| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| Delaware | 77-0493581 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
| Title of Each Class |
Name of Exchange on Which Registered | |
| Class A Common Stock, $0.001 par value |
The Nasdaq Stock Market LLC (Nasdaq Global Select Market) |
| Title of Each Class |
| Class B Common Stock, $0.001 par value |
| • | We will do our best to provide the most relevant and useful search results possible, independent of financial incentives. Our search results will be objective and we will not accept payment for inclusion or ranking in them. |
| • | We will do our best to provide the most relevant and useful advertising. Advertisements should not be an annoying interruption. If any element on a search result page is influenced by payment to us, we will make it clear to our users. |
| • | We will never stop working to improve our user experience, our search technology and other important areas of information organization. |
| • | Advanced Search Functionality—enables users to construct more complex queries, for example by using Boolean logic or restricting results to languages, countries or web sites. |
| • | Web Page Translation—automatically translates web pages published in French, German, Italian, Portuguese and Spanish into English, or vice versa. |
| • | Integrated Tools—such as a spell checker, a calculator, a dictionary and currency and measurement converters. |
| • | Search by Number—lets people do quick searches by entering shipping tracking numbers, vehicle ID numbers, product codes, telephone area codes, patent numbers, airplane registration numbers and electronic equipment ID government numbers. |
| • | Cached Links—provides snapshots of web pages taken when the pages were indexed, letting users view web pages that are no longer available. |
| • | Movie, Music and Weather Information—enables people to quickly and easily find movie reviews and showtimes, information about artists, songs and albums and weather conditions and forecasts. |
| • | News, Finance, Maps, Image, Book and Groups Information—when relevant, we also display results from other Google products including Google News, Google Finance, Google Maps, Google Image Search, Google Book Search and Google Groups. |
| • | placing a small shopping cart icon on the AdWords advertisements of stores who accept Google Checkout so that users can easily identify and visit participating merchants. |
| • | saving users time by letting them buy with a single login for use across the web and track shipping and purchase histories in one place. |
| • | improving security by not revealing the user’s full credit card number to the seller, reimbursing a user for unauthorized purchases and helping the user control commercial spam from online shopping. |
| • | Campaign management. Advertisers can target multiple ads to a given keyword and easily track individual ad performance to see which ads are the most effective. |
| • | Conversion tracking. Conversion tracking is a free tool integrated into AdWords reports that measures the conversions of an advertiser’s campaigns, enabling a better understanding of the overall return on investment generated for the advertiser by the AdWords program. |
| • | Traffic estimator. This tool estimates the number of searches and potential costs related to advertising on a particular keyword or set of keywords. |
| • | Quality-based bidding. Advertisers’ keywords are assigned dynamic minimum bids based on their Quality Score—the higher the Quality Score, the lower the minimum bid. This rewards advertisers with relevant keywords and ads. |
| • | Budgeted delivery. Advertisers can set daily budgets for their campaigns and control the timing for delivery of their ads. |
| • | AdWords Discounter. This feature gives advertisers the freedom to increase their maximum CPCs because it automatically adjusts pricing so that they never pay more than one cent over the next highest bid. |
| • | Creative maximization. Our AdWords specialists help advertisers select relevant keywords and create more effective ads. |
| • | Vertical market experts. Specialists with experience in particular industries offer guidance on how to target potential customers. |
| • | Bulk posting. We help businesses launch and manage large ad campaigns with hundreds or even thousands of targeted keywords. |
| • | The AdWords API and Commercial Developer Program. For large advertisers as well as third parties, Google’s free AdWords API service lets developers engineer computer programs that interact directly with the AdWords system. With such applications, advertisers and third parties can more efficiently and creatively manage their large AdWords accounts and campaigns. The AdWords Commercial Developer Program also enables our third-party developer ecosystem to continue designing and delivering innovative business applications based on the AdWords platform and distribution channel. |
