Mail Stop 4561
July 11, 2006
Eric Schmidt
Chief Executive Officer
Google Inc.
1600 Amphitheatre Parkway
Mountain View, California 94043
Re: Google Inc.
Form 10-K for the Fiscal Year Ended December 31, 2005
Forms 10-Q for Fiscal Quarters Ended
March 31, 2005, June 30, 2005, September 30, 2005
and March 31, 2006
Forms 8-K filed January 31, 2006 and April 20, 2006
Definitive Proxy Statement on Schedule 14A
Filed on March 31, 2006
File No. 000-50726
Dear Mr. Schmidt:
We have reviewed the above referenced filings and have the
following comments. Where indicated, we think you should revise
your
document in response to these comments. If you disagree, we will
consider your explanation as to why our comment is inapplicable or
a
revision is unnecessary. Please be as detailed as necessary in
your
explanation. In some of our comments, we may ask you to provide
us
with information so we may better understand your disclosure.
After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We note that you have filed a confidential treatment request,
Control No. 18573. Please be advised that we are processing this
request. Correspondence will follow under separate cover in the
near
future.
Form 10-K for the year ended December 31, 2005
Item 1. Business, page 1
General
2. We note that you entered into a letter agreement with AOL on
December 20, 2005 that established a commercial relationship
between
Google and AOL. Please revise to provide a materially complete
discussion of this agreement, including the rights and obligations
of
both parties and the plans for joint development of future
products.
Also, disclose the duration of the agreement and the monetary
arrangements agreed upon, including the arrangements made
regarding
advertising revenue. See Item 101(c)(1)(ii) of Regulation S-K.
Overview, page 1
3. We note that "Google Network" is a defined term within your
"Business" section. Please revise to define this term the first
time
it is used.
Our Advertisers, page 3
4. You disclose on page 3 that AdWords enables advertisers to
"deliver relevant ads targeted to search queries or web content"
and
it "provides advertisers with a cost-effective way to deliver ads
to
customers across Google Sites and through the Google Network."
You
also disclose on page 10 that AdWords "enables advertisers to
present
ads to people when those people are looking for information
related
to what the advertiser has to offer." Please expand your
disclosure
to further describe how the Adwords program works in conjunction
with
your products and services, such as Google WebSearch, Google
Groups,
Google Desktop and Gmail. In this regard, explain how
advertisements
of those participating in the AdWords Program are utilized in each
of
your products. Are advertisements from your AdWords program
concentrated in Google WebSearch?
Products and Services, page 5
Google AdSense, page 11
5. Please expand your disclosure to further explain the AdSense
for
search program. For example, how do Google Network web sites
present
the ads of AdWords program participants? Is this program an
adaptation of the AdWords program that allows advertisements to be
displayed on the web sites of Google Network members? Are the
Google
Network web sites that participate in the AdSense program required
to
use Google WebSearch on their sites? If they do not use Google
WebSearch how does AdSense function? Examples may be helpful to
further explain your product/service.
6. See the immediately preceding comment. Revise to further
explain
AdSense for content and the concept of "serving relevant AdWords
ads
targeted to web content." Similarly, explain how your "automated
technology analyzes the meaning of web content and serves relevant
advertising." When viewing the web site of a Google Network
member,
how are AdWords` ads presented? As we previously noted, examples
may
be helpful to further explain this product/service.
Google Enterprise, page 12
7. We note that Google Search Appliance starts at $30,000 and
Google
Mini starts at $2,995. Please revise to more clearly
differentiate
these products.
Intellectual Property, page 15
8. We note your statement that "[a]s we face increasing
competition,
the possibility of intellectual property claims against us grows."
It appears that you have been and are subject to claims in France,
Germany, the United States, Israel, Italy and Austria. Please
revise
to discuss more than merely the "possibility" of such claims, and
provide appropriate disclosure of these claims, as material.
Item 3. Legal Proceedings, page 38
9. For each of the claims discussed in this section, please
provide
all the information required by Item 103 of Regulation S-K, or
provide us with an analysis as to why the requirements of this
Item
are not applicable. In addition, please discuss the class-action
lawsuit in Arkansas, as discussed on page 49, or tell us why
disclosure is not required.
Item 7. Management`s Discussion and Analysis of Financial
Condition
and Results of Operations, page 43
How We Generate Revenue, page 44
10. We note that Google Network members receive "most" of the
advertiser fees. We also note that the "click-wrap" agreements
contain provisions that require Google to share "a portion of the
advertiser fees . . . ." To the extent possible, please revise to
quantify the terms "most" and "a portion" as it applies to your
"uniform revenue share terms." You may quantify in terms of a
percentage.
Revenue, page 48
11. You discuss "certain improvements in the monetization of
traffic
on [y]our web sites" on the top of page 49. Please revise to
disclose a materially complete discussion of the referenced
"improvements."
