Google 2008 Annual Report Download - page 58

We continue to invest 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 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. Our full-time employee headcount has increased over the last 12 months, growing from 16,805 at
December 31, 2007 to 20,222 at December 31, 2008. We have recently made efforts to improve the discipline of
our hiring process and to focus on better managing our expense growth. However, we expect to continue to invest
in our business, and this may cause our operating margins to decrease.
We expect our cost of revenues to continue to increase in dollars and may increase as a percentage of
revenues in 2009 and in future periods, primarily as a result of forecasted increases in traffic acquisition costs,
data center costs and credit card and other transaction fees, as well as content acquisition costs. In particular,
traffic acquisition costs as a percentage of advertising revenues may increase in the future if we are unable to
continue to improve the monetization or generation of revenue from traffic on our web sites and our Google
Network members’ web sites, particularly with those members to whom we have guaranteed minimum revenue
share payments.
Our international revenues have grown as a percentage of our total revenues to 51% in 2008 from 48% in
2007. This increase in the portion of our revenues derived from international markets results largely from
increased acceptance of our advertising programs, increases in our direct sales resources and customer support
operations and our continued progress in developing localized versions of our products in these international
markets, as well as an increase in the value of the Euro, the Japanese yen and other foreign currencies relative to
the U.S. dollar in 2008 compared to 2007. The increase in the proportion of international revenues derived from
international markets increases our exposure to fluctuations in foreign currency to U.S. dollar exchange rates. For
example, in the fourth quarter of 2008, the strengthening of the U.S. dollar relative to other foreign currencies
(primarily the Euro and the British pound) had an unfavorable impact on our international revenues. We have a
foreign exchange hedging program that is designed to reduce our exposure to fluctuations in foreign currencies,
however this program will not fully offset the effect of fluctuations on our revenues and earnings.
Recent Developments
On February 3, 2009, we commenced an exchange offer to allow employees the opportunity to exchange all
or a portion of their eligible outstanding stock options for the same number of new options. We expect that new
options will have an exercise price equal to the closing price per share of our common stock on March 6, 2009 and
that stock options with exercise prices above this closing price will be eligible for the exchange offer. Generally, all
employees with options are eligible to participate in the program (Eric Schmidt, Sergey Brin, and Larry Page do not
hold options). The exchange offer is currently set to expire at 6 a.m. Pacific Time on March 9, 2009.
The number of common shares subject to outstanding options will not change as a result of the exchange
offer. New options issued as part of the exchange offer will be subject to a new vesting schedule which adds 12
months to the original applicable vesting dates. In addition, new options will vest no sooner than six months after
the close of the offer period.
We expect to take a modification charge of approximately $400 million over the vesting periods of the new
options which will range from six months to five years. Assuming our exchange offer proceeds according to our
planned timeline, this modification charge will be recorded as additional stock-based compensation beginning in
the first quarter of 2009. This modification charge is estimated assuming an exchange price of approximately
$350 and that all eligible underwater options will be exchanged, and the actual amount of the modification charge
is likely to be different from the estimate provided above.
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