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March 16, 2006

Google's 10-K is out today

posted by MR WAVETHEORY at 3/16/2006 01:03:00 PM
Google's 10-K is out today. There are several interesting notes in there:

1) Our revenue growth rate has generally declined over time, and we expect it will continue to do so as a result of increasing competition and the difficulty of maintaining growth rates as our revenues increase to higher levels.

Mr Wave Theory's Translation: Growth rates and margins are exepcted to slow and not accelerate as most Wall Street analysts would predict.

2) Prior to the second quarter of 2004, these seasonal trends may have been masked by the substantial quarter over quarter growth of Internet traffic focused on commercial transactions and ultimately by the substantial quarter over quarter growth in our revenues. In addition, in the third quarters of 2004 and 2005 these seasonal trends may have been masked by certain monetization improvements to our advertising programs, as well as by the continued expansion of our global advertiser base and partner network.

Mr Wave Theory's Translation: In Q2 2004, internet traffic masked slow down in our business. In Q3 2004 and 2005, we masked the slow down by adding more ads to our search results and increasing their font size.

3) Beginning in the second quarter of 2004, growth in advertising revenues from our web sites has exceeded that from our Google Network members’ web sites. We expect that this will continue in the foreseeable future although the relative rate of growth in revenues from our web sites compared to the rate of growth in revenues from our Google Network members’ web sites may vary over time.

Mr Wave Theory's Translation: Expect to see us tweek our mix of revenue so that we hit our operating margin targets. We will do so by adding fewer partners into the Google Network. We will be spending less to buy other people's traffic.

4) Our operating margin may decrease as we invest in building the necessary employee and systems infrastructures required to manage our anticipated growth. We have experienced and expect to continue to experience substantial growth in our operations as we invest significantly in our research and development programs, expand our user, advertiser and Google Network member bases and increase our presence in international markets, as well as promote the distribution of our Google toolbar and other products in order to make our services easier to access.

Mr Wave Theory's Translation: We will be spending more to buy other people's traffic by paying for toolbar distribution.

5) We currently anticipate that our effective tax rate will decrease to approximately 30% in 2006 from 31.6% in 2005, primarily because we expect that our Irish subsidiary will recognize proportionately more of our earnings in 2006 as compared to 2005, and such earnings are taxed at a lower statutory tax rate than in the U.S. However, if future earnings recognized by our Irish subsidiary are not as proportionately great as we expect, our effective tax rate will be higher than we currently expect.

Mr Wave Theory's Translation: We get a real sweet tax deal in Ireland so we will be moving more business there to get a tax break.

Google then lists a laundry list of risks which most analysts have been happy to ignore so far:

1) AOL - We rely on our Google Network members for a significant portion of our revenues, and we benefit from our association with them. The loss of these members could adversely affect our business. In addition, advertising and other fees generated from one Google Network member, AOL, primarily through our AdSense program, accounted for approximately 9% of our revenues in 2005.

Mr Wave Theory's Translation: We still haven't closed our deal with AOL but we're going to bend over backwards to do it.

2) Click fraud - If we fail to detect click fraud or other invalid clicks, we could lose the confidence of our advertisers, thereby causing our business to suffer.

Mr Wave Theory's Translation: Click is a major issue and we'd just like you to be aware that you are factoring it in.

3) Index spamming - Index spammers could harm the integrity of our web search results, which could damage our reputation and cause our users to be dissatisfied with our products and services.

Mr Wave Theory's Translation: We are getting spammed like crazy by direct marketers and expect us to throw a lot of bodies at cleaning up this problem.

3) Privacy concerns - Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and services.

Mr Wave Theory's Translation: We keep all your search history and data and this is becoming a big liability.

4) Hiring and stock options - The incentives to attract, retain and motivate employees provided by our option grants may not be as effective as in the past and our current and future compensation arrangements, which include cash bonuses, may not be successful in attracting new employees and retaining and motivating our existing employees. In addition, we have recently introduced new stock award programs, and under these new programs new employees will be issued a portion of their stock awards in the form of restricted stock units.

Mr Wave Theory's Translation: Google is no longer a place to get rich, so we may have problems hiring talented people. In order to fix this problem, we are granting GSUs which will dilute your ownership in our business. Our old employees are vesting in peace (VIPs).

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Anonymous Anonymous said...

It was shocking to see how many pages of risks there were. You only picked out a few of them.

10:17 AM  
Anonymous Anonymous said...

These risks are not unique to Goo. They are an issue for all online ad businesses.

10:17 AM  
Blogger MR WAVETHEORY said...

Good point. There were too many risks to post them all so I picked out the most alarming admissions.

10:17 AM  
Anonymous phil said...


First time I read your blog, very good stuff!

Nice summary but with a "1-1.5% annual dillution" due to GSUs do you really need to mention anything else?

Today was get Google day on CNBC, first with a profile on some new company that has a GDrive up and running already and then wallpapering Balmer all day talking about how Google's gonna get whacked as soon as he talks to the boys in R&D!

I got off the Yahoo board today because the attacks were getting ridiculous as the thing went down after I told them it was going to happen...

10:17 AM  
Anonymous Anonymous said...

To anon #2 - Yes thay may be true but Goog has the most downsides, esp points #1-5 mywavetheory points out.

10:17 AM  
Blogger MR WAVETHEORY said...

Phil - Thanks for the kudos. I enjoy reading your blog as well and your analysis is always highly insightful and factual. I agree with you that the GSU issue is pretty significant. Management is clearly treating GOOG as their own piggy bank. I find it ironic that Larry and Sergei used Warren Buffett as their role model when writing their S-1 because Warren Buffett hates stock options. Warren would have a heart attack if he saw that kind of outright wealth transfer in his portfolio companies. In fact, I think Buffett would fire Larry and Sergei if he were running the show.

10:18 AM  
Anonymous phoennnix10 said...

Love you blog..keep it up. Where do you think Q1 earnings will be with dilution and "slowing of revenue?" The number I keep seeing is $1.99 per share...though, that is very hard to believe.

Keep up the good work.

10:18 AM  
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