GOOGLE ANNOUNCES THIRD QUARTER 2006 RESULTS

MOUNTAIN VIEW, Calif. October 19, 2006 - Google Inc. (NASDAQ: GOOG) today
announced financial results for the quarter ended September 30, 2006.
Our third quarter results are a testament to the strength of our network of advertisers and
partners, as well as our continuing focus on users, said Eric Schmidt, CEO of Google.
We were particularly pleased with the contributions of our international business in a
seasonally weaker quarter. In addition, we continued to forge significant partnerships
with companies such as eBay, Fox Interactive Media, and Intuit that will be of great
value to all involved.
Q3 Financial Summary
Google reported revenues of $2.69 billion for the quarter ended September 30, 2006, an
increase of 70% compared to the third quarter of 2005 and an increase of 10% compared
to the second quarter of 2006. Google reports its revenues, consistent with GAAP, on a
gross basis without deducting traffic acquisition costs, or TAC. In the third quarter of
2006, TAC totaled $825 million, or 31% of advertising revenues.
Google reports operating income, net income, and earnings per share (EPS) on a GAAP
and non-GAAP basis. The non-GAAP measures are described below and are reconciled
to the corresponding GAAP measures in the accompanying financial tables.

GAAP operating income for the third quarter of 2006 was $931 million, or 35%
of revenues. This compares to GAAP operating income of $815 million, or 33%
of revenues, in the second quarter of 2006. Non-GAAP operating income in the
third quarter was $1.03 billion, or 38% of revenues. This compares to non-GAAP
operating income of $925 million, or 38% of revenues, in the second quarter.

GAAP net income for the third quarter of 2006 was $733 million as compared to
$721 million in the second quarter. Non-GAAP net income in the third quarter
was $812 million, compared to $772 million in the second quarter.

GAAP EPS for the third quarter of 2006 was $2.36 on 311 million diluted shares
outstanding, compared to $2.33 for the second quarter, on 310 million diluted
shares outstanding. Non-GAAP EPS in the third quarter was $2.62, compared to
$2.49 in the second quarter.

Non-GAAP operating income, non-GAAP net income, and non-GAAP EPS are
computed net of stock-based compensation (SBC). In addition, in the second
quarter, we excluded investment gains of $55 million related to the sale of our
investment in Baidu from the calculation of non-GAAP net income and nonGAAP EPS. In the third quarter of 2006, the charge related to stock-based
compensation was $100 million as compared to $109 million in the second
quarter. Tax effects related to SBC charges and the sale of the investment in

Baidu have also been excluded from non-GAAP net income and non-GAAP
EPS. The tax benefit related to SBC was $21 million in the third quarter and $26
million in the second quarter. The tax expense related to the investment gains
from the sale of the Baidu investment in the second quarter was $23
million. Reconciliations of non-GAAP measures to GAAP operating income, net
income, and EPS are included at the end of this release.
Q3 Financial Highlights
Revenues Google reported revenues of $2.69 billion for the quarter ended September
30, 2006, representing a 70% increase over third quarter 2005 revenues of $1.58 billion
and a 10% increase over second quarter 2006 revenues of $2.46 billion. Google reports
its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition
costs, or TAC.
Google Sites Revenues - Google-owned sites generated revenues of $1.63 billion,
or 60% of total revenues, in the third quarter of 2006. This represents an 84%
increase over third quarter 2005 revenues of $885 million and a 14% increase
over second quarter 2006 revenues of $1.43 billion.
Google Network Revenues - Googles partner sites generated revenues, through
AdSense programs, of $1.04 billion, or 39% of total revenues, in the third quarter
of 2006. This is a 54% increase over network revenues of $675 million generated
in the third quarter of 2005 and a 4% increase over second quarter 2006 revenues
of $997 million.
International Revenues - Revenues from outside of the United States contributed
44% of total revenues in the third quarter of 2006, compared to 42% in the second
quarter of 2006 and 39% in the third quarter of 2005. Had foreign exchange rates
remained constant from the second quarter through the third quarter of 2006, our
revenues in the third quarter of 2006 would have been $19 million lower. Had
foreign exchange rates remained constant from the third quarter of 2005 through
the third quarter of 2006, our revenues in the third quarter of 2006 would have
been $35 million lower.
TAC - Traffic Acquisition Costs, the portion of revenues shared with Googles partners,
increased to $825 million in the third quarter of 2006. This compares to TAC of $785
million in the second quarter. TAC as a percentage of advertising revenues decreased to
31% in the third quarter from 32% in the second quarter.
The majority of TAC expense is related to amounts ultimately paid to our AdSense
partners, which totaled $780 million in the third quarter of 2006. TAC is also related to
amounts ultimately paid to certain distribution partners and others who direct traffic to
our website, which totaled $45 million in the third quarter of 2006.

