Google IPO To Happen, Files For Public Offering


As many expected, Google filed to go public today. Below, Search Engine Watch provides a highlight of interesting information out of the filing. For more traditional coverage, see the story from our sister site ClickZ: Google Files For $2.7B Public Offering.

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Google Revenues – Ad Revenues Up Close
Google Worries – Google Employee Facts
Google Acquisitions – Other Google Facts
News Coverage & Other Resources

Google Revenues

Google is on track to earn over US $1 billion in net revenues in 2004, according to the filing, earning over $250 million in profit. Here’s a look at net income, expense and profit (income/loss figures) based on Google’s filing:

Note that figures for 1999 through 2003 are based on what Google reported for a full year. Figures for 2004 are a simple Search Engine Watch projection, created by multiplying Google’s first quarter figures by four. The actually earnings could obviously be much higher or lower than projected, depending on a variety of factors.

Some additional revenue related highlights, from the filing:

  • Google had $335 million in cash, cash equivalents and short-term investments, as of the end of 2003.
  • Since at least March 2002, Google has had no quarter where net revenues decreased.
  • Google’s has earned a profit every quarter since at least March 2002.
  • Google’s quarterly profit since flattened between the fourth quarter of 2002 and the first quarter of 2003. Of all quarters since March 2002, it has dropped only once — in the third quarter of 2003. This was largely due to a spike in stock-based compensation.
  • Google earned less than 3 percent of its net revenues in 2003 by serving search results to Yahoo.
  • Yahoo still retains the right to use Google’s search results on its sites. Google is terminating this right as of July 2004.
  • No advertiser generated more than 3 percent of Google’s net revenues in 2001, 2002, 2003 and the first quarter of 2004.
  • Distribution agreements, the ability to run ads on sites outside of Google on the Google Network, accounted for 15 percent of Google’s net revenues in 2003 and 21 percent as of the first quarter of 2004.
  • No Google Network partner generated more than 5 percent of Google’s net revenues in 2002, 2003 and the first quarter of 2004.
  • Google had $527 million promised in revenue share agreements relating to AdSense placements, at the end of 2003. About 39 percent of this is due within the next year.
  • Five Google network partners account for 70 percent of what Google has promised in revenue sharing. Ten partners account for 91 percent of the payments.
  • Based on advertiser billing addresses, Google estimated that 74 percent of its net revenues in 2003 came from the US, dropping to 70 percent for the first quarter of 2004.
  • Countries outside the US generated 26 percent of Google’s net revenues in 2003, and the figure rose to 30 percent for the first quarter of 2004. More than half Google’s traffic, however, came from outside the US.

Google Ad Revenues: Up Close

The vast majority of Google’s revenue comes from advertising. Only a tiny slice comes from other sources, such as enterprise search services, web search services and other products:


Figures shown are for the full years of 2001, 2002, 2003 and for the first three months of 2004, from the filing.

Where is that advertising income earned? Google operates its own web sites, plus it distributes ads to partner web sites (the filing calls these partners the Google Network). This dual distribution has been well-known, but what hasn’t been known was how much revenue the partners added to Google. As it turns out, relatively little, though that trend is rapidly reversing:


Figures shown are for the full years of 2001, 2002, 2003 and for the first three months of 2004, from the filing.

What’s going on? In a word (well, two): Google AdSense. Google gained no major portal partners or other keyword-driven ad distribution deals in that might have accounted for such a growth in revenue from on the network side. But in 2003, it launched its AdSense contextual ad program and then greatly expanded AdSense.

AdSense placements are almost certainly the reason why Google has seen network-derived ad revenue rise so sharply. It also shows Google becoming increasingly tied to what happens beyond the borders of its own web sites to earn money.

Also interesting is a portion of the filing the admits in some cases, Google may enter into agreements where it pays a network member more than they have earned for AdSense placements, because of its inability to predict accurately how much earnings will be:

Due to intense competition for Google Network members and our limited ability to accurately forecast the number of paid clicks that will result, we expect that we will enter into AdSense agreements from time to time under which we will make payments to the Google Network member exceeding the revenue we recognize from the agreement.

