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Google Q3 2015 Earnings Report

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Quarterly Earnings Summary Q3 2015


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Quarterly Revenues Revenues by Revenue Source(1) Revenues by Geography(2) ($ in millions) ($ in millions) 13,754 100% 90% $20,000 Y/Y Change = 13% Q/Q Change = 5% 18,675 18,103 17,258 15,707 $15,000 15,420 15,955 3,694 3,576 13,754 3,668 3,528 3,563 15,955 16,523 17,258 17,727 18,675 10% 10% 10% 18,103 9% 10% 10% 10% 44% 44% 45% 46% 46% 45% 45% 45% 43% 46% 45% 44% 44% 46% 45% 45% Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 80% 70% 3,621 60% 3,568 50% 3,278 $10,000 40% 12,429 10,538 $5,000 15,420 10% 17,727 16,523 3,880 15,707 10% 46% $25,000 10,469 10,935 11,252 11,932 12,402 47% 13,087 30% 9,376 20% 10% $0 1,100 1,501 1,423 1,457 1,703 1,794 1,750 1,704 1,894 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 0% Q3'13 Other Google Sites Network US Rest of the world Q3'15 UK (1) Prior period amounts have been adjusted to reflect the reclassification primarily related to DoubleClick ad serving software revenues from other revenues to advertising revenues from Google Network Members' websites to conform with our current period presentation. (2) In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities. We revised the classification of such revenues between Rest of the world and U.S. for periods beginning in 2008 through the first quarter of 2015. 2


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Traffic Acquisition Costs $4,000 30% 3,624 $3,500 $3,000 3,311 3,232 3,293 3,348 3,566 3,345 3,377 2,972 25% (in millions) $2,500 23.5% 23.3% 23.1% 22.7% 22.6% $2,000 22.2% 21.6% 21.1% 21.3% $1,500 20% $1,000 $500 $0 15% Q3'13 Q4'13 Q1'14 TAC ($ in millions) Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 TAC as % of Advertising Revenues (1) (1) Prior period amounts have been adjusted to reflect the impact of reclassification primarily related to DoubleClick ad serving software revenues from other revenues to advertising revenues from Google Network Members' websites to conform with our current period presentation. 3


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GAAP Costs and Expenses $ in millions As a % of Revenues $16,000 100% 12,799 $12,000 $10,000 11,278 9,993 1,135 $8,000 13,967 13,704 $14,000 1,628 11,305 1,184 11,697 1,489 1,729 1,933 2,126 5,961 77% 72% 73% 9% 8% 9% 73% 2,065 2,813 2,753 2,080 12% 12% 11% 12% 12% 14% 14% 39% 3,230 40% 39% 38% Q3'13 Q4'13 Q1'14 Q2'14 8% 16% 2,238 7,037 6,921 6,356 6,114 6,583 40% 40% 75% 74% 73% 9% 8% 12% 12% 16% 16% 16% 38% 37% 37% 38% Q4'14 Q1'15 Q2'15 Q3'15 73% 13% 60% 2,789 76% 9% 13% 2,655 6,695 6,253 80% 2,223 1,821 $6,000 1,450 1,477 2,377 2,084 1,941 12,902 1,637 1,365 1,404 1,908 12,811 1,593 9% 13% 8% 12% 17% 5,409 $4,000 20% $2,000 $0 0% Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Q3'14 Cost of Revenues Research and Development Cost of Revenues Research and Development Sales and Marketing General and Administrative Sales and Marketing General and Administrative 4


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Non-GAAP Costs and Expenses $ in millions As a % of Revenues $14,000 80% 12,535 12,503 $12,000 10,405 $10,000 9,137 10,466 1,058 10,817 11,166 1,348 1,003 1,473 $6,000 1,754 1,467 1,414 1,142 1,229 1,783 1,860 1,670 2,138 1,989 5,866 66% 68% 68% 68% 69% 67% 66% 67% 8% 7% 7% 2,489 11% 11% 11% 2,206 7% 9% 8% 8% 11% 10% 11% 11% 12% 9% 11% 11% 12% 12% 12% 12% 13% 38% 1,884 7% 10% 60% 8% 11% 1,260 39% 38% 38% 37% 37% 36% 36% 36% Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 40% 6,806 6,750 1,385 6,126 66% 1,267 1,973 2,182 1,582 1,791 11,770 2,164 1,887 $8,000 1,407 11,608 6,014 6,196 6,148 6,420 5,276 $4,000 20% $2,000 $0 0% Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Cost of Revenues Research and Development Cost of Revenues Research and Development Sales and Marketing General and Administrative Sales and Marketing General and Administrative For reconciliation of GAAP to non-GAAP costs and expenses, please refer to Table 1 at the end of the slide deck. 5