Other Cost of Revenues - Other cost of revenues, which is comprised primarily of data
center operational expenses, as well as credit card processing charges, increased to $223
million, or 8% of revenues, in the third quarter of 2006, compared to $204 million, or 8%
of revenues, in the second quarter. Other cost of revenues also included stock-based
compensation of $2 million in the third quarter of 2006, compared to $2 million in the
second quarter of 2006.
Operating Expenses - Operating expenses, other than cost of revenues, were $710
million in the third quarter. These operating expenses included $382 million in payrollrelated and facilities expenses, $98 million in stock-based compensation, and $50 million
in advertising and promotional expenses, of which $14 million was related to certain
distribution deals.
Stock-Based Compensation In the third quarter, the total charge related to stock-based
compensation was $100 million as compared to $109 million in the second quarter.
For the full year, we expect stock-based compensation charges for grants to employees
prior to October 1, 2006 to be $377 million. This does not include expenses to be
recognized over the remainder of the year related to employee stock awards that are
granted after October 1, 2006 or non-employee stock awards that have been or may be
granted. We currently anticipate that dilution related to all equity grants to employees
will be approximately 1% to 1.5% per year.
Operating Income - GAAP operating income in the third quarter of 2006 was $931
million, or 35% of revenues. This compares to GAAP operating income of $815 million,
or 33% of revenues, in the second quarter. Non-GAAP operating income in the third
quarter was $1.03 billion, or 38% of revenues. This compares to non-GAAP operating
income of $925 million, or 38% of revenues, in the second quarter.
Net Income GAAP net income for the third quarter of 2006 was $733 million as
compared to $721 million in the second quarter. Non-GAAP net income was $812
million in the third quarter, compared to $772 million in the second quarter. GAAP EPS
for the third quarter was $2.36 on 311 million diluted shares outstanding, compared to
$2.33 for the second quarter, on 310 million diluted shares outstanding. Non-GAAP EPS
for the third quarter was $2.62, compared to $2.49 in the second quarter.
Income Taxes Our effective tax rate was 29% for the third quarter. We currently
anticipate that our effective tax rate for the full year will be at or below 30%.
Cash Flow and Capital Expenditures Net cash provided by operating activities for
the third quarter of 2006 totaled $1 billion as compared to $841 million for the second
quarter. In the third quarter of 2006, capital expenditures were $492 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 third
quarter, free cash flow was $512 million.

We continue to expect that the growth rate in capital expenditures in 2006 will be
substantially greater than the revenue growth rate for the year.
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 September 30, 2006, cash, cash equivalents, and marketable securities were
$10.4 billion.
On a worldwide basis, Google employed 9,378 full-time employees as of September 30,
2006, up from 7,942 full time employees as of June 30, 2006.

WEBCAST AND CONFERENCE CALL INFORMATION

A live audio webcast of Googles third quarter 2006 earnings release call will be
available at http://investor.google.com/webcast.html. The call begins today at 1:30 PM
(PT) / 4:30 PM (ET). This press release, the financial tables, as well as other
supplemental information including the reconciliations of certain non-GAAP measures to
their nearest comparable GAAP measures, are also available at that site. A replay of the
call will be available beginning at 7:30 PM (ET) today through midnight Thursday,
October 26, 2006 by calling 888-203-1112 in the United States or 719-457-0820 for calls
from outside the United States. The required confirmation code for the replay is
2704080.

