The Analysis of Business & Financial Performance

of Google Inc. from 2009 -11

T h e R e s e a r ch a n d A n a l y s i s P ro j e c t
By
S h a h Ta j Al i Kh a n
Reg no: 1933312

Submitted to the faculty of OBU Business School in partial fulfilment of the requirements of
Bachelors Honours Degree in Applied Accounting
O x f o r d B ro o k e s U n iv e r s i t y,
Oxford
[ N o v e mb e r , 2 0 1 2]
[ Wo rd c o u n t : 6, 4 9 0 ]

Table of Contents
Introduction
Project objectives and research questions
Information gathering

2
3
4

Google Inc.
Company Overview
Competitors

5
6

SWOT analysis of the company

Strengths
Weaknesses
Opportunities
Threats

6
11
13
15

Ratio analysis
Sales
Profitability ratios
Liquidity ratios
Efficiency ratios
Gearing ratios
Investor ratios
EPS

16
17
19
20
20
21
22

Conclusion

23

Appendix 1: FS extracts
Appendix 2: References list

24
30

1933312 | OBU RAP: Analysis of Google Inc......

Introduction
The topic that I have chosen for this Research and Analysis Project (RAP) is topic number 8: The
business and financial performance of an organisation over a three year period. Having to choose
this topic among others was a challenge as each of the 20 topics provided by the Oxford Brooke's
University is not only very interesting but also presents a massive scope for research and analysis.
So it was a tough choice.
In my opinion the analysis of business and financial performance of a company is one of the most
important aspects of the modern day accounting profession and therefore, I decided to opt for this
topic. Also, by analysing the performance of a real company, I had the opportunity to apply my
theoretical knowledge, which I learned through ACCA exams, into a practical scenario. Moreover, I
feel that by applying the acquired skills to a real world scenario will broaden my knowledge of
various financial analysis techniques. After settling for topic 8, I had to make an equally important
decision about my choice of company on which to base my RAP.
After a day of research I was convinced that Google Inc. (NASDAQ:GOOG) would indeed be a
much better company for me to analyse by taking account of the ease in accessibility of various
information available for the company. Indeed Ill be using this Company's services in
accomplishing this task by using its core Search Engine, Google Search. Though taking everything
into perspective, i.e. the availability of information, the scale of operations of the company, its
impact on the Internet users regardless of borders, choosing Google Inc. indeed came as a natural
choice. Google's innovation in search technology made it the No.1 search engine. It processes over
one billion search requests and about twenty-four petabytes (One Petabyte equals 1 million
gigabytes) of user-generated data every day.
Another reason for choosing to write on this company was due to the magnitude of CHANGE it has
brought in the Internet services and retail industry. Because so many people use Google, it has
become more than a Household name. In fact the word Google has even become noun as people
often say I'll just Google it, as a reference to searching the internet. This is not only good for
Google's brand, but it also gives Google an edge for any new products or services they wish to
launch.

1933312 | OBU RAP: Analysis of Google Inc......

PROJECT OBJECTIVES AND RESEARCH QUESTIONS

The primary objective of this research report is to present a thorough analysis of the business of
Google Inc. and its performance over a three year period from the point of view of an investor. The
period under consideration is the three financial years from 2009 to 2011. This will mainly be
accomplished by employing a detailed ratio analysis on the financial data available for a three year
period.
Only focusing on the financial aspects will not provide a comprehensive analysis of its
performance.
Therefore, this report will also focus on the non-financial aspects using a strategic planning tool
called SWOT analysis which will focus on strength, weaknesses, opportunities and threats inherent
in the company of faced by it.
The main aims and objectives of the report on which my research questions were based can be
summarised as follows:

To gather, present and analyse the financial information of Google Inc. for the three year
period ended 31st December 2011 in a form which can assist an investor to assess the overall
financial performance and prospects of the Company.

To analyse the strengths, weakness, opportunities and threats which have resulted from the
adopted strategy and their impact on the company as a whole?

To evaluate the effectiveness of the strategy of Google Inc.

To present conclusions on the analysis carried out to aid a potential investor to make a
Well informed decision regarding investment in the company. In addition to the above, I had
to base my research on answering the following questions:

What are the reasons for Google Inc. being one of the leading Internet Servicer & retailer?
Where will Google stand in the near future?
The Opportunities and Challenges it is going to face?

1933312 | OBU RAP: Analysis of Google Inc......

