Google Industry Analysis

1. Here is a summary of earnings reports for selected technology companies for the first quarter of 2010 and what they reveal about the state of corporate spending: April 13, 2010: Intel Corp. says net income nearly quadrupled revenue up 44 percent. Intel says corporations are upgrading their employees’ computers and buying more servers. April 15, 2010: Advanced Micro Devices Inc. shows a 34 percent increase in revenue and says spending on servers is “pretty healthy. ” The microprocessor maker’s CEO says he is less certain about corporate spending on personal computers.

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April 15, 2010: Google Inc. says revenue surged 23 percent, its best rate since the summer of 2008. Prices paid for Google’s ads were 7 percent higher than the average rate at the same time last year. April 19, 2010: IBM Corp. reports net income gain of 13 percent, revenue up 5 percent. Revenue would have been flat without currency fluctuations but company predicts revenue will rise even without such adjustments in the current quarter. April 20, 2010: Yahoo Inc. reports first revenue growth in 18 months. Although total ad revenue increased just 3 percent, display advertising rose 20 percent.

That category includes online billboards that companies use to promote brands. April 21, 2010: EMC Corp. reports net income up 92 percent and revenue up 23 percent. Company questions whether unusual spike in information-technology spending has already ended. April 22, 2010: Microsoft Corp. says net income in the last quarter rose 35 percent. It credits strong sales of the newly released Windows 7. Although businesses have been spending more on new computers and some software, Microsoft says revenue for the group that makes server software rose only 2 percent.

April 23, 2010: Xerox Corp. says it lost money because of acquisition charges but says revenue from services and printer and copier supplies rose as corporate spending picked up. April 26th, 2010 “Back in January, Google made a splash over the Nexus One smartphone – summoning the tech press out to the Googleplex for an introduction to not only the device itself, but also a new way of selling it. You see, Google (GOOG) wanted to reinvent the way consumers shop for and buy cell phones. Pushing away from a model where specific devices are tied to certain arriers, Google had this vision of selling its devices directly to the consumer and then giving them a choice on which carrier to use. It was a valiant effort but was flawed right out of the gate. First, there were questions galore on who would handle offline sales, support and service – Google certainly wasn’t equipped to handle that. Then came the rumblings over what was perceived to be double “early termination fees” – those imposed by the carriers and a separate that would be charged by Google.

Now, the company has quietly made one change to its Nexus One online store that suggests – for those of us trying to read deeper into it – that Google may be backing away from its push into the online smartphone sales business. (Techmeme) For months, its site has been pitching the Nexus One for Verizon (VZ) as a “Coming in Spring 2010. ” This morning, the language was changed to read: For Verizon’s network, you can buy the Droid Incredible by HTC, a powerful Android phone and similarly feature-packed cousin of the Nexus One” April 26th, 2010 Google (NasdaqGS: GOOG – News)—which continues to try to improve its relationship with ad agencies—is now making it cheaper for agencies to manage large search-ad campaigns on behalf of their clients. The company says that it will now provide certified partners with “preferred pricing” for use of the Google AdWords API, which is used to build the apps necessary to manage “large or complex” AdWords accounts and campaigns. The company says it is also launching a directory so that advertisers can more easily find qualified agencies to run their campaigns.

Google VP Penry Price tells AdAge that “a lot of people on the agency side have been frustrated that we are charging for our APIs” and that his company wanted to “remove a disincentive to innovation. ” In a blog post announcing the move, Google also says it hopes the lower pricing—depending on spend, fees may be completely eliminated—will get agencies “to experiment with new strategies, expand the functionality of their tools, and build more comprehensive client campaigns without worrying about increased costs. Unlikely Google has much to lose here; the fees were never a significant revenue driver for Google and instead were put in place so that agencies would not abuse the AdWords system, according to AdAge. ” April 26th, 2010 “It all started with a letter earlier this month from the data protection authorities of ten countries demanding that Google (GOOG) improve user privacy, citing concerns about Google Buzz and Street View services. The letter was signed by officials in Canada, France, Germany, Ireland, Israel, Italy, the Netherlands, New Zealand, Spain and the United Kingdom.