| • | Access to Advertisers. Many small web site companies and content producers do not have the time or resources to develop effective programs for generating revenue from online advertising. Even larger sites, with dedicated sales teams, may find it difficult to generate revenue from pages with specialized content. Google AdSense promotes effective revenue generation by providing Google Network members access to Google’s base of advertisers and their broad collection of ads. Our technology automatically starts delivering ads on a web site as soon as the site joins the Google Network. Because the ads are related to what the web site’s visitors are looking for on the site, AdSense provides web sites with a way to both monetize and enhance their sites. The Google Network member determines the placement of the ads on its web site, and controls and directs the nature of ad content. |
| • | Improved User Satisfaction. Many web sites are cluttered with intrusive or untargeted advertising that may distract or confuse users and may undermine users’ ability to find the information they want. Some web sites have adopted practices we consider to be abusive, including pop-up ads or ads that take over web pages. We believe these tactics can cause dissatisfaction with internet advertising and reduce use of the internet overall. Our AdSense program extends our commitment to improving the overall web experience by enabling web sites to display AdWords ads in a fashion that we believe people find useful rather than disruptive. |
| • | Better Storage, Management, Access and Visibility. Google has developed new storage, management and access technologies to allow content owners and producers to distribute and, if they wish, monetize more types of online and offline content. We believe that only a small fraction of the world’s information and content is easily and effectively stored and searchable, and that bringing non-traditional, online or offline content into Google’s index will encourage the preservation and continued creation of this content. Google Scholar, Google Book Search, and Google Video enable more print and video content to be made easily accessible (and monetizable) online, while Google Base allows owners and creators to put online even non-traditional forms of structured information. |
| • | Syndicated Search. We provide our search technology to partners of all sizes, allowing Google search service to be offered through these partners’ properties. For commercial partners, we provide an extensive range of customization options. We also provide free standard Web Search and Site Search to other partners through Google Free. |
| • | Competitive ad filters. Web sites can block competitive ads, or other ads they want to keep off their site, simply by telling us which URLs to block. |
| • | Reports. Publishers can view customizable reports about their AdSense performance. |
| • | Sensitive content filters. At times, certain ads may be inappropriate for some pages. For example, Google automatically filters out ads that would be inappropriate on a news page about a catastrophic event. |
| • | Choose default ads. In the unlikely event that Google is unable to serve targeted ads on a page, we offer web sites the option of displaying a default ad of their choice. |
| • | Users. We compete to attract and retain users of our search and communication products and services. Most of the products and services we offer to users are free, so we do not compete on price. Instead, we compete in this area on the basis of the relevance and usefulness of our search results and the features, availability and ease of use of our products and services. |
| • | Advertisers. We compete to attract and retain advertisers. We compete in this area principally on the basis of the return on investment realized by advertisers using our AdWords and AdSense programs. We also compete based on the quality of customer service, features and ease of use of our products and services. |
| • | Content providers. We compete to attract and retain content providers as members of our Google Network based on the size and quality of our advertiser base, our ability to help our Google Network members generate revenues from advertising and the terms of agreements with our Google Network members. |
| Name |
Age | Position | ||
| Eric Schmidt |
51 | Chairman of the Executive Committee, Chief Executive Officer and Director | ||
| Sergey Brin |
33 | President of Technology and Director | ||
| Larry Page |
34 | President of Products and Director | ||
| Omid Kordestani |