FORWARD LOOKING STATEMENTS

This press release contains forward-looking statements that involve risks and
uncertainties, including statements relating to the value of our partnerships with eBay,
Fox Interactive Media, and Intuit, our plans to acquire YouTube, invest in our business,
our expected stock-based compensation charges, the expected dilution related to equity
grants to our employees, our anticipated tax rate for 2006, and our expectations regarding
the growth rate in our capital expenditures. Actual results may differ materially from the
results predicted and reported results should not be considered as an indication of future
performance. The potential risks and uncertainties that could cause actual results to differ
from the results predicted include, among others, the failure to receive regulatory
approval for our proposed acquisition of YouTube, the failure of the other closing
conditions in our agreement to purchase YouTube to be satisfied, risks related to our
hiring patterns, the amount of stock-based compensation we issue to our service
providers, the uncertain and complex nature of tax forecasting, the fact that we may have
exposure to greater than expected tax liabilities, and our need to expend capital to
accommodate the growth of the business, as well as those risks and uncertainties included
under the captions Risk Factors" and Managements Discussion and Analysis of
Financial Condition and Results of Operations, in our report on Form 10-Q for the

quarter ended June 30, 2006, which is on file with the SEC and is available on our
investor relations website at investor.google.com and on the SECs website at
www.sec.gov. Additional information will also be set forth in our quarterly report on
Form 10-Q for the quarter ended September 30, 2006, which will be filed with the SEC in
November 2006. All information provided in this release and in the attachments is as of
October 19, 2006, and Google undertakes no duty to update this information.

ABOUT NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which statements are prepared and
presented in accordance with GAAP, we use the following non-GAAP financial
measures: non-GAAP operating income, non-GAAP net income, non-GAAP operating
margins, non-GAAP EPS and free cash flow. The presentation of this financial
information is not intended to be considered in isolation or as a substitute for, or superior
to, the financial information prepared and presented in accordance with GAAP. For more
information on these non-GAAP financial measures, please see the tables captioned
Reconciliations of non-GAAP results of operations measures to the nearest comparable
GAAP measures and Reconciliation from net cash provided by operating activities to
free cash flow included at the end of this release.
We use these non-GAAP financial measures for financial and operational decision
making and as a means to evaluate period-to-period comparisons. Our management
believes that these non-GAAP financial measures provide meaningful supplemental
information regarding our performance and liquidity by excluding certain expenses and
expenditures that may not be indicative of our recurring core business operating results,
meaning our operating performance excluding not only non-cash charges, such as stockbased compensation, but also discrete cash charges that are infrequent in nature, such as
gains from the sale of investments and the related tax effects of such non-cash charges.
We believe that both management and investors benefit from referring to these nonGAAP financial measures in assessing our performance and when planning, forecasting
and analyzing future periods. These non-GAAP financial measures also facilitate
managements internal comparisons to our historical performance and liquidity as well as
comparisons to our competitors operating results. We believe these non-GAAP financial
measures are useful to investors both because (1) they allow for greater transparency with
respect to key metrics used by management in its financial and operational decision
making and (2) they are used by our institutional investors and the analyst community to
help them analyze the health of our business.
Non-GAAP operating income and operating margin. We define non-GAAP operating
income as operating income minus stock-based compensation. We define non-GAAP
operating margin as non-GAAP operating income divided by revenues. Google considers
these non-GAAP financial measures to be useful metrics for management and investors
because they exclude the effect of stock-based compensation so that Googles
management and investors can compare Googles recurring core business operating
results over multiple periods. We believe that, given our recent adoption of SFAS 123R,

it is difficult for investors to evaluate our GAAP results of operations on a year-over-year