Google’s initial response, as reported by Bloomberg: We try very hard to be upfront about the data we collect, and how we use it. Of course we do not get everything 100 percent right – that is why we acted so quickly on [Google] Buzz. However, Google took a testier turn when talking to the Wall Street Journal: We have discussed all these issues publicly many times before and have nothing to add to the letter. European authorities have long been among the Internet giant’s harshest critics when it comes to privacy issues.

The company has negotiated with the European Union about the Street View mapping service, agreeing to limit to one year the storage of photos from the day images are published on the site. Criticism is the U. S has been building too. A group of lawmakers recently asked the Federal Trade Commission to investigate Buzz, which they contend exposed private information about Google users. Google is also being sued in a California federal court over allegations the Buzz service violated privacy rights.

Google recently unveiled a “transparency tool” that gives information about requests it receives for user data or content removal from government agencies. The company is initially using data from July to December of last year. David Drummond, Google’s chief legal officer, said in a blog post, “we believe that greater transparency will lead to less censorship. ” The elephant in the room, as much as the United States government prides itself on privacy and censorship, it is the one country conspicuously missing from the signatories of the letter.

This coupled with the latest and more defiant tone from Google regarding its privacy policies, one could not help wonder if the allegation is entirely baseless that Google’s China fiasco was nothing more than a political quid pro quo for the regulatory heat Google’s been under. ” [pic] [pic] [pic] [pic] [pic] Two year relationship between Yahoo! & Google. [pic] Two year relationship between Baidu, Inc. & Google. [pic] Two year relationship between Microsoft & Google. 2. Porter’s Five Forces Level of Competition • In terms of the search engine market, competition is relatively low. There are only a few major rivals (Yahoo! Bing, Baidu) and Google has the majority share of the market. There is little or no cost to the user in switching between the alternatives however, and choice often comes down to convenience due to the lack of user awareness of the differences between the various search engines. • Google’s leadership in search engines naturally translates into dominance in the online advertising market. Although there are many small competitors in pop-ups and banner ads, Google AdWords and AdSense have provided an arguably monopolistic share of the market, and as such Google may be subject to a monopoly investigation.

Threat of Substitutes • Generally there is little or no alternative to the classic concept of the internet search engine, therefore substitution is almost impossible. • Within the broad market search engine market, switching between rival products bares negligible costs to the user and therefore the threat of substitution is very high. • Should another product arise that is categorically and publicly known to be better than Google’s, it is highly probable that Google would lose a lot of users as they themselves rely heavily on word of mouth promotion for their success. Due to the direct relationship between number of users and advertising revenue, a drop user numbers would translate into a large loss in revenue for Google. Threat of New Entrants • Large levels of investment are required to develop competitive technology and brand identity in this market, and as such the threat of entirely new entrants is low. • The threat from established high-technology firm on the other hand is fairly substantial. The potential will always remain for companies in similar industries, such as Apple, to develop their own search engine technology in the future. Similarly, there is a strong patter of re-entry by existing players in the market, such as Microsoft replacing Live Search with Bing, and this continues to be a serious threat to Google. Bargaining Power of Buyers • There are such a vast amount of Google users that the loss of a small number of these would have a negligible effect. • There is no real vehicle for canvassing public opinion on search engines other than internet forums and independent reviews, which reduces the power of buyers. There are no switching costs associated with rival products, which means that should a large number of users become disillusioned they could easily boycott Google with no negative effect on their own utility. The impact of this on Google’s revenue would be severe, and it is therefore in their interest to continually innovate and provide more services free of charge. Bargaining Power of Suppliers • If defining Google’s suppliers as the individual advertisers or websites that it links to, there is very little bargaining power for suppliers.

Google has an almost infinite number of potential suppliers, the majority of which would inflict no great loss to Google if they no longer existed • When viewing the suppliers as the web browser software creators, Google’s position is far less secure. There is little to stop Microsoft or Apple, for example, developing browsers that hinder the performance of Google. It is not in their interest to do so however, as Google has an extensive collection of users that would be dissatisfied with such a product.

Because of this, Google and its suppliers are mutually dependant. Suppliers such as Microsoft are limited to tentative actions such as providing their software with their own product as the primary search engine tools. 3. Google was formally founded in 1998 following a successful research project by Larry Page and Sergey Brin two years previous. A history of innovative product developments and acquisitions, most notably YouTube and DoubleClick, has seen Google grow into the world’s largest search engine provider, and diversify into a number of related industries.