43 | Senior Vice President of Global Sales and Business Development | ||
| David C. Drummond |
43 | Senior Vice President of Corporate Development, Chief Legal Officer and Secretary | ||
| George Reyes |
52 | Senior Vice President and Chief Financial Officer | ||
| Jonathan J. Rosenberg |
45 | Senior Vice President of Product Management | ||
| Shona L. Brown |
40 | Senior Vice President of Business Operations | ||
| Alan Eustace |
50 | Senior Vice President of Engineering |
| • | Our ability to continue to attract users to our web sites. |
| • | Our ability to monetize (or generate revenue from) traffic on our web sites and our Google Network members’ web sites. |
| • | Our ability to attract advertisers to our AdWords program. |
| • | Our ability to attract web sites to our AdSense program. |
| • | The mix in our revenues between those generated on our web sites and those generated through our Google Network. |
| • | The amount and timing of operating costs and capital expenditures related to the maintenance and expansion of our businesses, operations and infrastructure. |
| • | Our focus on long-term goals over short-term results. |
| • | The results of our investments in risky projects. |
| • | Our ability to keep our web sites operational at a reasonable cost and without service interruptions. |
| • | Our ability to achieve revenue goals for partners to whom we guarantee minimum payments or pay distribution fees. |
| • | Our ability to generate revenue from services in which we have invested considerable time and resources, such as YouTube, Gmail and orkut. |
| • | Implementation or remediation of controls, procedures and policies at the acquired company. |
| • | Diversion of management time and focus from operating our business to acquisition integration challenges. |
| • | Cultural challenges associated with integrating employees from the acquired company into our organization. |
| • | Retention of employees from the businesses we acquire. |
| • | Integration of each company’s accounting, management information, human resource and other administrative systems. |
| • | Challenges caused by distance, language and cultural differences and by doing business with foreign agencies and governments. |
| • | Difficulties in developing products and services in different languages and for different cultures. |
| • | Longer payment cycles in some countries. |
| • | Credit risk and higher levels of payment fraud. |
| • | Currency exchange rate fluctuations. |
| • | Foreign exchange controls that might prevent us from repatriating cash earned in countries outside the U.S. |
| • | Import and export requirements that may prevent us from shipping products or providing services to a particular market and may increase our operating costs. |
| • | Political and economic instability. |
| • | Potentially adverse tax consequences. |
| • | Higher costs associated with doing business internationally. |
| • | We have limited experience in implementing or operating hedging programs. Hedging programs are inherently risky and we could lose money as a result of poor trades. |
| • | We may be unable to hedge currency risk for some transactions because of a high level of uncertainty or the inability to reasonably estimate our foreign exchange exposures. |
| • | We may be unable to acquire foreign exchange hedging instruments in some of the geographic areas where we do business, or, where these derivatives are available, we may not be able to acquire enough of them to fully offset our exposure. |
| • | Quarterly variations in our results of operations or those of our competitors. |
| • | Announcements by us or our competitors of acquisitions, new products, significant contracts, commercial relationships or capital commitments. |
| • | Recommendations by securities analysts or changes in earnings estimates. |
| • | Announcements about our earnings that are not in line with analyst expectations, the risk of which is enhanced because it is our policy not to give guidance on earnings. |
| • | Announcements by our competitors of their earnings that are not in line with analyst expectations. |
| • | The volume of shares of Class A common stock available for public sale. |
| • | Sales of stock by us or by our stockholders. |
| • | Short sales, hedging and other derivative transactions on shares of our Class A common stock, activities that will likely increase after we make the transferable stock option (TSO) program, which we announced in December 2006, available to our eligible employees. |
| • | Our certificate of incorporation provides for a dual class common stock structure. As a result of this structure our founders, executives and employees have significant influence over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change of control transaction that other stockholders may view as beneficial. |