basis because our GAAP results of operations for 2005 calculated our stock-based
compensation expense in a different manner than that required under SFAS 123R.
Therefore, investors cannot compare the year-over-year results of our recurring core
business operating results unless we exclude these non-cash charges that result from two
different accounting methods. Moreover, because of varying available valuation
methodologies, subjective assumptions and the variety of award types that companies can
use when adopting SFAS 123R, Googles management believes that providing a nonGAAP financial measure that excludes stock-based compensation allows investors to
make meaningful comparisons between Googles recurring core business operating
results and those of other companies, as well as providing Google's management with an
important tool for financial and operational decision making and for evaluating Googles
own recurring core business operating results over different periods of time. There are a
number of limitations related to the use of non-GAAP operating income versus operating
income calculated in accordance with GAAP. First, non-GAAP operating income
excludes some costs, namely, stock-based compensation, that are recurring. Stock-based
compensation has been and will continue to be for the foreseeable future a significant
recurring expense in Googles business. Second, stock-based compensation is an
important part of our employees compensation and impacts their performance. Third,
the components of the costs that we exclude in our calculation of non-GAAP operating
income may differ from the components that our peer companies exclude when they
report their results of operations. Management compensates for these limitations by
providing specific information regarding the GAAP amounts excluded from non-GAAP
operating income and evaluating non-GAAP operating income together with operating
income calculated in accordance with GAAP.
Non-GAAP net income and non-GAAP EPS. We define non-GAAP net income as net
income minus stock-based compensation and, for the second quarter of 2006, the gains
from the sale of our investment in Baidu, as well as the related tax effects of such items.
We define non-GAAP EPS as non-GAAP net income divided by the weighted average
shares, on a fully-diluted basis, outstanding as of September 30, 2006. We consider these
non-GAAP financial measures to be a useful metric for management and investors for the
same reasons that Google uses non-GAAP operating income and non-GAAP operating
margin. However, in order to provide a complete picture of our recurring core business
operating results, we exclude from non-GAAP net income and non-GAAP EPS the tax
effects associated with stock-based compensation and the gains from the sale of our
investment in Baidu in the second quarter of 2006. Without excluding these tax effects,
investors would only see the gross effect that excluding these expenses and gains had on
our operating results. The same limitations described above regarding Googles use of
non-GAAP operating income and non-GAAP operating margin apply to our use of nonGAAP net income and non-GAAP EPS. Management compensates for these limitations
by providing specific information regarding the GAAP amounts excluded from nonGAAP net income and non-GAAP EPS and evaluating non-GAAP net income and nonGAAP EPS together with net income and EPS calculated in accordance with GAAP.

Free cash flow. We define free cash flow as net cash provided by operating activities
minus capital expenditures. We consider free cash flow to be a liquidity measure that
provides useful information to management and investors about the amount of cash
generated by the business that, after the acquisition of property and equipment, including
information technology infrastructure and land and buildings, can be used for strategic
opportunities, including investing in our business, making strategic acquisitions and
strengthening the balance sheet. Analysis of free cash flow also facilitates managements
comparisons of our operating results to competitors operating results. A limitation of
using free cash flow versus the GAAP measure of net cash provided by operating
activities as a means for evaluating Google is that free cash flow does not represent the
total increase or decrease in the cash balance from operations for the period since it
excludes cash used for capital expenditures during the period. Our management
compensates for this limitation by providing information about our capital expenditures
on the face of the cash flow statement and under Managements Discussion and Analysis
of Financial Condition and Results of Operations in its Form 10-Q.
Google has computed free cash flow using the same consistent method from quarter to
quarter and year to year.
The accompanying tables have more details on the GAAP financial measures that are
most directly comparable to non-GAAP financial measures and the related reconciliations
between these financial measures.

Investor Contact:
Maria Shim
650-253-7663
[email protected]
Media Contact:
Jon Murchinson
650-253-4437
[email protected]
Note to Editors:
Video of CEO Eric Schmidt addressing the third quarter results, capital investments, and
other topics will be available in Google's multi media press room
(www.google.com/press) and The News Market (www.thenewsmarket.com/google) at
2:30 p.m. PDT in the following formats: broadcast quality MPEG2, QuickTime and
WMV.

