $1,500 2,735 2 735 2,486 2 486 2,282 $1,000 1,977 1,626 1,432 1,297 $500 $0 Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Google.com Network Licensing and Other 3
  • 4. U.S. vs. U S vs International Revenue 5,701 $6,000 5,541 5,367 , $5,500 $5 500 5,186 4,827 $5,000 50% 51% $4,500 4,231 52% 3,872 $4,000 $4 000 51% 3,664 48% $ in millions $3,500 3,205 48% 48% $3,000 2,690 47% 2,456 n $2,500 2,254 44% 50% 44% $2,000 52% 49% 42% 49% 48% 52% 42% 53% 52% $1,500 56% $1,000 58% 56% 58% $500 $0 Q1 06 Q1'06 Q2 06 Q2'06 Q3 06 Q3'06 Q4 06 Q4'06 Q1 07 Q1'07 Q2 07 Q2'07 Q3 07 Q3'07 Q4 07 Q4'07 Q1 08 Q1'08 Q2 08 Q2'08 Q3 08 Q3'08 Q4 08 Q4'08 US International 4
  • 5. Traffic Acquisition Costs $1,500 40% $1,400 $1,300 35% $1,200 32.5% 32.3% 31.0% 30.7% 31.0% $1,100 30.3% 29.9% 29.2% 29.1% % $1,000 $1 000 30% 28.4% 27.9% 26.9% $900 $ in millions $800 25% 1,495 1,486 1,483 1,474 1,440 $700 n 1,221 $600 1,148 1,125 $500 20% 976 825 $400 785 723 $300 15% $200 $100 $0 10% Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1'06 Q2'06 Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 TAC TAC as % of Advertising Revenues 5
  • 6. Costs and Expenses GAAP $Millions Q4'07 Q3'08 Q4'08 Cost of Revenues $1,956 $1 956 $2,173 $2 173 $2,190 $2 190 Percent of revenues 41% 39% 38% Research & Development $631 $705 $733 Percent of revenues 13% 13% 13% Sales & Marketing $422 $509 $506 Percent of revenues 9% 9% 9% General & Administrative $377 $507 $412 Percent of revenues 8% 9% 7% Total Costs & Expenses $3,386 $3,894 $3,841 Percent of revenues 71% 70% 67% Non-GAAP $Millions Q4'07 Q3'08 Q4'08 Cost of Revenues $1,950 $2,162 $2,178 Percent of revenues 40% 39% 38% Research & Development $470 $536 $551 Percent of revenues 10% 10% 10% Sales & Marketing $384 $445 $450 Percent of revenues 8% 8% 8% General & Administrative $337 $376 $376 Percent of revenues 7% 7% 6% Total Costs & Expenses $3,141 $3,519 $3,555 Percent of revenues 65% 64% 62% Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and expenses to GAAP costs and expenses 6
  • 7. Profitability GAAP $Millions Q4'07 Q3'08 Q4'08 Income from Operations $ 1,441 $ 1,648 $ 1,860 Operating Margin 30% 30% 33% Net Income $ 1,206 $ 1,290 $ 382 EPS (diluted) $ 3.79 $ 4.06 $ 1.21 Non-GAAP $Millions Q4'07 Q3'08 Q4'08 Income from Operations $ 1,686 $ 2,023 $ 2,146 Operating Margin 35% 37% 38% Net Income $ 1,409 $ 1,563 $ 1,616 EPS (diluted) $ 4.43 $ 4.92 $ 5.10 Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations pp g p measures to the nearest comparable GAAP measures 7
  • 8. Free Cash Flow $Millions Q4'07 Q3'08 Q4'08 Net cash provided by p y operating activities $1,693 $2,185 $2,122 Less purchases of property and equipment ($678) ($452) ($368) Free cash flow (Non-GAAP) $1,015 $1,733 $1,754 8
  • 9. Google Exchange Offer g g โ€ข Offers employees the ability to participate in a voluntary one-for-one stock option exchange โ€ข Designed t i Di d to increase retention t ti โ€ข The number of Google shares subject to outstanding options will not change as a result of the exchange offer โ€ข Total options expected to be exchanged represents less than 3% of total shares currently outstanding tl t t di โ€ข New options are subject to an increased vesting schedule which adds 12 months to the original vesting schedule โ€ข In addition, new options will vest no sooner than 6 months after the close of the offer period id โ€ข We expect to take a modification charge estimated to be $460 million over the vesting periods of the new options. These vesting periods range from six months to approximately five years. This modification charge will be recorded as additional stock based compensation beginning in the first quarter of 2009 โ€ข This estimate assumes an exchange price of approximately $300 and that all eligible underwater options will be exchanged under the program. As a result, it is subject to change. The option exchange described in this slide has not launched. When the option exchange begins, Google will provide employees with written materials explaining the terms and timing. Eligible optionholders should read these materials carefully when they become available because they will contain important information about the option exchange. When the offer period begins, Google will file these materials with the Securities and Exchange Commission (SEC) as part of a tender offer statement. You will be able to obtain these written materials and other documents filed by Google with the SEC free of charge from the SEC's website at www.sec.gov.
