April 29, 2004 3:11 PM PDT

Lifting the lid on Google

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Google files for unusual $2.7 billion IPO

April 29, 2004
A search through Google's IPO filing--a long-awaited glimpse into a notoriously secretive company--pulls up the answers to some key queries: Who are its rivals? Who are its board members? And just how profitable is the Internet search giant?

In the document, filed Thursday with the Securities and Exchange Commission, Google stated it had amassed a solid hoard of $454.9 million in cash, cash equivalents and short-term investments, as of


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March 31. The company is already profitable, with net income of $64 million, 42 cents per basic share, on revenue of $389.6 million, for the quarter ending March 31.

Among other highlights:

• Its head-count is growing nearly as fast as its cash position. Its number of full-time employees has more than doubled over the last couple of years, going from 284 in 2001 to 1,907 this year.

• The Mountain View, Calif.-based company figures it needs the numbers in order to compete with its two largest rivals, Microsoft and Yahoo.

"We expect that Microsoft will increasingly use its financial and engineering resources to compete with us. Yahoo has become an increasingly significant competitor, having acquired Overture Services...as well as the Inktomi, AltaVista and AlltheWeb search engines...Both Microsoft and Yahoo have more employees than we do (in Microsoft's case, currently more than 20 times as many). Microsoft also has significantly more cash resources than we do."

Google also said it counts other Internet companies, Web search providers, Internet advertising and destination Web sites and traditional media companies as competitors.

• The company expects its growth rates to decline and operating margins to experience a squeeze.


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"We believe our revenue growth rate will decline as a result of anticipated changes to our advertising program revenue mix, increasing competition and the inevitable decline in growth rates as our net revenues increase to higher levels. We believe our operating margin will decline as a result of increasing competition and increased expenditures for all aspects of our business as a percentage of our net revenues, including product development and sales and marketing expenses. We also expect that our operating margin may decline as a result of increases in the proportion of our net revenues generated from our Google Network members."

• Most of Google's revenue comes from its AdWords service, but the company does not rely on any advertiser.

"We generated approximately 95 percent of our net revenues in 2003 from our advertisers. Our advertisers can generally terminate their contracts with us at any time...No advertiser generated more than 3 percent of our net revenues...We expect our base of advertisers and Google Network members to remain large and diverse for the foreseeable future."

• The United States is by far Google's biggest geographic market, accounting for over 70 percent of revenue. But international efforts are increasing.

"The growth in international net revenues is the result of our efforts to provide search results to international users and deliver more ads from non-U.S. advertisers."

• The company is amid a significant billing and collection transition, which, if not done well, could hurt the company's business.

"We are in the process of transferring to a third-party service provider our worldwide billing, collection and credit evaluation functions. The third-party provider will also track, on an automated basis, our growing number of AdSense revenue share agreements. These functions are critical to our operations and involve sensitive interactions between us and our users, advertisers and members of our Google Network."

• Ad-blocking and click-through frauds are threats as well.

"Technologies may be developed that can block the display of our ads. Most of our net revenues are derived from fees paid to us by advertisers in connection with the display of ads on web pages. As a result, ad-blocking technology could, in the future, adversely affect our operating results...We are exposed to the risk of fraudulent clicks on our ads. We have regularly paid refunds related to fraudulent clicks and expect to do so in the future. If we are unable to stop this fraudulent activity, these refunds may increase. If we find new evidence of past fraudulent clicks we may have to issue refunds retroactively of amounts previously paid to our Google Network members."

• Dividends aren't in the future for shareholders.

"We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future."

• Board members include John Doerr, a general partner at Kleiner Perkins Caufield & Byers; John Hennessy, president, Stanford University; Art Levinson, chief executive, Genentech; Michael Moritz, general partner, Sequoia Capital; Paul S. Otellini, president, Intel; and K. Ram Shriram (Sherpalo).

• Google CEO Eric Schmidt drew a $250,000 salary, while Brin and Page collected $150,000. As part of Schmidt's employment package, he was granted an option to buy more than 14 million class B common shares at an exercise price of 30 cents and was permitted to buy more than 426,000 of the series C preferred stock at $2.3425 per share.

Brin and Page each have over 38 million shares in the company, while Doerr and Moritz--through their venture capital firms--have close to 24 million shares each.

• Google owns a perpetual license for a method of ranking Web pages in search results, called PageRank, from Stanford. But the exclusivity period ends in 2011. Thus, the university could license the underlying technology, or derivatives of it, in seven years. In October 2003, Google extended the exclusivity period.

• The company released the prices of its search appliances in the filing. The search appliances allow businesses to perform Google-like searches on their own networks. The three models cost $32,000, $230,000 and $600,000.

 

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