Q3 2009 Quarterly EarningsQuarterly Earnings

Summary

Third Quarter 2009 HighlightsThird Quarter 2009 Highlights• Revenue growth of 7% Y/Y and 8% Q/Q

G l ti th f 8% Y/Y d Q/Q– Google properties revenue growth of 8% Y/Y and Q/Q

– Network revenues increased 7% Y/Y and Q/Q

– International revenues were $3.1 billion

• Operational Highlights– Strong financial metrics: revenue growth, profitability, and cash flow

– Investing in Innovation: 70/20/10

• Innovation in our Core Business

Creating the Perfect Search Engine and Better Ads– Creating the Perfect Search Engine and Better Ads

• Innovation in our Emerging Businesses

– Mobile/Android

2

– Display/YouTube

– Enterprise

Quarterly RevenuesQuarterly Revenues

$6,000

Q3’09 Y/Y Growth = 7%Q3’09 Q/Q Growth = 8%

5 541 5,7015,945

1 6551,680

1,6931,638

1,801

1,684$4,500

$5,000

$5,5005,186

5,3675,541 5,701

5,509 5,523

in m

illio

ns

1,686 1,655

$3 000

$3,500

$4,000

$

3,5303,811

3,4003,693 3,9563,672 3,653$2,000

$2,500

$3,000

$500

$1,000

$1,500

3

$0Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09

Google.com Network Licensing and Other

U S vs International RevenuesU.S. vs. International Revenues

100%5,186 5,367 5,541 5,701 5,509 5,523

($ in millions)5,945

80%

90%

52% 51%51% 50% 52% 53% 53%

50%

60%

70% 52% 51%51% 50% 52% 53% 53%

30%

40%

48% 49%49% 50% 48% 47% 47%

0%

10%

20%

4

0%Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09

US International

Traffic Acquisition Costs

$1,500$1,600 40%

Traffic Acquisition Costs

29 2%$1 100$1,200$1,300$1,400$1,500

35%

1,5591,486 1,474 1,495 1,483 1 436 1 453

27.1%26.9% 26.9% 27.2%27.9%28.4%29.2%

$700$800$900

$1,000$1,100

25%

30%

n m

illio

ns

, 1,474 , , 1,436 1,453

$400$500$600$700

20%

$ in

$0$100$200$300

10%

15%

5

Q1'08 Q2'08 Q3'08 Q4'08 Q1'09 Q2'09 Q3'09

TAC TAC as % of Advertising Revenues

Costs and ExpensesCosts and ExpensesGAAP$Millions Q3'08 Q2'09 Q3'09Cost of Revenues $2 173 $2 108 $2 226Cost of Revenues $2,173 $2,108 $2,226

Percent of revenues 39% 38% 37%

Research & Development $705 $708 $758Percent of revenues 13% 13% 13%

Sales & Marketing $509 $469 $498Percent of revenues 9% 8% 8%

G l & Ad i i t ti $ $ $General & Administrative $507 $364 $389Percent of revenues 9% 7% 7%

Total Costs & Expenses $3,894 $3,649 $3,871Percent of revenues 70% 66% 65%

Non-GAAP$Millions Q3'08 Q2'09 Q3'09Cost of Revenues $2,162 $2,094 $2,211

Percent of revenues 39% 38% 37%

Research & Development $536 $526 $563Percent of revenues 10% 10% 10%

Sales & Marketing $445 $412 $436Percent of revenues 8% 7% 7%

General & Administrative $376 $324 $344Percent of revenues 7% 6% 6%

Total Costs & Expenses $3,519 $3,356 $3,554Percent of revenues 64% 61% 60%

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Note: Please refer to supporting Table 1 for reconciliations of non-GAAP costs and expenses to GAAP costs and expenses

Percent of revenues 64% 61% 60%

ProfitabilityProfitability

GAAP$Millions (except per share amounts) Q3'08 Q2'09 Q3'09Income from Operations $1,648 1,874$ 2,074$

Operating Margin 30% 34% 35%

Net Income $1,290 1,485$ 1,639$

EPS (diluted) $4.06 4.66$ 5.13$

Non-GAAP$Milli ( t h t ) Q3'08 Q2'09 Q3'09$Millions (except per share amounts) Q3'08 Q2'09 Q3'09Income from Operations $2,023 2,167$ 2,391$

Operating Margin 37% 39% 40%

Note: Please refer to supporting Table 2 for reconciliations of non-GAAP results of operations

Net Income $1,563 1,708$ 1,884$

EPS (diluted) $4.92 5.36$ 5.89$

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pp g pmeasures to the nearest comparable GAAP measures