Information gathering
Firstly I went through my own ACCA study texts to for re-collection of key topics. These included
the financial reporting area's and Business Analysis topics. This refreshed the concepts in my mind
which enabled me to me more efficient in carrying out the RAP activity.
I mostly used the Secondary sources of Information because I didn't have any access to any
Organization. This is a hub of information on the Web which fills the incumbency factor,
I surfed the web for a few weeks. Read the business & Technology press like Newspapers such as
financial times, The New York Times, Economic times & Magazines like Time, Fortune, Economist,
Bloomberg Business-week, Harvard Business Review, Forbes, Wired, TechCrunch, BGR etc. This
gave me an insight into the Internet industry which helped me in deepening my Research activity.

Limitations
There is always a risk that Information might not serve the purpose for which it is intended.
Opinions presented in press can be at times unfairly inclined towards some organisations. This can
be a risk when relying on information produced in Press. However this risk can be minimised by
going through credible media organisations.
More useful and sophisticated information was not available freely. It was costly and hence I
couldn't get grab of it otherwise the research would have been more effective.

Ethical issues
There wasn't any significant ethical issue that I came across with since I dealt mostly with
Secondary data. I have correctly referenced the information throughout the RAP using the Harvard
Referencing system.

1933312 | OBU RAP: Analysis of Google Inc......

How it started!
By late 1992, there were only 26 websites in the world, so there was not much need for a search
engine. Just five years later, in 1998, web pages numbered in the tens of millions, and search
became crucial. At this point, Google was a small research project at Stanford; later that year it
became a tiny start-up. The search index sat on a small number of disk drives. Fast forward to
today, the changes in scale are striking. The web itself has grown by about a factor of 10,000, as has
the search index. Billions of people now have access to the Internet via computers and mobile
phones. Like many other web companies, the vast majority of Google's services are available
worldwide and free to users because they are supported by ads. So a child in an Internet cafe in a
developing nation can use the same online tools as the wealthiest person in the world. Google has
played a significant role in the democratization of information.

Google's real ambition

Google may be a money spinner, but the company says it has much more high-minded aims than
making a fast internet buck. "Google's mission is to organize the world's information and make it
universally accessible and useful," claims its corporate vision statement. Note the word universal.
Whether high-minded or not, it is this "Google everywhere" ambition that makes it such a
successful company.
Over the years, Google has been releasing a steady stream of innovative tools and services - some of
them developed in-house, many others bought in from start-ups: Gmail, Google Docs for word
processing and spreadsheets, Picasa for picture editing, Google Earth and Maps for location-based
search and display of information, Blogger, YouTube's video service ... the list is seemingly endless.
Not that long ago this looked like random growth. But as these services get a more coherent look
and feel, the pieces of Google's puzzle are falling into place.
Every search we do, every tool we use helps Google to gather more information and organise the
artefacts of our knowledge society (BBC, 2008).
But with Google spreading its wings and complementing more and more parts of our lives, a
rapidly growing number of companies in ever more industries have to ponder whether it is a
partner, a competitor or a destroyer of business models.
Google's company motto could quite as well be: "Anything you can do I can do better - and for
free." It leaves even Google's largest rivals constantly stressed out - whether it is Microsoft (who is
seeing its Internet Explorer overshadowed by Chrome), the ailing web portal Yahoo, which was
forced to agree a revenue-sharing deal by outsourcing some of its advertising to Google or the
equally innovating Apple (Whose its iOS is being Out-performed by Google's Android).

1933312 | OBU RAP: Analysis of Google Inc......

Who are its Competitors?

Areas of Competition

1933312 | OBU RAP: Analysis of Google Inc......

SWOT Analysis
SWOT analysis is a management tool that is used by most corporate organisations in making
decisive strategic decisions that helps the organisation to be stable and sustainable in the long
term. SWOT is an acronym for Strengths; Weaknesses; Opportunities; and Threats. The Strength
and Weaknesses are within the organization; whilst the Opportunities and Threats are beyond the
organization in the wider external environment.
In terms of the application of the SWOT analysis, most business organizations including Google
can have some vital strengths; weaknesses which are internal, whilst they are also benefiting from
the opportunities and affected by the threats in the external environment.

Limitations of SWOT Analysis

The SWOT framework emphasizes the elements of strengths, weaknesses, opportunities and threats,
but provides no real guidance on how individual organizations can identify these elements for
themselves. The line separating strengths from weaknesses or opportunities from threats is not always
clear, and SWOT offers no methods for drawing such lines.
1. Strengths

a) Technology Infrastructure
Google does not disclose the number of data centres or servers they operate, but based on energy
usage, recent guesstimates (Gartner, 2011) reckons that Google now make use of more than 1
million servers, spitting out search results, images, videos, emails and ads (Pandia, 2011). Data
centres require massive amounts of energy. They consume up to 1.5 percent of all the electricity in
the world. Googles data centre electricity use is about 0.01% of total worldwide electricity use and
less than 1 percent of global data centre electricity use in 2010, writes Stanford professor Jonathan
Koomey, in a report on Data centres (The New York Times, 2011).
An article published by Wired Magazine in Oct 2012, revealed facts about the unprecedented
energy savings Google is making. The standard measurement of data centre efficiency is called
power usage effectiveness, or PUE. A perfect number is 1.0, meaning all the power drawn by the
facility is put to use. Experts considered 2.0indicating half the power is wastedto be a
reasonable number for a data centre. Google is getting an unprecedented 1.2.
Googles services would not be possible without their infrastructure which makes it very hard for
competitors to copy or even try to rival Google. This makes Googles infrastructure a sustainable
competitive advantage.

