Google 2007 Annual Report Download - page 55

Checkout. Further, cash ultimately paid to merchants under Google Checkout promotions, including cash paid to
merchants as a result of discounts provided to consumers on certain transactions processed through Google Checkout, is
accounted for as an offset to revenues.
In the third quarter of 2007, we acquired Postini, a provider of electronic communications security, compliance, and
productivity software. We recognize as revenue the fees we charge customers for hosting enterprise applications and
services ratably over the terms of the service arrangements.
Trends in Our Business
Our business has grown rapidly since inception, resulting in substantially increased revenues, and we expect that our
business will continue to grow. However, 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. In addition, the main focus of our advertising programs is to provide relevant and useful
advertising to our users, reflecting our commitment to constantly improve their overall web experience. As a result, we
may continue to take steps to improve the relevance of the ads displayed on our web sites and our Google Network
members’ web sites. These steps include removing ads that generate low click-through rates or that send users to
irrelevant or otherwise low quality sites and terminating Google Network members whose web sites do not meet our
quality requirements. In addition, we may continue to take steps to reduce the number of accidental clicks. These steps
could negatively affect our near-term advertising revenues. Both seasonal fluctuations in internet usage and traditional
retail seasonality have affected, and are likely to continue to affect, our business. Internet usage generally slows during the
summer months, and commercial queries typically increase significantly in the fourth quarter of each year. These seasonal
trends have caused and will likely continue to cause, fluctuations in our quarterly results, including fluctuations in
sequential revenue and paid click growth rates.
From the inception of the Google Network in 2002 through the first quarter of 2004, the growth in advertising
revenues from our Google Network members’ web sites exceeded that from our web sites, which had a negative impact on
our operating margins. The operating margin we realize on revenues generated from ads placed on our Google Network
members’ web sites through our AdSense program is significantly lower than the operating margin we realize from
revenues generated from ads placed on our web sites because most of the advertiser fees from ads served on Google
Network member web sites are shared with our Google Network members. However, 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.
This trend has had a positive impact on our operating margins, and we expect that this will continue for 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.
We are heavily investing in building the necessary employee and systems infrastructures required to manage our
growth and develop and promote our products and services, and this may cause our operating margins to decrease. We
have experienced and expect to continue to experience substantial growth in our operations as we build our research and
development programs, expand our base of users, advertisers, Google Network members and content providers and
increase our presence in international markets. Also, we have acquired and expect to continue to acquire businesses and
other assets from time to time. These acquisitions generally enhance the breadth and depth of our expertise in engineering
and other functional areas, our technologies and our product offerings. In addition, we are incurring significant costs and
expenses to support our Google Checkout product and promote its adoption by merchants and consumers, as well as
promote the distribution of certain other products, including the Google Toolbar. Our headcount growth has required us
to make substantial investments in property and equipment. Our full-time employee headcount has significantly increased
over the last 12 months, growing from 10,674 at December 31, 2006 to 16,805 at December 31, 2007, and we also utilize a
significant number of temporary employees. We also expect to continue to make significant capital expenditure
investments, including information and technology infrastructure and corporate facilities. In April 2007, we launched our
employee transferable stock option (TSO) program. We modified employee options to allow them to participate in this
program, and as a result we incurred a modification charge of approximately $95 million in 2007 related to vested options,
and we expect to incur an additional modification charge of approximately $134 million related to unvested options over
41