Free Cash FlowFree Cash Flow

$Millions Q3'08 Q2'09 Q3'09Net cash provided by operating activities $2,185 $1,609 $2,726

Less purchases of property and equipment ($452) ($139) ($186)q p ($ ) ($ ) ($ )

Free cash flow (Non-GAAP) $1,733 $1,470 $2,540

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Overview of Q3 2009 OI&E and FXOverview of Q3 2009 OI&E and FXIn Interest and Other Expenses, we had a net expense of $7M for Q3

• In Q3 the interest income earned on our investments was $47M and we recognized• In Q3, the interest income earned on our investments was $47M and we recognized $19M in realized gains.

• Given the context of where we are now in the economic cycle, we have revised our approach to focus again on increasing our long-term expected returns and began this pp g g g p gtransition in Q3.

• Primarily as a result of our average option strike price having moved closer to the market FX rate in Q3 relative to that in Q2, we expensed $67M related to our cash flow

$FX hedging program, compared to $93M in Q2.

• Also, our cash flow FX hedging programs allowed us to recognize a benefit of approximately $39M to international revenue this quarter.

• Before hedging, the recent weakening of the USD relative to other currencies had a positive impact of $166M on revenue in Q3 compared to the prior quarter, but the strengthening of the USD compared to Q3 of the prior year resulted in a negative impact of roughly $297M

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of roughly $297M.

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

$Millions Q3'08As a % of

Revenues (1) Q2'09As a % of

Revenues (1) Q3'09As a % of

Revenues (1)Cost of revenues (GAAP) 2,173$ 39% 2,108$ 38% 2,226$ 37%( ) ,$ ,$ ,$Less: Stock-based compensation expense (11) (14) (15) Cost of revenues (non-GAAP) 2,162$ 39% 2,094$ 38% 2,211$ 37%

Research and development (GAAP) 705$ 13% 708$ 13% 758$ 13%Less: Stock-based compensation expense (169) (182) (195) Research and development (non GAAP) 536$ 10% 526$ 10% 563$ 10%Research and development (non-GAAP) 536$ 10% 526$ 10% 563$ 10%

Sales and marketing (GAAP) 509$ 9% 469$ 8% 498$ 8%Less: Stock-based compensation expense (64) (57) (62) Sales and marketing (non-GAAP) 445$ 8% 412$ 7% 436$ 7%

General and administrati e (GAAP) 507$ 9% 364$ 7% 389$ 7%General and administrative (GAAP) 507$ 9% 364$ 7% 389$ 7%Less: Stock-based compensation expense (36) (40) (45) Less: Settlement agreement with the Authors Guild and the Association of American Publishers ("AAP") (95) - - General and administrative (non-GAAP) 376$ 7% 324$ 6% 344$ 6%

Total costs and expenses (GAAP) 3,894$ 70% 3,649$ 66% 3,871$ 65%Less: Stock-based compensation expense and settlement agreement with the Authors Guild and the AAP (375) (293) (317) Total costs and expenses (non-GAAP) 3,519$ 64% 3,356$ 61% 3,554$ 60%

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(1) Percentages based on revenues of $5,541 million in Q3'08, $5,523 million in Q2'09 and $5,945 million in Q3'09.

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

$ millions except per share amounts Q3'08Operating Margin (1) Q2'09

Operating Margin (1) Q3'09

Operating Margin (1)

Income from operations (GAAP) 1,648$ 30% 1,874$ 34% 2,074$ 35%Add: Stock-based compensation expense 280 293 317 Add Settlement agreement ith the A thors G ild and the AAP 95Add: Settlement agreement with the Authors Guild and the AAP 95 - -

Income from operations (non-GAAP) 2,023$ 37% 2,167$ 39% 2,391$ 40%

Net income (GAAP) 1,290$ 1,485$ 1,639$ Add: Stock-based compensation expense (net of tax) 217 223 245 Add: Settlement agreement with the Authors Guild and the AAP (net of tax) 56 - -

Net income (non-GAAP) 1,563$ 1,708$ 1,884$

Net income per share - diluted (GAAP) 4.06$ 4.66$ 5.13$ Net income per share - diluted (non-GAAP) 4.92$ 5.36$ 5.89$ Shares used in per share calculation - diluted 318 319 320

(1) Percentages based on revenues of $5,541 million in Q3'08, $5,523 million in Q2'09 and $5,945 million in Q3'09.

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Q3 2009 Quarterly EarningsQuarterly Earnings

Summary