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Operating Income and Operating Margin GAAP Non-GAAP 6,140 5,957 $5,000 4,825 4,429 $4,500 4,399 50% $6,000 4,447 5,600 5,650 5,357 5,302 $5,500 45% 4,258 45% 5,138 4,954 4,115 $4,000 50% 4,708 $5,000 3,761 4,617 40% 3,724 40% $4,500 $3,500 34% 35% 34% 32% $4,000 27% 28% 30% 27% 27% 26% $2,500 23% 27% 25% 24% 25% $2,000 20% $1,500 32% 33% 34% 33% 35% 31% 30% $3,500 (in millions) (in millions) $3,000 32% $3,000 25% $2,500 20% 15% $2,000 15% $1,500 $1,000 10% 10% $1,000 $500 5% $0 0% Q3'13 Q4'13 Q1'14 Q2'14 Operating Income ($ in millions) Q3'14 Q4'14 Q1'15 Q2'15 Operating Margin (%) Q3'15 5% $500 $0 0% Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Operating income ($ in millions) For reconciliation of GAAP to non-GAAP operating income, please refer to Table 2 at the end of the slide deck. Q4'14 Q1'15 Q2'15 Q3'15 Operating Margin (%) 6


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Net Income and Earnings per Share (1) GAAP Non-GAAP 5,102 $5,000 $8 $5,000 4,654 4,519 $4,500 $4,500 6.79 $7 $4,000 6.63 $4,000 6.43 5.73 3,515 3,324 (in millions) $3,000 2,921 3,371 4.87 4.92 4.88 4.93 $7 6.47 6.25 5.98 5.56 $5 $5 $3,000 2,739 4.31 6.99 6.76 $6 $3,500 5.10 4,104 $6 3,351 3.98 $2,500 $4 $2,000 (in millions) $3,500 4,218 6.16 3,770 7.35 4,461 4,299 3,979 3,931 $8 4,829 4,675 $2,500 $4 $2,000 $3 $1,500 $3 $1,500 $2 $1,000 $2 $1,000 $1 $500 $1 $500 $0 $0 Q3'13 Q4'13 Q1'14 Q2'14 GAAP Net income ($ in millions) Q3'14 Q4'14 Q1'15 Q2'15 (2) Q3'15 GAAP Diluted earnings per share ($) $0 $0 Q3'13 Q4'13 Q1'14 Q2'14 Non-GAAP Net income ($ in millions) Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Non-GAAP Diluted earnings per share ($) (1) In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. (2) In the second quarter of 2015, an adjustment payment was made to Class C capital stockholders that resulted in EPS for Class A and B common stock of $4.93 (diluted EPS) and Class C capital stock of $6.43 (diluted EPS), based on Net income available to all stockholders of $3,409 million and the adjustment payment available to only Class C capital stockholders of $522 million. For reconciliation of GAAP to non-GAAP net income, please refer to Table 2 at the end of the slide deck. 7


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Constant Currency Q3'15 Revenues Using Q3'14 Rates (Y/Y) UK Revenues Rest of the world (ROW) Revenues Constant Currency Revenue Growth rate(1) = 18% 2,000 Constant Currency Revenue Growth rate(2) = 23% 1,917 10,000 20 1,792 9,301 266 (145) 8,135 Hedging benefit GAAP revenues 8,000 (1,432) $ (Millions) $ (Millions) 1,500 1,000 6,000 4,000 500 2,000 0 0 Constant Currency Revenues Foreign exchange impact Hedging benefit GAAP revenues Constant Currency Revenues Foreign exchange impact (1) Constant currency growth rate is calculated as Q3'15 constant currency revenues of $1,917M compared with Q3'14 revenues of $1,627M (UK GAAP revenue of $1,627M less hedging benefit of $0M). (2) Constant currency growth rate is calculated as Q3'15 constant currency revenues of $9,301M compared with Q3'14 revenues of $7,562M (ROW GAAP revenue of $7,572M less hedging benefit of $10M). 8