b) Googles Markets
Google strive to bring to the market various innovative products. Google has a diverse customer
base ranging from young people to the older people. Google targets all the people who use the
internet. Anyone who uses the internet search engine is a potential market for Google because by
using Google search engine you are making money indirectly for Google.
Recent research on Global search engine market share (Statowl, 2012) shows Google leading by
(81.77%), followed by Bing (8.41%) and Yahoo (6.78%).
Google in recent times have been tactically making in-roads into markets previously not part of
their business model. Damon lavrinc in an article (Wired, 2012) reported that Google has entered

1933312 | OBU RAP: Analysis of Google Inc......

the navigation market by providing free navigation in Android phones. Google have become a
direct threat to Garmin Ltd and TomTom, both being the leading GPS device providers. Soon after
these developments, Garmin one of the worlds largest GPS device providers watched its stock
drop nearly 10 percent for the day.
Google reinforces its presence with users through the placement of its search toolbar in the everpopular Firefox browser and in the Apple iPhone. Innovative and frequently-used Google offerings,
such as Google Maps, Google Earth, and Google Apps continue to increase Google mindshare
amongst consumers. Google's search partnerships with third-party websites also give Google
additional web presence.

c) Innovation
Google uses a perfect search engine that to a large extent understands exactly what you mean and
gives you exactly what you want. Some of Google's innovations are only now being matched. For
instance, Yahoo gives the top spot on its search results page to the advertiser who pays the most per
click. But Google maximizes the revenue it gets from that precious real estate by giving its best
position to the advertiser who is likely to pay Google the most in total, based on the price per click
multiplied by Google's estimate of the likelihood that someone will actually click on the ad. Google
earns about 30% more revenue per ad impression than Yahoo does (Bloomberg, 2006).
The Research and development expenses of Google were $2.8 billion, $3.8 billion, and $5.2 billion
in 2009, 2010, and 2011, respectively. It is expected to continue to invest in building the employee
and systems infrastructures needed to support the development of new products and services and
to improve existing ones.

25

Percentage

20

15

2009
2010
2011

10

0
Google

Microsoft

Yahoo

R & D spending as a percentage of revenues from year 2009-11

d) Quality of Personnel
Google has an astounding profile of men and women with high academic achievements and
experience in various endeavours in information technology and knowledge management. Google
once again topped Fortune Magazines annually published rankings of 100 best Companies to
work for for the year 2012. At December 31, 2011, Google had 32,467 full-time employees. (Google
Annual accounts, 2011). All of Googles full-time employees are also equity-holders, resulting in

1933312 | OBU RAP: Analysis of Google Inc......

significant collective employee ownership.

Profit per employee is an interesting metric because it gives you a number that doesn't depend too
much on the workforce of the company. This makes it easier to compare companies of different
sizes. Google had $209,624 in profit per employee in 2008, which beaten all the other large tech
companies like Microsoft, Apple, Intel and IBM. It grabbed the second place in 2009 with a figure
of $336,297 (Pingdom, 2011).

107214
121762

Cisco

130267

Intel

64145
244831

Microsoft

2008
2009

194297
336297

Google

209624
419528

Apple

151063
0

50000

100000 150000 200000 250000 300000 350000 400000 450000

Source: Google Finance

Top five Profit per Employee making Companies

e) Financial Strength
Googles stock market value topped that of long-time rival Microsoft for the first time in October
2012 (Financial times, 2012),capping a decade-long struggle for dominance between leaders of the
PC and internet eras of computing. Based on closing prices, Googles shares valued the company at
$249.1bn, nearly $2bn more than Microsoft.
Google has established a brand name for itself that is very hard for others to imitate. Google's
brand was the only one that topped the list for four Continuous years, from 2007 (Brand value: $66
Billion) to 2010 (Brand value: $114 Billion)[Millwardbrown, 2011].

1933312 | OBU RAP: Analysis of Google Inc......

120
100
80
60
40
20
0
IBM
Google

Apple

Microsoft
McDonalds
China Mobile
Coca Cola
Marlboro
HP

Vodafone

All figures in $billions

Top ten most valuable global brands of 2010.

f) Platforms
Apart from displaying Targeted ads on its Search engine, Google uses several different Platforms to
display advertisements.