12. Your tabular analysis quantifies the increase in advertising
revenue recognized from your web sites and Google network web
sites
separately. We note fluctuations in each sources contribution to
total revenue over the three years presented. However, you
discuss
the reasons for the increase in advertising revenue on an
aggregate
basis. Tell us what consideration you gave to separate discussion
of
the reasons for the fluctuations in advertising revenue recognized
from your web sites and network web sites. Tell us what
consideration you gave to viewing separate discussion of the two
web
site revenue sources results as key variables or factors used to
manage the business. If this information is material to
investors,
it would appear to be required disclosure pursuant to the
Commissions` "Guidance Regarding Management`s Discussion and
Analysis
of Financial Condition and Results of Operations" Release No. 33-
8350, Section III. B. 1.
13. We note your disclosure, "[t]he advertising revenue growth
resulted primarily from increases in the total number of paid
clicks
and ads displayed through [your] programs, rather than from
changes
in the average fees realized." Tell us your consideration of
disclosing the extent to which increases in revenues are
attributable
to increases in the number of paid clicks, ads displayed, changes
in
the average fees realized and the introduction of new programs
(e.g.
the AdWords cost-per-impression program that you introduced in the
second quarter 2005) pursuant to Regulation S-K, Item 303(a) (3)
(iii).
14. Your revenues appear to be significantly impacted by the total
number of paid clicks and ads that are displayed through your
programs. Tell us whether you consider the number of clicks and
ads
displayed to be key indicators of your financial condition and
operating performance as addressed in SEC Release 33-8350, Section
III.B.1. If so, tell us your consideration for disclosing such
key
indicators pursuant to this release.
Liquidity and Capital Resources, page 60
15. We refer you to the discussion of your statement of cash
flows.
Rather than restating the information that is available on the
face
of the statement of cash flows, revise to also disclose the
underlying drivers of the increased cash flows. For example,
although you disclose that investing activities increased due to
the
purchases of marketable securities, capital expenditures and cash
consideration used in acquisitions and other investments, it is
unclear what drove the increase of each of these investing
activities.
16. Please expand the discussion regarding your anticipated
increase
in investing activities in 2006. What is the basis for your
belief
that you will be increasing your investment in property and
equipment, such as information technology infrastructure and land
and
buildings? Also, please revise to disclose whether you have any
plans,
proposals or arrangements to enter into any extraordinary
transactions, such as acquisitions, other than those disclosed on
pages 61 and 62.
17. We note that Google agreed to purchase a five percent indirect
equity interest in AOL for $1.0 billion in cash. Please expand
your
liquidity section to address the impact of this expenditure. In
this
regard, we note that your existing cash, cash equivalents,
marketable
securities and cash generated from operations will be sufficient
to
satisfy your current and anticipated cash requirements through at
least the next 12 months. Also, what consideration was given to
including this expenditure in your "Contractual Obligations"
table?
See Item 303(a)(5) of Regulation S-K.
Critical Accounting Policies and Estimates, page 63
Incentive Stock Options, "Disqualifying Dispositions", page 66
18. We note your disclosure, "[you] have applied the portfolio
method
to determine the portion of this benefit that is recorded as a
reduction to [your] provision for income taxes as it is more
practicable than the alternative individual award method."
Clarify
why you believe that the provisions of APB Opinion 25, Accounting
for
Stock Issued to Employees, provide for a choice between these
alternatives when accounting for the income tax benefit resulting
from disqualifying dispositions. Additionally, clarify how
applying
the `portfolio method` complies with APB Opinion 25, paragraph 17,
considering you have six stock option plans active at December 31,
2005.
Consolidated Statements of Income, page 74
19. Tell us what consideration you have given to the two-class
method
for computing basic and fully diluted earnings per share for each
of
your issued and registered Class A and Class B common stock. Tell
us
what consideration you gave to presenting Class A common stock on
a
fully diluted "if converted" basis reflecting the conversion of
Class
B common stock into Class A common stock. We refer you to SFAS
128,
Earnings per Share, paragraphs 60 and 61 and EITF 03-6,
Participating
Securities and the Two-Class Method under FASB Statement No. 128,
paragraph 1.
Note 1. Google Inc. and Summary of Significant Accounting
Policies,
page 77
Revenue Recognition, pages 77-78
20. Your advertising revenue recognition policy focuses on how you
determine the delivery criterion is met, i.e. that services have
been
rendered. Tell us how you evaluate and how your disclosure
addresses
the other basic criteria of SAB Topic 13, Revenue Recognition,
when
determining that revenue is realized or realizable and earned.
21. For your search services that are included with certain of
your
AdSense agreements you disclose that you have separate units of
accounting for search services and revenue share arrangements.
Please tell us how these delivered items meet the separate unit of
accounting criteria under paragraph 9 of EITF 00-21, Revenue
Arrangements with Multiple Deliverables.