Google Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

Assets
Current assets:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowance
Deferred income taxes, net
Prepaid revenue share, expenses and other assets

December 31,
2005*

September 30,
2006
(Unaudited)

Total current assets

Deferred income taxes, net, non-current
Prepaid revenue share, expenses and other assets, non-current
Non-marketable equity securities
Property and equipment, net
Intangible assets, net
Goodwill
Total assets

Liabilities and Stockholders' Equity

Current liabilities:
Accounts payable
Accrued compensation and benefits
Accrued expenses and other current liabilities
Accrued revenue share
Deferred revenue
Income taxes payable

3,877,174
4,157,073
687,976
49,341
229,507

3,038,341
7,390,374
1,031,055
51,532
346,941

9,001,071

11,858,243

16,941
14,369
961,749
82,783
194,900

49,643
67,890
1,028,591
2,174,314
177,406
337,145

10,271,813

15,693,232

115,575
198,788
114,377
215,771
73,099
27,774

207,348
212,594
212,123
307,010
88,359
188,613

Total current liabilities

Deferred revenue, long-term
Deferred income taxes, net
Other long-term liabilities

745,384

1,216,047

10,468
35,419
61,585

16,794
63,304

Stockholders' equity:
Common stock
Additional paid-in capital
Deferred stock-based compensation
Accumulated other comprehensive income
Retained earnings

293
7,477,792
(119,015)
4,019
2,055,868

304
10,289,724
4,462
4,102,597

Total stockholders' equity

9,418,957

14,397,087

Total liabilities and stockholders' equity

*Derived from audited financial statements as of December 31, 2005.

10,271,813

15,693,232

Google Inc.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)

Nine Months Ended

September 30,
2005
2006

Three Months Ended

September 30,
2005
2006
Revenues

$ 1,578,456

2,689,673

$ 4,219,468

$ 7,399,419

655,154

1,048,728

1,800,053

2,941,879

177,793

312,632

409,639

841,783

111,487

206,972

305,521

594,312

104,851

190,010

256,616

532,043

1,049,285

1,758,342

2,771,829

4,910,017

Income from operations

Interest income and other, net

529,171
20,797

931,331
108,180

1,447,639
54,205

2,489,402
336,904

Income before income taxes

Provision for income taxes

549,968
168,786

1,039,511
306,150

1,501,844
408,655

2,826,306
779,577

$ 1,093,189

$ 2,046,729

$
$

$
$

Costs and expenses:

Cost of revenues (including stock-based compensation
expense of $1,328, $2,149, $3,925, $6,754)*
Research and development (including stock-based
compensation expense of $26,072, $61,714, $82,733,
$205,364)*
Sales and marketing (including stock-based
compensation expense of $6,491, $14,673, $20,549,
$44,887)*
General and administrative (including stock-based
compensation expense of $12,417, $21,324, $35,348,
$66,668)*
Total costs and expenses

Net income

381,182

733,361

Net income per share - basic

Net income per share - diluted

$
$

1.39
1.32

$
$

2.42
2.36

Shares used in per share calculation - basic

Shares used in per share calculation - diluted

275,130
289,673

303,400
310,574

*Stock-based compensation recognized in the three and nine months ended September 30, 2005 have been reclassified
to these expense lines to conform with the presentation in the three and nine months ended September 30, 2006.

4.04
3.80
270,655
287,841

6.83
6.64
299,569
308,245

Google Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended
September 30,
2005
2006
Operating activities
Net income
Adjustments:
Depreciation of property and equipment
Amortization of intangibles and warrants
In-process research and development
Stock-based compensation
Excess tax benefits from stock-based award activity
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable
Income taxes, net
Prepaid revenue share, expenses and other assets
Accounts payable
Accrued expenses and other liabilities
Accrued revenue share
Deferred revenue

Net cash provided by operating activities

1,093,189 $

2,046,729

171,107
27,980
20,812
142,555
271,700

335,629
47,060
10,800
323,673
(329,068)