- YouTube
YouTube provides a range of video interactive and other ad formats for advertisers to reach their
intended audience. YouTube gets around 800 million unique visitors every month (YouTube Press
release, 2012). Viewers have grown significantly as bandwidth capabilities to support video
buffering have steadily expanded, enabling easy viewing on mobile devices as well.
- Gmail
Gmail is a free, advertising-supported email service provided by Google. As of June 2012 (The
Verge, 2012), Gmail has 425 million active users worldwide. It is growing at about 15 million users
per month, and those numbers are no doubt primarily boosted by ever-increasing Android
activations (about 12 new Android devices sold every second).
- Android
Google gives away its Android operating system in order to have real estate on mobile devices and,
therefore, is critical for Google to deliver ads. The first Android-powered phone was sold in October
2008, and by the second quarter of 2012, it had a worldwide Smartphone market share of 68%
(TechCrunch, 2012).
During an interview, Google chairman Eric Schmidt projected that there will be more than 1 billion
Android devices activated by this time next year if the company keeps up its current pace of
activating 1.3 million per day (BGR, 2012). The biggest advantage of Android is that it is free and

1933312 | OBU RAP: Analysis of Google Inc......

10

open-sourced. This feature makes it a preferred choice as an operating system, especially for new
entrants to the Smartphone market. Emerging markets are the growth hub for Smartphones and
tablets, and Android can act an affordable and effective mobile OS to local manufacturers.
- Google Chrome OS and Google Chrome
Google Chrome OS is an open source operating system with the Google Chrome web browser as its
foundation. Both the Google Chrome OS and the Google Chrome browser are built around the core
tenets of speed, simplicity, and security. Designed for people who spend most of their time on the
web, the Google Chrome OS is a new approach to operating systems.
As of September 2012, Google Chrome had 34% worldwide usage share of web browsers making it
the most widely used web browser (Stat Counter, 2012).

- Google Plus
Social networking has proved to be a particularly popular activity on Internet with several brands
competing. People started spending more time on Social networking sites. Facebook, being the
market leader became the most visited website globally (Alexa, 2011). After delivering some Flops
in the Social networking world, Google finally came up with something Captivating, the Google
plus (Time, 2011).
After being launched in June 2011, Google+ is receiving an encouraging response. As of September
2012, it has a total of 400 million registered users of whom 100 million are active on a monthly
basis.

2. Weaknesses

a) Issues with Privacy of data

Although Google is a company that has grown to be the number one search engine, in the United
States, a few problems have occurred. Foreign countries are not open to the amount of information
Google needs for certain applications. Google's ambitious plans to scan millions of books and make
them readable through its search engine have been criticized for copyright violations.
Google automatically scans emails to add context-sensitive advertisements to them. Privacy
advocates raised concerns that the plan involved scanning their personal, private emails and that
this was a security problem. Privacy advocates have also objected to the Google Street view feature
encompassed to Google Maps. The concerns have led to several temporary bans of Street View in
countries around the world (USA Today, 2007).

b) Problems with Chinese Government

In Jan 2010, Google announced that in response to a Chinese-originated hacking attack on them
and other US tech companies, they were no longer willing to censor searches in China and would
pull out of the country completely if necessary (Wall street Journal, 2010). Since then Google's
operations in China are in disruptions whose main beneficiary is Baidu, China's Premier searchengine. Baidu's market share in China is around 80%, according to data from Beijing-based
research firm Analysys International (CNN Money, 2012).

1933312 | OBU RAP: Analysis of Google Inc......

11

c) Lack of Diversification in revenue model

39.00%
Google
Yahoo + Microsoft
Facebook
AOL
Others

44.10%

1.50%
3.10%
12.30%

Online Advertising Market Share 2011 (Source: EMarketer)

As with all channels of media, Google survives on one thing and one thing only, and that is
advertising. Google generated 96% of their revenues in 2011 from advertising (Yahoo Finance,
2011). This is not seen as a weakness for Google as of the year 2011, but it could reap a negative
outcome for the future. We have seen how the newspaper and print industry has disappeared over
the years. The question is not about the popularity of Google but how long this trend of advertising
on the Web will last. As the generations change, so could the advertising industry.

d) Google search
Even Google has acknowledged that its becoming really difficult to differentiate between real good
content, good content and average content as a search engine cant check for credibility of all the
information. Thus there are a lot of search engine optimization strategies coming up. Even if a
businessman is credible, his counterpart who might be more knowledgeable about Googles
algorithm might receive more business. Google is just a search engine and it maintains its
information in a organized manner and provide it to the users. Thus it can be manipulated, and it is
getting manipulated to an extent.

12

1933312 | OBU RAP: Analysis of Google Inc......