Now just over 10 years old, Google offers a huge range of open source products and services including office tools, video and photo sharing, online book viewing and maps. A history of legal issues and accusations relating to censorship, anti-trust, monopoly, and intellectual property has somewhat tarnished Google’s reputation as a small and popular organization. Nevertheless, Google remains the world’s largest internet services company. Google generates revenue from its two core advertising functions: Google AdWords and Google AdSense.

AdWords is Google’s main source of income, allowing organizations to utilize a “pay-per-click” system whereby they incur costs only when potential customers interact with their advertisements. This is complemented by AdSense, which places relevant adverts in web pages based on its content and provides the publisher with a share of the generated revenue. Google’s AdSense and AdWords are the foundation for generating revenue the company. Hundreds of thousands of advertisers worldwide use Google AdWords program to promote their products and services on the web.

Advertisers bid in an open and competitive auction to have their ads appear alongside the search results for particular keywords. They can specify the geographic location and time of day for their ads to appear. As a result, people see ads that are so useful and relevant that they become a valuable form of information in their own right. In addition, hundreds of thousands of partners, from bloggers to major online publishers, participate in Google AdSense program. This program delivers ads from AdWords advertisers that are relevant to the content or search results on partner sites.

The AdSense program enables advertisers to extend the reach of their ad campaigns, improves partners’ ability to generate revenue from their content, and delivers relevant ads for their users. Google also offers a number of other services to advertisers, including various advertising formats on YouTube, Google TV Ads, as well as online ad serving and management services through DoubleClick. “Google performed very well in the first quarter, with 23% year over year revenue growth driven by strength across all major verticals and geographies,” said Patrick Pichette, CFO of Google. Going forward, we remain committed to heavy investment in innovation — both to spur future growth in our core and emerging businesses as well as to help build the future of the open web. ” Q1 Financial Summary Google reported revenues of $6. 77 billion for the quarter ended March 31, 2010, an increase of 23% compared to the first quarter of 2009. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs (TAC). In the first quarter of 2010, TAC totaled $1. 71 billion, or 26% 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 2010 was $2. 49 billion, or 37% of revenues. This compares to GAAP operating income of $1. 88 billion, or 34% of revenues, in the first quarter of 2009. Non-GAAP operating income in the first quarter of 2010 was $2. 78 billion, or 41% of revenues.

This compares to non-GAAP operating income of $2. 16 billion, or 39% of revenues, in the first quarter of 2009. • GAAP net income in the first quarter of 2010 was $1. 96 billion, compared to $1. 42 billion in the first quarter of 2009. Non-GAAP net income in the first quarter of 2010 was $2. 18 billion, compared to $1. 64 billion in the first quarter of 2009. • GAAP EPS in the first quarter of 2010 was $6. 06 on 323 million diluted shares outstanding, compared to $4. 49 in the first quarter of 2009 on 317 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2010 was $6. 76, compared to $5. 16 in the first quarter of 2009. Non-GAAP operating income and non-GAAP operating margin exclude the expenses related to stock-based compensation (SBC). Non-GAAP net income and non-GAAP EPS exclude the expenses related to SBC and the related tax benefits. In the first quarter of 2010, the charge related to SBC was $291 million, compared to $277 million in the first quarter of 2009. The tax benefit related to SBC was $65 million in the first quarter of 2010 and $64 million in the first quarter of 2009. Reconciliations of non-GAAP measures to GAAP operating income, operating margin, net income, and EPS are included at the end of this release. Q1 Financial Highlights

Revenues – Google reported revenues of $6. 77 billion in the first quarter of 2010, representing a 23% increase over first quarter 2009 revenues of $5. 51 billion. Google reports its revenues, consistent with GAAP, on a gross basis without deducting TAC. Google Sites Revenues – Google-owned sites generated revenues of $4. 44 billion, or 66% of total revenues, in the first quarter of 2010. This represents a 20% increase over first quarter 2009 revenues of $3. 69 billion. Google Network Revenues – Google’s partner sites generated revenues, through AdSense programs, of $2. 04 billion, or 30% of total revenues, in the first quarter of 2010.