(225,083)
127,835
(24,645)
54,694
66,555
52,577
21,712

(343,356)
528,493
(267,759)
91,198
124,640
90,856
10,819

1,800,988

2,669,714

Investing activities
Purchases of property and equipment
Purchases of marketable securities
Maturities and sales of marketable securities
Investments in non-marketable equity securities
Acquisitions, net of cash acquired, and purchases of intangible and other assets

(592,386)
(4,992,995)
4,627,212
(10,000)
(41,748)

(1,536,160)
(23,151,347)
19,888,930
(1,014,222)
(257,812)

Net cash used in investing activities

(1,009,917)

(6,070,611)

Financing activities
Net proceeds from stock-based award activity
Net proceeds from stock offerings
Excess tax benefits from stock-based award activity
Payments of principal on capital leases and equipment loans

33,546
4,287,621
(1,413)

155,551
2,063,751
329,068
-

Net cash provided by financing activities

4,319,754

2,548,370

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of period

(19,129)

5,091,696
426,873
5,518,569 $

13,694
(838,833)
3,877,174
3,038,341

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

The following table presents certain non-GAAP results before certain material items (in thousands, unaudited):

GAAP Actual

Three months ended June 30, 2006

As a % of
Non-GAAP
revenues
Adjustments
Results

As a % of
revenues

GAAP Actual

Three months ended September 30, 2006

As a % of
Non-GAAP
revenues
Adjustments
Results

109,149 (a)
Income from operations

815,372

33.2%

109,149

99,860 (d)
$ 924,521

37.6%

931,331

34.6%

109,149 (a)
(54,850) (b)
(25,813) (c)
Net income

721,077

Net income per share - diluted

Shares used in per share calculation - diluted

2.33
310,038

As a % of
revenues

99,860

$ 1,031,191

99,860 (d)
(20,938) (c)

22,582 (c)
51,068
$ 772,145

2.49
310,038

(a) To eliminate $109.1 million of stock-based compensation charges recorded in the second quarter of 2006.
(b) To eliminate $54.9 million of one-time gain from the sale of our investment in Baidu in the second quarter of 2006.
(c) To eliminate income tax effects related to charges noted in (a), (b) and (d).
(d) To eliminate $99.9 million of stock-based compensation charges recorded in the third quarter of 2006.

733,361

2.36
310,574

78,922

812,283

2.62
310,574

38.3%

Reconciliation from net cash provided by operating activities (1) to free cash flow (in thousands, unaudited):

Three months ended

September 30, 2006
Net cash provided by operating activities

Less purchases of property and equipment

Free cash flow

1,004,324
(492,222)

512,102

(1) Excess tax benefits related to stock-based award activity of $70,981 were excluded from net cash provided by operating activities as a result of our adoption
of SFAS 123R, "Shared-based Payment" on January 1, 2006; these amounts are now included in net cash provided by financing activities.

The following table presents our revenues, by revenue source, for the periods presented (in thousands, unaudited):

Three Months Ended

September 30,
2005
2006

Nine Months Ended

September 30,
2005
2006

Advertising revenues:
Google web sites
Google Network web sites
Total advertising revenues
Licensing and other revenues
Revenues

884,679

$ 1,625,977

$ 2,278,848

$ 4,355,754

675,012

1,037,022

1,889,369

2,961,965

1,559,691

2,662,999

4,168,217

7,317,719

18,765

26,674

51,251

81,700

$ 1,578,456

$ 2,689,673

$ 4,219,468

$ 7,399,419

The following table presents our revenues, by revenue source, as a percentage of total revenues for the periods presented (unaudited)
Three Months Ended
September 30,
2006
2005

Nine Months Ended

September 30,
2005
2006

Advertising revenues:
Google web sites

56%

60%

54%

59%

Google Network web sites

43%

39%

45%

40%

Total advertising revenues

99%

99%

99%

99%

Licensing and other revenues

1%

1%

1%

1%

100%

100%

100%

100%

Revenues