3. Opportunities

a) Social Networking
6
4.99

5
4.21
$Billions

3.45
2.76

3
2.11
2

1.59

1
0
2011

2012

2013

2014

2015

2016

US Social Media Ad Spending Trends

[Source: EMarketer]

Google Plus is in a great spot to combine all of Googles services and become the best social
networking and internet search tool available. Google has successfully become the go-to place for
just about anything on the web. News affects everyone in one way or another, and if Google Plus
was able to make it easier for users to exchange viewpoints on anything from a companys next
earnings report to a natural disaster in China, Googles News and Finance services could become
drastically more popular. There are countless services provided by Google. As with the examples
above, a Google Plus interface could only make these services more popular and more useful to the
online and real world communities.

Percentage
18
21

89

36

Facebook
Twitter
Youtube
Linkedin
Google+

13
39
[Source: Emarketer]

Where Advertising agencies are planning to spend their Money in 2012?

1933312 | OBU RAP: Analysis of Google Inc......

b) Chrome OS
Google Chrome OS is being created for people who spend most of their time on the Web, and is
being designed to power computers ranging from small net-books to full-size desktop systems. The
operating systems that browsers run on were designed in an era where there was no Web.
Microsoft believes new Web services will work in tandem with software installed on the computer,
a vision that differs from Google's which advocates services delivered over the Web to eventually
replace software that resides on local PCs. This is indeed a great opportunity for Google to expand
and assert itself on the market because their new operating system. There is plenty of business
opportunity for Google in this market (Bloomberg, 2009).

c) Fast growing Android OS demand/Mobile Market

Estimates indicate that Google is generating $7 per year from each Smartphone (and tablet). This
includes both search and display advertising in mobile apps on both Android and iOS (iPhones and
iPads). Thanks to the rapid growth in active smart mobile devices worldwide from an estimated
509 million last year to an estimated 914 million in 2012, Googles mobile ad revenues are expected
to more than double from an estimated $2.5 billion last year to $5.8 billion in 2012. As a
percentage of Googles total revenues, it is estimated that mobile grew from 3 percent in 2010 to 7
percent last year and will almost double again to 13 percent in 2012 (TechCrunch, 2012).

Google could see gains from synergies between Android and Motorolas Smartphone/tablet
business. It is expected the Google Motorola combination to become a major player in the
hardware space going forward (Forbes, 2012).
Mobile devices are increasingly being adopted to perform online activities which were earlier
reserved for PC's.

d) Growing demand for online video

Online video has reached critical mass among US internet viewers. A study predicted 169 million
people, or 71% of US internet users, will be watching online video each month by the end of 2012.
Such a healthy, size-able audience cant help but capture advertiser attention. It is estimated US
online video ad spending will enjoy an aggressive 40% year-over-year increase from 2011, topping
$3.1 billion in 2012 (eMarketer, 2011). This is where YouTube comes in.

1933312 | OBU RAP: Analysis of Google Inc......

14

For advertisers today, its about context, not content. YouTube is focusing on the kind of ads that
appear as a short video advertisement that is played before the video you selected called the preroll video advertising, and has become the fastest growing and most effective way of advertising
online (Wired, 2012). A recent study by Break Media predicted that the dominant video formats in
year 2012 will be pre-roll and mobile video. 63% of advertisers plan to buy pre-roll ads this year
and about 55% plan to use mobile video ads, up from 39% last year (Media Post, 2012).
Internet penetration still remains low in countries like India, staying much under the 30% mark.
This suggests an enormous potential to expand internet access, especially in semi-urban and rural
areas. Consequently, YouTube users could see a direct upside as this penetration improves.

4. Threats
a) Legal threats
Quite possibly the biggest threat to Google is the considerable amount of money it must spend in
defending itself in court. The outcome of these costly litigation processes is typically an equally
costly settlement or ruling that royalties must be paid. Regardless of the outcome, such legal
proceedings can have an adverse impact on it because of legal costs, diversion of management
resources, and other factors (Google Financial Statements, 2011).
Android partners have been subjected to a lot of patent injunctions recently, especially from Apple,
which has pushed sales bans of Android based smart-phones and tablets in various regions. A
recent example is the sales ban on the Samsung Galaxy 10.1 tablet in Europe. The tablet has also
been subjected to a sales ban in Australia for the lucrative Christmas shopping season. Any such
sales bans may directly reduce the scale of Android devices sold, thereby reducing the Android's
market share (Time 2012).

b) Severe Competition
Competition is always a threat, but in Googles case, intense competition comes from new sources
each day. And the costs of remaining competitive could add up quickly. Google is targeted by
competition in its search business, social networking business and application business by the
biggest names in technology; Oracle, Microsoft, Facebook and Apple. Additionally, smaller,
emerging start-ups could innovate quicker and provide services quicker than Google.