| • | Our board of directors has the right to elect directors to fill a vacancy created by the expansion of the board of directors or the resignation, death or removal of a director, which prevents stockholders from being able to fill vacancies on our board of directors. |
| • | Our stockholders may not act by written consent. As a result, a holder, or holders, controlling a majority of our capital stock would not be able to take certain actions without holding a stockholders’ meeting. |
| • | Our certificate of incorporation prohibits cumulative voting in the election of directors. This limits the ability of minority stockholders to elect director candidates. |
| • | Stockholders must provide advance notice to nominate individuals for election to the board of directors or to propose matters that can be acted upon at a stockholders’ meeting. These provisions may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of our company. |
| • | Our board of directors may issue, without stockholder approval, shares of undesignated preferred stock. The ability to issue undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to acquire us. |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
| Fiscal Year 2006 Quarters Ended: |
High | Low | ||||
| March 31, 2006 |
$ | 475.11 | $ | 331.55 | ||
| June 30, 2006 |
450.72 | 360.57 | ||||
| September 30, 2006 |
427.89 | 363.36 | ||||
| December 31, 2006 |
513.00 | 398.19 | ||||
| Fiscal Year 2005 Quarters Ended: |
High | Low | ||||
| March 31, 2005 |
$ | 216.80 | $ | 172.57 | ||
| June 30, 2005 |
309.25 | 179.84 | ||||
| September 30, 2005 |
320.95 | 273.35 | ||||
| December 31, 2005 |
446.21 | 290.68 | ||||
| Period |
Total Number of Shares Purchased (1) |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
| October 1 – 31 |
533 | $ | 4.43 | — | — | ||||
| November 1 – 30 |
401 | $ | 0.30 | — | — | ||||
| December 1 – 31 |
— | $ | — | — | — | ||||
| Total |
934 | $ | 2.66 | — | — | ||||
| (1) | All shares were originally purchased from us by employees pursuant to exercises of unvested stock options. During the months listed above, we routinely repurchased the shares from our service providers upon their termination of employment pursuant to our right to repurchase unvested shares at the original exercise price under the terms of our Stock Plans and the related stock option agreements. |
| Year Ended December 31, | ||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | ||||||||||||
| (in thousands, except per share data) | ||||||||||||||||
| Consolidated Statements of Income Data: |
||||||||||||||||
| Revenues |
$ | 439,508 | $ | 1,465,934 | $ | 3,189,223 | $ | 6,138,560 | $ | 10,604,917 | ||||||
| Costs and expenses: |
||||||||||||||||
| Cost of revenues |
132,575 | 634,411 | 1,468,967 | 2,577,088 | 4,225,027 | |||||||||||
| Research and development |
40,494 | 229,605 | 395,164 | 599,510 | 1,228,589 | |||||||||||
| Sales and marketing |
48,783 | 164,935 | 295,749 | 468,152 | 849,518 | |||||||||||
| General and administrative |
31,190 | 94,519 | 188,151 | 386,532 | 751,787 | |||||||||||
| Contribution to Google Foundation |
— | — | — | 90,000 | — | |||||||||||
| Non-recurring portion of settlement of disputes with Yahoo |
— | — | 201,000 | — | — | |||||||||||
| Total costs and expenses |
253,042 | 1,123,470 | 2,549,031 | 4,121,282 | 7,054,921 | |||||||||||
| Income from operations |
186,466 | 342,464 | 640,192 | 2,017,278 | 3,549,996 | |||||||||||
| Interest income (expense) and other, net |
(1,551 | ) | 4,190 | 10,042 | 124,399 | 461,044 | ||||||||||
| Income before income taxes |
184,915 | 346,654 | 650,234 | 2,141,677 | 4,011,040 | |||||||||||
| Provision for income taxes |
85,259 | 241,006 | 251,115 | 676,280 | 933,594 | |||||||||||
| Net income |
$ | 99,656 | $ | 105,648 | $ | 399,119 | $ | 1,465,397 | $ | 3,077,446 | ||||||
| Net income per share of Class A and Class B common stock |
||||||||||||||||
| Basic |
$ | 0.86 | $ | 0.77 | $ | 2.07 | $ | 5.31 | $ | 10.21 | ||||||
| Diluted |
$ | 0.45 | $ | 0.41 | $ | 1.46 | $ | 5.02 | $ | 9.94 | ||||||
| As of December 31, | |||||||||||||||||||
| 2002 | 2003 | 2004 | 2005 | 2006 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data: |
|||||||||||||||||||
| Cash, cash equivalents and marketable securities |
$ | 146,331 | $ | 334,718 | $ | 2,132,297 | $ | 8,034,247 | $ | 11,243,914 | |||||||||
| Total assets |
286,892 | 871,458 | 3,313,351 | 10,271,813 | 18,473,351 | ||||||||||||||
| Total long-term liabilities |
9,560 | 33,365 | 43,927 | 107,472 | 128,924 | ||||||||||||||
| Redeemable convertible preferred stock warrant |
13,871 | 13,871 | — | — | — | ||||||||||||||
| Deferred stock-based compensation |
(35,401 | ) | (369,668 | <||||||||||||||||