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Constant Currency Q3'15 Revenues Using Q2'15 Rates (Q/Q) UK Revenues Rest of the world (ROW) Revenues Constant Currency Revenue Growth rate(2) = 5% Constant Currency Revenue Growth rate(1) = 7% 2,000 10,000 1,733 39 20 1,792 266 7,930 8,135 Hedging benefit GAAP revenues 8,000 (61) $ (Millions) $ (Millions) 1,500 1,000 6,000 4,000 500 2,000 0 0 Constant Currency Revenues Foreign exchange impact Hedging benefit GAAP revenues Constant Currency Revenues Foreign exchange impact (1) Constant currency growth rate is calculated as Q3'15 constant currency revenues of $1,733M compared with Q2'15 revenues of $1,624M (UK GAAP revenue of $1,678M less hedging benefit of $54M). (2) Constant currency growth rate is calculated as Q3'15 constant currency revenues of $7,930M compared with Q2'15 revenues of $7,584M (ROW GAAP revenue of $8,001M less hedging benefit of $417M). 9


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Paid Clicks Y/Y Paid Clicks Growth % 50% Q/Q Paid Clicks Growth % 25% 44% 40% 40% 20% 37% 18% 35% 33% 31% 16% 30% 30% 15% 26% 26% 25% 24% 25% 13% 25% 23% 11% 20% 17% 14% 10% 10% 11% 10% 18% 10% 8% 7% 13% 7% 7% 6% 9% 9% 5% 4% 4% 6% 4% 3% 5% 2% 2% 2% 0% 0% 0% (1)% (1)% (3)% (3)% (2)% (5)% (4)% (9)% (11)% -10% (5)% (12)% -5% (7)% -20% -10% Q3'13 Q4'13 Q1'14 Aggregated Q2'14 Q3'14 Network Q4'14 Q1'15 Q2'15 Google Sites Q3'15 Q3'13 Q4'13 Q1'14 Aggregated Q2'14 Q3'14 Network Q4'14 Q1'15 Q2'15 Q3'15 Google Sites 10


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Cost-per-Click Y/Y Cost-Per-Click Growth % Q/Q Cost-Per-Click Growth % 10% 15% 6% 10% 5% 10% 2% 0% 5% (2)% 3% (3)% (4)% -5% 2% (4)% 1% 0% (6)% 3% (3)% 0% 0% 0% (6)% (7)% (1)% (7)% (8)% 0% (2)% (1)% (2)% (8)% (3)% (9)% (4)% (3)% (5)% -10% (11)% (11)% (11)% (11)% (2)% (4)% (5)% -5% (12)% (13)% (3)% (4)% (5)% (7)% (13)% (13)% (8)% (8)% (15)% -15% (16)% (16)% Q2'15 Q3'15 -20% -10% (11)% -15% Q3'13 Q4'13 Q1'14 Aggregated Q2'14 Q3'14 Network Q4'14 Q1'15 Google Sites Q3'13 Q4'13 Q1'14 Aggregated Q2'14 Q3'14 Network Q4'14 Q1'15 Q2'15 Q3'15 Google Sites 11


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Capital Expenditures & Free Cash Flow ($ in millions) $8,000 6,985 6,617 6,364 $6,000 5,627 5,083 2,515 5,238 2,927 2,417 4,391 $4,000 6,007 5,994 2,289 4,470 2,646 2,255 2,983 $2,000 3,690 3,577 2,345 2,794 2,373 3,551 2,981 3,634 2,813 2,046 $0 Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Free Cash Flow Q4'14 Q1'15 Q2'15 Q3'15 Capital Expenditures Free cash flow is defined as net cash provided by operating activities less capital expenditures. All numbers include Motorola Mobile until its date of disposal (October 29, 2014). 12


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Overview of Q3 2015 OI&E $ (in millions) Interest income $ Interest expense (26) Realized loss on marketable securities, net (6) Foreign currency exchange loss, net(1) (100) Realized gain on non-marketable investments, net 7 Other income, net Interest & Other income, net (1) 259 49 $ 183 Our foreign currency exchange losses are primarily related to the cost of our FX hedging programs. 13