c) Alternate ways to Search

Apple's voice-enabled search tool Siri has found a lot of favour with users, as it provides an even
simpler and hands-free approach towards web search. While still not a credible threat, Siri could be
paving the way for voice-enabled search becoming the norm, and Google might need to follow suit
with its own version.

d) Potential Economic Downturn

Expenditures by advertisers tend to be cyclical, reflecting overall economic conditions and
budgeting and buying patterns. Adverse economic conditions can have a material negative impact
on the demand for advertising and cause the advertisers to reduce the amounts they spend on
advertising, which could negatively impact its revenues and business.
Although Google's earning's defied the Economic downturn of 2007-08 but some analysts noted
that Google's growth did slow from the previous quarter and said the results did not completely
dispel concerns about the health of Google's business in the United States. Google's performance in
the International market improved its overall results.

1933312 | OBU RAP: Analysis of Google Inc......

15

Ratio Analysis
Financial ratio analysis is one of the most popular financial analysis techniques for companies and
particularly small companies. However despite usefulness, financial ratio analysis has some
disadvantages. Some key demerits of financial ratio analysis are:
Financial accounting information is affected by estimates and assumptions. Accounting
standards allow different accounting policies, which impairs comparability and hence ratio
analysis is less useful in such situations.
Companies can use Window Dressing to Manipulate Their Financial Statements
Companies' Balance Sheets are distorted by Inflation
Ratio analysis explains relationships between past information while users are more
concerned about current and future information.

Sales
The sales revenue increased by almost 60% from $23.65 Billion in the year 2009 to $37.90 Billion
in 2011. The continuous increase in revenues from 2009 to 2011 resulted primarily from an
increase in advertising revenues generated by Google websites and Google Network Members
websites. The increase in advertising revenues for Google websites and Google Network Members
websites resulted primarily from an increase in the number of paid clicks through the advertising
programs and, to a lesser extent, an increase in the average cost-per-click paid by the advertisers.
The increase in the number of paid clicks generated through the advertising programs was due to
an increase in aggregate traffic, certain monetization improvements including new ad formats, and
the continued global expansion of its products, and its advertiser and user base, as well as an
increase in the number of Google Network Members. The increase in the average cost-per-click
paid by the advertisers was primarily driven by the increased spending from advertisers and a
general weakening of the U.S dollar compared to foreign currencies (primarily the Euro, Japanese
yen, and British pound)[ Google Annual accounts, 2009-11].
Aggregate paid clicks on Google websites and Google Network Members websites increased
approximately 25% from 2010 to 2011 and approximately 16% from 2009 to 2010. Average costper-click on Google websites and Google Network Members websites increased approximately 3%
from 2010 to 2011 and 5% from 2009 to 2010.

16

1933312 | OBU RAP: Analysis of Google Inc......

Profitability ratios

a) Gross profit Margin

Company
Google
Microsoft
Yahoo
Industry

2009 (%)
63
79
56
-

2010 (%)
64
80
58
-

2011 (%)
65
78
70
65

Source: MSN Money

The Gross profit margins have remained fairly consistent from one year to the next. The figure for
2011 exactly matches the industry average. The Profits Google realize on revenues generated from
ads placed on their Google Network Members websites through their Adsense program are
significantly lower than the Profits they realize from revenues generated from ads placed on
Google's websites. This is because most of the advertiser fees from ads served on Google Network
Members websites is shared with their Google Network Members. For the past five years, growth
in advertising revenues from their own websites has generally exceeded that from the Google
Network Members websites. This can be one of the reasons for the consistent gradual increase in
the GPM.

b) Operating Profit Margin

There is a slight decrease (11%) in the Operating profit margin for the year 2011. The industry
average and some of the competitors are ahead from OPM of Google. This was largely due to the
increase in Operating costs such traffic acquisition costs TAC, data centre costs, content acquisition
costs, credit card and other transaction fees, and other costs.
Competition is steadily rising in the online advertising space, with other large tech companies like
Amazon also pushing their respective ad businesses to improve margins. This may raise TAC for
Google, putting downward pressure on margins.

Company
Google
Microsoft
Yahoo
Industry

2009 (%)
35
36
6
-

2010 (%)
35
39
12
-

2011 (%)
31
39
16
34

Source: MSN Money

1933312 | OBU RAP: Analysis of Google Inc......