  • 10. Table 1 - Reconciliations of non-GAAP costs and expenses to GAAP costs and expenses As a % of As a % of As a % of $Millions Q4'07 Revenues (1) Q3'08 Revenues (1) Q4'08 Revenues (1) Cost of Revenues (GAAP) $ 1,956 41% $ 2,173 39% $ 2,190 38% Less: Stock-based Less Stock based compensation (6) (11) (12) Cost of Revenues (non-GAAP) $ 1,950 40% $ 2,162 39% $ 2,178 38% Research and development (GAAP) $ 631 13% $ 705 13% $ 733 13% Less: Stock-based compensation (161) (169) (182) Research and development (non-GAAP) $ 470 10% $ 536 10% $ 551 10% Sales and marketing (GAAP) $ 422 9% $ 509 9% $ 506 9% Less: Stock-based compensation (38) (64) (56) Sales and marketing (non-GAAP) $ 384 8% $ 445 8% $ 450 8% General and administrative (GAAP) $ 377 8% $ 507 9% $ 412 7% Less: Stock-based compensation (40) (36) (36) Less: Settlement agreement with the Authors Guild and the Association of American - (95) - Publishers (quot;AAPquot;) General and administrative (non-GAAP) $ 337 7% $ 376 7% $ 376 6% Total costs and expenses (GAAP) $ 3,386 71% $ 3,894 70% $ 3,841 67% Less: Stock-based compensation and settlement (245) (375) (286) agreement with the Authors Guild and the AAP Total costs and expenses (non-GAAP) $ 3,141 65% $ 3,519 64% $ 3,555 62% (1) Percentages based on GAAP revenues of $4,827 million in Q4'07, $5,541 million in Q3 '08 and $5,701 million in Q4 '08. 10
  • 11. Table 2 - Reconciliations of non-GAAP results of operations measures to the nearest comparable GAAP measures Operating Operating Operating Margin Margin Margin Figures in millions except per share amounts Q4'07 (1) Q3'08 (1) Q4'08 (1) Income from operations (GAAP) $ 1,441 30% $ 1,648 30% $ 1,860 33% Add: Stock-based compensation 245 280 286 Add: Settlement agreement with the Authors Guild and the AAP - 95 - Income from operations (non-GAAP) $ 1,686 35% $ 2,023 37% $ 2,146 38% Net income (GAAP) $ 1,206 $ 1,290 $ 382 Add: Stock-based compensation (net of tax) 203 217 221 Add: Settlement agreement with the Authors Guild and the AAP (net of tax) - 56 - Add: Impairment charges related to certain equity investments (net of tax) tax). - - 1,013 1 013 Net income (non-GAAP) $ 1,409 $ 1,563 $ 1,616 Net income per share - diluted (GAAP) $ 3.79 $ 4.06 $ 1.21 Net income per share - diluted (non-GAAP) $ 4.43 $ 4.92 $ 5.10 Shares used in per share calculation - diluted p 318 318 317 (1) Percentages based on GAAP revenues of $4,827 million in Q4'07, $5,541 million in Q3 '08 and $5,701 million in Q4 '08. 11