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Table 1: Reconciliations of consolidated GAAP to non-GAAP costs and expenses Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 $5,409 $6,253 $5,961 $6,114 $6,695 $6,921 $6,356 $6,583 $7,037 (133) (127) (95) (100) (547) (171) (160) (163) (231) Cost of Revenues (non-GAAP) $5,276 $6,126 $5,866 $6,014 $6,148 $6,750 $6,196 $6,420 $6,806 Research & Development (GAAP) $1,821 $1,933 $2,126 $2,238 $2,655 $2,813 $2,753 $2,789 $3,230 (436) (466) (456) (447) (666) (631) (615) (583) (741) Research & Development (nonGAAP) $1,385 $1,467 $1,670 $1,791 $1,989 $2,182 $2,138 $2,206 $2,489 Sales & Marketing (GAAP) $1,628 $1,908 $1,729 $1,941 $2,084 $2,377 $2,065 $2,080 $2,223 (155) (154) (147) (158) (197) (213) (205) (196) (250) $1,473 $1,754 1,582 1,783 1,887 2,164 $1,860 $1,884 $1,973 $1,135 $1,184 $1,489 $1,404 $1,365 $1,593 $1,637 $1,450 $1,477 (132) (126) (141) (175) (223) (186) (223) (190) (210) General & Administrative (nonGAAP) $1,003 $1,058 $1,348 $1,229 $1,142 $1,407 $1,414 $1,260 $1,267 Total Costs & Expenses (GAAP) $9,993 $11,278 $11,305 $11,697 $12,799 $13,704 $12,811 $12,902 $13,967 (856) (873) (839) (880) (1,633) (1,201) (1,203) (1,132) (1,432) $9,137 $10,405 $10,466 $10,817 $11,166 $12,503 $11,608 $11,770 $12,535 Cost of Revenues (GAAP) Less: Non-GAAP adjustments (1) (2) Less: Non-GAAP adjustments (1) Less: Non-GAAP adjustments (1) Sales & Marketing (non-GAAP) General & Administrative (GAAP) Less: Non-GAAP adjustments (1) Less: Non-GAAP adjustments (1) Total Costs & Expenses (nonGAAP) (1) (2) Comprised of stock based compensation expense. Q3'14 Includes a $378M impairment charge related to a patent licensing royalty asset acquired in the purchase of Motorola. 14


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Table 2: Reconciliations of non-GAAP consolidated results of operations measures to the nearest comparable GAAP measures ($ in millions) Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Income from operations (GAAP) $3,761 $4,429 $4,115 $4,258 $3,724 $4,399 $4,447 $4,825 $4,708 $856 $873 $839 $880 $1,255 $1,201 $1,203 $1,132 $1,432 Add: Stock-based compensation expense from continuing operations Add: Impairment charge related to a patent licensing royalty asset Income from operations (non-GAAP) $— $— $— $— $378 $— $— $— $— $4,617 $5,302 $4,954 $5,138 $5,357 $5,600 $5,650 $5,957 $6,140 ($ in millions) Q3'13 Q4'13 Q1'14 Q2'14 Q3'14 Q4'14 Q1'15 Q2'15 Q3'15 Net income (GAAP)(1) $2,921 $3,324 $3,371 $3,351 $2,739 $4,675 $3,515 $3,931 $3,979 $656 $689 $649 $685 $997 $946 $946 $898 $1,123 $— $— $— $— $378 $— $— $— $— $193 $506 $198 $68 $185 $(967) $— $— $— $3,770 $4,519 $4,218 $4,104 $4,299 $4,654 $4,461 $4,829 $5,102 Add: Stock-based compensation expense from continuing operations (net of tax) (2) Add: Impairment charge related to a patent licensing royalty asset acquired in connection with the purchase of Motorola Add: Net loss (income) from discontinued operations Net income (non-GAAP)(1) (1) In the second quarter of 2015, we identified an incorrect classification of certain revenues between legal entities, and as a consequence, we revised our income tax expense for periods beginning in 2008 through the first quarter of 2015. (2) Tax effect of stock-based compensation expense is calculated using tax-deductible portion of stock-based compensation expense and applying entity-specific tax rates. 15


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