17

c) Net Profit Margin

2 009

2 01 0

2 01 1

Rev en u e ($B)
Net Pr ofit ($B) NPM (%) Rev en u e ($B) Net pr ofit ($B)NPM (%) Rev en u e ($B)Net pr ofit ($B)
NPM (%)
Goog le

23650

6520

2 7 .5 6 9

29321

85 05

2 9 .007

3 7 9 05

97 37

2 5 .6 9

Micr osoft

5 843 7

14569

2 4 .9 3 1

62484

1 87 60

3 0.02 4

69943

23150

3 3 .1

6460

598

9 .2 5 7

6324

1231

1 9 .4 6 6

4984

1 04 8

2 1 .03

Y a h oo
In du st r y

23

Calculation of three- Year NPM on a spreadsheet [Source: Google Finance]

NPM is almost identical for the years 2009 and 2010 but it showed a decrease in the year 2011.
Although the NPM is still above the industry average but it still needs due consideration. This
decrease can be attributed to a number of reasons. In connection with a resolution of an
investigation by the United States Department of Justice into the use of Google advertising by
certain advertisers, it accrued $500 million during the three months ended March 31, 2011, which
was paid in August 2011 upon final resolution of that matter. Sales and marketing expenses
increased $1,790 million from 2010 to 2011. The Sales and marketing expenses as a percentage of
revenues were 8.4%, 9.5% and 12.1% for the Year 2009, 2010 and 2011 respectively.

d) ROCE

Company
Google
Microsoft
Yahoo
Industry

2009 (%)
22
3
42
-

2010 (%)
22
6
40
-

2011 (%)
18
6
34
19

Source: MSN Money

The decreasing NPM trend has been translated to the ROCE of Google for the year 2011. The
Return on Capital employed was the same (22%) for the years 2009 & 2010. Although the industry
ROCE is almost the same as Google's for the year 2011, still efforts are needed to put it to get it back
on track.

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1933312 | OBU RAP: Analysis of Google Inc......

Liquidity ratios

Ratios
Current
ratio
Quick ratio

2009
10.61

Google
2010
4.15

2011
5.91

Microsoft
2011
2.6

Yahoo
2011
2.85

Industry
2011
4.6

10.61

4.15

5.91

2.55

2.85

2.3

Source: MSN Money

Note: The inventory value for almost all companies was zero therefore the Current and Quick ratios are
almost same.

The Current ratio has decreased in 2010 from what it was in 2009. However it again got increased
in 2011. This ratio is still very high, beating all the Competitors and Industry average. However, a
high ratio may indicate poor working capital management, due to excessive amounts of cash in the
bank, earning low rates of interest (or possibly no interest at all). Google had more than $5 billion
of Cash and Equivalents at the year end 2011. This amount is a big amount and it needs to be
managed well, financially.

Current ratios for the year 2011

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1933312 | OBU RAP: Analysis of Google Inc......

Efficiency ratios

Ratios
Asset
Turnover
Receivables
Turnover

2009
0.81

Google
2010
0.7

7.5

2011
0.71

Microsoft
2011
2

Yahoo
2011
0.43

Industry
2011
0.7

4.5

4.8

9.5

Source: MSN Money

There is no exact number that determines whether a company is doing a good job of generating
revenue from its investment in fixed assets. it's important to determine the type of company that
you are using the ratio on. Fixed assets vary greatly among companies. For example, an internet
company, like Google, has less of a fixed-asset base than a heavy manufacturer like Caterpillar.
Obviously, the fixed-asset ratio for Google will have less relevance than that for Caterpillar. Still the
Asset Turnover ratio for Google is identical to that of the Industry average.
The Receivables Turnover ratio is impressive as compared to its Competitors However it is slightly
below the Industry average. High Receivables Turnover ratio implies the extension of credit and
collection of accounts receivable is efficient. However there is still a lot of room for improvement.

Gearing ratios
Google
Ratios
Gearing
Interest cover

2009
0.90%
-

2010
19.00%
-

2011
15.00%
200

Microsoft
2011
17.00%
55

Yahoo
2011
0.30%
-

Source: MSN Money

In recent years, at least until the credit crunch in 2008, some companies deliberately increased
their financial gearing by borrowing more. Some companies borrowed and used the money to buy
back and cancel equity shares. This is the Case with Google too. In 2009 its Gearing level is 0.90%
and by the end of 2010, 19% of its Capital is Debt capital.
The reasons for this have been,
A confidence that the annual profits (PBIT) of the company will be stable or will increase, and
The comparatively low cost of debt compared with the cost of equity.
Higher gearing meant that if profits before interest continued to rise, EPS would rise at an even
faster rate. Increasing financial gearing was therefore a way of increasing EPS.
Interest cover is a measure of the security of the interest payments. The very high interest cover
suggests a sensible financing structure. It also suggests that gearing could safely be increased, and
that the company should borrow more low-cost debt instead of higher-cost equity.

1933312 | OBU RAP: Analysis of Google Inc......