This represents a 24% increase from first quarter 2009 network revenues of $1. 64 billion. International Revenues – Revenues from outside of the United States totaled $3. 58 billion, representing 53% of total revenues in the first quarter of 2010, compared to 53% in the fourth quarter of 2009 and 52% in the first quarter of 2009. Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the fourth quarter of 2009 through the first quarter of 2010, our revenues in the first quarter of 2010 would have been $112 million higher.

Excluding gains related to our foreign exchange risk management program, had foreign exchange rates remained constant from the first quarter of 2009 through the first quarter of 2010, our revenues in the first quarter of 2010 would have been $242 million lower. • Revenues from the United Kingdom totaled $842 million, representing 13% of revenues in the first quarter of 2010, compared to 13% in the first quarter of 2009. • In the first quarter of 2010, we recognized a benefit of $10 million to revenues through our foreign exchange risk management program, compared to $154 million in the first quarter of 2009.

Paid Clicks – Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of our AdSense partners, increased approximately 15% over the first quarter of 2009 and increased approximately 5% over the fourth quarter of 2009. 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 7% over the first quarter of 2009 and decreased approximately 4% over the fourth quarter of 2009. TAC – Traffic Acquisition Costs, the portion of revenues shared with Google’s partners, increased to $1. 1 billion in the first quarter of 2010, compared to TAC of $1. 44 billion in the first quarter of 2009. TAC as a percentage of advertising revenues was 26% in the first quarter of 2010, compared to 27% in the first quarter of 2009. The majority of TAC is related to amounts ultimately paid to our AdSense partners, which totaled $1. 45 billion in the first quarter of 2010. TAC also includes amounts ultimately paid to certain distribution partners and others who direct traffic to our website, which totaled $265 million in the first quarter of 2010.

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 $741 million, or 11% of revenues, in the first quarter of 2010, compared to $666 million, or 12% of revenues, in the first quarter of 2009. Operating Expenses – Operating expenses, other than cost of revenues, were $1. 84 billion in the first quarter of 2010, or 27% of revenues, compared to $1. 52 billion in the first quarter of 2009, or 28% of revenues.

Stock-Based Compensation (SBC) – In the first quarter of 2010, the total charge related to SBC was $291 million, compared to $277 million in the first quarter of 2009. We currently estimate SBC charges for grants to employees prior to April 1, 2010 to be approximately $1. 2 billion for 2010. This estimate does not include expenses to be recognized related to employee stock awards that are granted after March 31, 2010 or non-employee stock awards that have been or may be granted. Operating Income – GAAP operating income in the first quarter of 2010 was $2. 49 billion, or 37% of revenues.

This compares to GAAP operating income of $1. 88 billion, or 34% of revenues, in the first quarter of 2009. Non-GAAP operating income in the first quarter of 2010 was $2. 78 billion, or 41% of revenues. This compares to non-GAAP operating income of $2. 16 billion, or 39% of revenues, in the first quarter of 2009. Interest Income and Other, Net – Interest income and other, net increased to $18 million in the first quarter of 2010, compared to $6 million in the first quarter of 2009. Income Taxes – Our effective tax rate was 22% for the first quarter of 2010.

Net Income – GAAP net income in the first quarter of 2010 was $1. 96 billion, compared to $1. 42 billion in the first quarter of 2009. Non-GAAP net income was $2. 18 billion in the first quarter of 2010, compared to $1. 64 billion in the first quarter of 2009. GAAP EPS in the first quarter of 2010 was $6. 06 on 323 million diluted shares outstanding, compared to $4. 49 in the first quarter of 2009 on 317 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2010 was $6. 76, compared to $5. 16 in the first quarter of 2009.

Cash Flow and Capital Expenditures – Net cash provided by operating activities in the first quarter of 2010 totaled $2. 58 billion, compared to $2. 25 billion in the first quarter of 2009. In the first quarter of 2010, capital expenditures were $239 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 2010, free cash flow was $2. 35 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, 2010, cash, cash equivalents, and short-term marketable securities were $26. 5 billion. On a worldwide basis, Google employed 20,621 full-time employees as of March 31, 2010, up from 19,835 full-time employees as of December 31, 2009.

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