Google Worries

Google’s filing is full of many standard things that investors might be warned about. The company even addresses the issue of privacy concerns about its Gmail system or the controversy over anti-Semitic site ranking at the top of its results for the word “jew” might hurt its brand. Here are a few things that particularly caught my eye among the many investor warnings:

  • Yahoo and Microsoft are specifically named by Google as its primary competitors.
  • Google reveals that it had issues with “employee access to our advertising system” in 2002, requiring changes made in 2003 to improve internal controls.
  • Google worries that proprietary document formats might preventing it from indexing information. For instance, it says that software providers could perhaps demand a royalty to search these type of documents. Microsoft Word documents are listed as an example, along with this disclaimer: “If the software provider also competes with us in the search business, they may give their search technology a preferential ability to search documents in their proprietary format. Any of these results could harm our brand and our operating results.”
  • Google discusses that it has regularly paid refunds because of clickfraud and potentially might have to make retroactive payments.
  • Google specifically calls out “index spammers” and link bombing as an “ongoing and increasing effort” that could harm its results. “If our efforts to combat these and other types of index spamming are unsuccessful, our reputation for delivering relevant information could be diminished. This could result in a decline in user traffic, which would damage our business,” the filing says.
  • Many in senior management and key employees are fully vested. In short, they could cash out and depart Google at any time.
  • Google notes system failures can be a concern and reveals in November 2003, it failed to provide web results for 20 percent of its traffic for 30 minutes.

Google Employee Facts

Google has nearly 2,000 full-time employees at the moment and a “significant number” of temporary employees. Figures over time:


Most of these employees are involved in sales and marketing, but a healthy chunk focus on research and development. Employee classification, as of March 31, 2004:


Google cofounder and president of technology Sergey Brin is the youngest of Google’s executive officers and directors. At 30, he just beats Google’s other cofounder and president of products, Larry Page. The oldest of this group is Wayne Rosing, Google’s vice president of engineering. The entire group has a median age of 48.

  • Google CEO Eric Schmidt earns a salary of $250,000 and earned a bonus of $301,556
  • Google’s two cofounders each earn a salary of $150,000 and earned bonuses of $206,556

Google Acquisitions

Google bought Applied Semantics in April 2003 for $102 million, $41.5 million of which was in cash.

Google also says that in 2003, it purchased three other companies for a total of $15 million, only $1.5 million of which was in cash.

The companies aren’t named. But Google bought Blogger in February 2003, acquired Kaltix in September 2003 and purchased Sprinks in October 2003. These are almost certainly the “three” companies referenced.

Other Google Facts

PageRank, as I’ve written many times before, is not the Google ranking algorithm. Instead, it’s just one of many different factors. However, it is the most known and a key element of what Google does.

Stanford University, where PageRank was developed by Google’s cofounders, owns the patent on PageRank. However, the filing reveals that Google has been granted a perpetual license and that in October 2003, it extended an agreement giving it exclusivity to PageRank through 2011. So speculation that issues over the rights to PageRank might complicate the Google IPO don’t appear to be a problem.

Google notes there’s a lawsuit against it by Yahoo over patents held by Yahoo-owned Overture relating to paid listings. This dispute was well-known. What’s surprising, if I read the filing correctly, is that Google does not consider several lawsuits involving trademarks and keyword-linked ads to be significant.

Writes Google, after discussing the Overture case:

Currently, there is no other significant litigation pending against the Company other than as disclosed in the paragraph above.

News Coverage & Resources

  • A copy of Google’s S1 filing can be found here via the US Securities & Exchange web site.
  • Financial Times has a copy of a letter from Google’s cofounders contained as part of its filing, explaining the reasons behind going public and how the hope that a dual-class ownership structure will allow Google to focus on long-term goals, rather than short-term gains. You can also view the letter as it is contained within the filing.
  • CNN/Money has a recap story with nice charts comparing key financials at Google to Amazon, eBay and Yahoo.
  • Forbes provides a Google timeline.
  • has a plain-English guide to how the IPO by auction will work.
  • Wired has a nice story that notes among other things that the exact value of Google’s offering is the same as the mathematical constant e.
  • Dow Jones says the IPO may be the largest ever for an internet-based company and provides lots of examples.
  • The Street explains more about how Google’s two classes of stock are designed to keep the founders in control and estimates how much of the company is currently owned by various parties. The two founders each have 15 percent, with the company’s two venture capital backers at 9 percent, and Google’s CEO holding about 6 percent.
  • A Search Engine Watch story filed today, Search Wars: Battle Of The Search Superpowers, explains some of the competition Google faces, including recent moves by Yahoo and MSN.
  • Search Engine Watch’s comScore Media Metrix Search Engine Ratings provides a look at the share of searches Google and other services have in the United States.
  • Search Engine Watch’s Who Powers Whom? Search Providers Chart provides a look at how Google and Yahoo have extended their efforts to gain searchers into other search engines.


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