Q3 2008 Quarterly EarningsQuarterly Earnings

Summary

Third Quarter 2008 HighlightsThird Quarter 2008 Highlights

• Revenue growth of 31% Y/Y and 3% Q/QG 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

Quarterly RevenueQuarterly Revenue

$5,500Q3’08 Y/Y Growth = 31%Q Q/Q G %

5,1865,367

5,541

1,636

1,686 1,6551,680

$4,000

$4,500

$5,000 Q3’08 Q/Q Growth = 3%

3,6643,872

4,231

4,827

mill

ions 1,345

1,352

1,455

1,198$2,500

$3,000

$3,500

2,4562,690

3,664

3,205

$ in

3,530 3,672

630675

799928

2,282 2,4862,735

3,1223,400

1,037997

$1,500

$2,000

$2,500

1,3841,578

1,9192,254

1,257

737

584630

1,098657

1,2971,626

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

Q1'05

Q2'05

Q3'05

Q4'05

Q1'06

Q2'06

Q3'06

Q4'06

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

Google.com Network Licensing and Other

U S vs International RevenueU.S. vs. International Revenue

$5 000

$5,500

4 8275,186

5,3675,541

$4,000

$4,500

$5,000

3,6643,872

4,231

4,827

51%

51%52%

n m

illio

ns

$2,500

$3,000

$3,500

2,2542,456

2,69044%

3,205

47%48% 48%

48%

$ in

$1,000

$1,500

$2,000

1,3841,578

1,919

39%39%

38%42%

42%

58%

44%

56% 56% 1,257

39%52% 52%

52%49% 49%

48%53%

$0

$500

Q1'05

Q2'05

Q3'05

Q4'05

Q1'06

Q2'06

Q3'06

Q4'06

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

61% 61% 62% 58%58%

61%

4

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

US International

Traffic Acquisition Costs

1,4401,4861,4741,495

36.1%37.2%

$1,400$1,500 40%

Traffic Acquisition Costs

976

1,2211,1481,125

31 0%

33.2%32.5%32.3%34.0%

31 0%$1,000$1,100$1,200$1,300$ ,

30%

35%

825

530

629723

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%

n m

illio

ns

462 494 530

$200$300$400$500$600

15%

20%$ in

$0$100$200

Q1'05

Q2'05

Q3'05

Q4'05

Q1'06

Q2'06

Q3'06

Q4'06

Q1'07

Q2'07

Q3'07

Q4'07

Q1'08

Q2'08

Q3'08

10%

5

Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

TAC TAC as % of Advertising Revenues

Costs and ExpensesCosts and Expenses

GAAP$Millions Q3'07 Q2'08 Q3'08Cost of Revenues $1,663 $2,148 $2,173

Percent of revenues 39% 40% 40%

Research & Development $549 $682 $705Percent of revenues 13% 13% 13%

Sales & Marketing $381 $485 $509Percent of revenues 9% 9% 9%

General & Administrative $321 $474 $412Percent of revenues 8% 9% 7%

Total Costs & Expenses $2,914 $3,789 $3,799Percent of revenues 69% 71% 69%

Non-GAAPNon GAAP$Millions Q3'07 Q2'08 Q3'08Cost of Revenues $1,659 $2,139 $2,162

Percent of revenues 39% 40% 39%

Research & Development $418 $495 $536Percent of revenues 10% 10% 10%

Sales & Marketing $351 $442 $445Percent of revenues 8% 8% 8%

General & Administrative $288 $440 $376Percent of revenues 7% 8% 7%

Total Costs & Expenses $2,716 $3,516 $3,519Percent 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%

ProfitabilityProfitability

GAAP$Millions Q3'07 Q2'08 Q3'08Income from Operations $1,318 1,578$ 1,743$

Operating Margin 31% 29% 31%

Net Income $1,070 1,247$ 1,346$ EPS (diluted) $3.38 $3.92 $4.24

Non-GAAP$$Millions Q3'07 Q2'08 Q3'08Income 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 pmeasures to the nearest comparable GAAP measures

Free Cash FlowFree Cash Flow

$Millions Q3'07 Q2'08 Q3'08Net cash provided by operating activities $1 633 $1 766 $2 185operating activities $1,633 $1,766 $2,185

Less purchases of property and equipment ($553) ($697) ($452)q p ($ ) ($ ) ($ )

Free cash flow (Non-GAAP) $1,080 $1,069 $1,733

8

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 earnings g g greported in USD.

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.

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.

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 any p g yparticular 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.

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

$Millions Q3'07As a % of

Revenues (1) Q2'08As a % of

Revenues (1) Q3'08As a % of

Revenues (1)

Cost of Revenues (GAAP) 1,663$ 39% 2,148$ 40% 2,173$ 40%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)Less: Stock based compensation (131) (187) (169) 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% 412$ 7%Less: Stock-based compensation (33) (34) (36) General and administrative (non-GAAP) 288$ 7% 440$ 8% 376$ 7%

Total costs and expenses (GAAP) 2,914$ 69% 3,789$ 71% 3,799$ 69%Less: Stock based compensation (198) (273) (280)Less: Stock-based compensation (198) (273) (280) Total costs and expenses (non-GAAP) 2,716$ 64% 3,516$ 66% 3,519$ 64%

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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% 1,743$ 31%Add: Stock-based compensation 198 273 280Add: Stock based compensation 198 273 280

Income from operations (non-GAAP) 1,516$ 36% 1,851$ 34% 2,023$ 37%

Net income (GAAP) 1,070$ 1,247$ 1,346$ Add: Stock-based compensation (net of tax) 167 225 217

Net income (non-GAAP) 1,237$ 1,472$ 1,563$

Net income per share - diluted (GAAP) 3.38$ 3.92$ 4.24$ Net income per share - diluted (non-GAAP) 3.91$ 4.63$ 4.92$ Shares used in per share calculation - diluted 317 318

(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.( ) g , , , ,

14

Q3 2008 Quarterly EarningsQuarterly Earnings

Summary