20

Investor ratios
a) Share price trends
Price of Google Inc's shares from Jan 2009 to Dec 2011

Source: Yahoo Finance, 2012

The two Charts are self-explanatory. It shows the immense growth in the share prices of Google Inc
starting at $325 per share at 2 Jan 2009 and closing at $630 per share at 31 Dec 2011. The share
prices almost doubled. However the Share prices of both of its Competitors remained almost the
same at the start of 2009 and at the end of 2011.
Comparative analysis of Google, Microsoft and Yahoo

Source: Google Finance, 2012

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1933312 | OBU RAP: Analysis of Google Inc......

b) EPS

Ratios
EPS
P/E

2009
20.41
24.1

Google
2010
26.31
24.6

2011
31.23
20.3

Microsoft
2011
2.69
9.6

Yahoo
2011
0.83
18.6

Source: MSN Money

The Earnings per Share figure for all the three years under Consideration is impressive. The
Earnings grew by 29% in 2010 and 19% in 2011. The faster a company grows its earnings, the faster
its stock price increases, and the higher it can go. The figures for its Competitors are very bleak.
Google's performance in this area is stand out. However changes in the EPS growth rate may
influence stock prices more than the actual rate of growth. Acceleration in EPS growth will usually
result in a stock price increase. While a deceleration in a companys EPS growth can result in a
stock price drop. The Earnings growth rate has decreased slightly in 2011 but Overall EPS figures
will be quite delightful for the investors.
Although there was a decrease in the P/E ratio for the year 2011. The price to earnings ratio of
Google is still quite high than that of its Competitors. This indicates the stock markets belief that
the company will grow and investors are willing to pay a high P/E multiple to buy the shares.

Three-year comparative EPS figures (in $s)

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1933312 | OBU RAP: Analysis of Google Inc......

Conclusion
Advertising transactions continue to shift from offline to online as the digital economy evolves.
This has contributed to the rapid growth of Google's business since inception, resulting in
substantially increased revenues. And it is expected that Google will continue to grow. According to
GroupM, a leading global media investment Consultancy, Global digital ad spending is expected to
reach $98.2 billion in 2012, and is expected to grow at 16 percent annually.
However, the revenue growth rate has generally declined over time, and it could do so in the future
as a result of a number of factors, including increasing competition. Even its core business, search,
doesn't look too great - it's becoming stuffed with spam as many of us migrate to social networks,
and Facebook attempts to annex the entire internet.
The unstoppable rise of smart-phones and tablets will see 1.2 billion of the devices being bought
worldwide in 2013, analyst Gartner is predicting. On the Smartphone side, Gartner is forecasting a
win for Android in the enterprise estimating that more than half (56 percent) of smart-phones
purchased by businesses in North America and Europe will be Android devices in 2016, up from
around a third (34 percent) in 2012 and virtually no penetration back in 2010. This is going to be
a huge market and Google will get hold of precious Real estate via its Android platform
(TechCrunch, 2012). However Android revenues are still tiny. Googles Android profits were
around $600 million in 2011. Compare that with Apples earnings of $33 billion, which mostly
came from iPhone and iPad sales.
The latest forecasts suggest that the mobile advertising market worldwide will be worth $11.5billion
per annum by 2015 (Juniper Research). According to Google's own figures, 96 per cent of its
revenues currently come from the combination of display advertising and search ads, so it's no
wonder that the firm continues to invest in these two key products.
With the Acquisition of Motorola, Google is now officially Hardware Company too. It will be
interesting to see how Google integrate Motorola into its Strategy and achieve Synergies. With the
acquisition, hardware will now account for a significant portion of Googles revenues. However as
Google expand its advertising programs and other products to international markets; it continues
to increase its exposure to fluctuations in foreign currency to U.S. dollar exchange rates. The
Company is fighting various cases on the legal front, whose results can be drastic too.
The key to Google's strategy is that it doesn't really have a formal strategy. Google encourages
innovation through emergence. It doesn't have a strategic master-plan with investors or clients,
which for some is a source of confusion or frustration. The resulting mesh of products is
exceptionally strong in some places, but loose and ragged in others.
The company is facing challenges, certainly, but Google remains one of the world's biggest, richest,
smartest and most innovative companies. This is what makes Google Google: its physical network,
its thousands of fibre miles, and those many thousands of servers that, in aggregate, add up to the
mother of all clouds. This multibillion-dollar infrastructure allows the company to index 20 billion
web pages a day. To handle more than 3 billion daily search queries. To conduct millions of ad
auctions in real time. To offer free email storage to 425 million Gmail users. To zip millions of
YouTube videos to users every day. To deliver search results before the user has finished typing the
query. Google is placing big bets to ensure it's as relevant in 2020 as it is today.

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1933312 | OBU RAP: Analysis of Google Inc......