22. You disclose that you recognize revenue from fees from the
sale
and license of your Search Appliance, which includes hardware,
software and 12 to 24 months of postcontract support in accordance
with Statement of Position 97-2, Software Revenue Recognition, as
amended. Please tell us how you recognize revenue and have
established VSOE of fair value for the deliverables in
arrangements
where the fee is not recognized ratably over the term of the post-
contract support arrangement.
23. Your disclosure on page 10 indicates you charge a $5.00 sign-
up
fee for becoming an AdWords advertiser. Tell us when you
recognize
revenue from such up-front fees. In this respect, tell us your
consideration of SAB Topic 13, Section A.3.f when determining the
appropriate time to recognize such fees. In addition, tell us
your
consideration of disclosing your accounting policy for such up-
front
fees pursuant to SAB Topic 13.B.
Accounting for the Costs of Computer Software Developed or
Obtained
for Internal Use and Sold to Others
24. Your disclosure on pages 46 and 52 indicates you incur
research
and development costs related to your systems infrastructures.
You
also disclose that you sell software related to your Search
Appliance
sales. It appears you incur costs of computer software developed
or
obtained for internal use as well as for sale to others. Please
tell
us how your accounting for such costs complies with SOP 98-1
Accounting for Costs of Computer Software for Internal Use and
SFAS
86, Accounting for the Costs of Computer Software to Be Sold,
Leased,
or Otherwise Marketed. In addition, tell us what consideration
you
gave to disclosures required by paragraph 41 of SOP 98-1,
paragraph
13 of SFAS 2 paragraphs 11 and 12 of SFAS 86 and SOP 94-6.
Note 8. Commitments and Contingencies, page 93
AdSense Agreements, page 94
25. Your disclosure states you enter into non-cancelable
guaranteed
minimum revenue guarantees in connection with your AdSense
agreements. Tell us whether you apply the recognition and
measurement provisions of FIN 45, Guarantor`s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees
of Indebtedness of Others, to such agreements pursuant to
paragraphs
8 through 12 of FIN 45. In addition, tell us whether the
application
of FIN 45-3, Application of FASB
Interpretation No. 45 to Minimum Revenue Guarantees Granted to a
Business or Its Owners, will impact your accounting.
Other Legal Matters, page 95
26. We note your disclosure that certain companies have filed
trademark infringement and copyright claims against you. Tell us
what consideration you gave to disclosing the information required
by
SFAS 5, Accounting for Contingencies, paragraphs 9 and 10 for each
claim. For example, your disclosure states you have been held
liable
for certain trademark infringement and related claims in France.
However, you do not provide disclosure with respect to the nature
of
the individual claims, the amount to which you are liable, whether
an
accrual has been made, or the amount of accrual, if applicable.
In
addition, please explain why for ongoing claims for which you are
currently in litigation and an accrual has not been made, you do
not
disclose an estimate of the possible loss or range of loss or
state
that such an estimate cannot be made.
27. We note, based on your disclosure on pages 49 and 53, a class-
action lawsuit has been filed against you that will require you to
issue AdWord credits for a total of up to $90 million. Tell us
what
consideration you gave to providing footnote disclosure of this
loss
contingency pursuant to SFAS 5, paragraph 9 or 10 and whether you
have accrued an estimated loss from this loss contingency pursuant
to
SFAS 5, paragraph 8. In addition, we note you will most likely
expense attorney fees in the first quarter of 2006. Tell us your
accounting policy for legal costs expected to be incurred in
connection with a loss contingency and your consideration for
disclosing such policy; we refer you to EITF Topic No. D-77,
Accounting for Legal Costs Expected to Be Incurred in Connection
with
a Loss Contingency.
Note 13. Information about Geographic Areas, page 99
28. Clarify how you determined that you have one operating segment
based on the guidance of SFAS 131, Disclosures about Segments of
an
Enterprise and Related Information, paragraphs 10 through 15. In
this respect, we note your chief operating decision-makers review
the
results of your geographic regions for purposes of allocating
resources and evaluating financial performance. Therefore, it
appears that your geographic regions are components of your
enterprise that meet the definition of separate operating segments
pursuant to SFAS 131, paragraph 10. If this is correct, tell us
why
you believe the absence of segment managers would require you to
aggregate your operating segments into one segment.
Note 14. Subsequent Events, page 100
Investment in America Online, Inc., page 100
29. We note your disclosure, "At the time [you] entered into the
Letter Agreement, [you] also agreed to enter into certain arms-
length
commercial agreements with AOL pursuant to the Letter Agreement."
Explain the main provisions of these commercial agreements and
tell
us your consideration for disclosing such provisions. In
addition,
we cannot locate the Letter Agreement in your exhibits. Please
refer
us to the exhibit number or file the Letter Agreement as an
exhibit
accordingly.
Forms 10-Q for the Quarterly Periods Ended March 31, 2005, June
30,
2005, September 30, 2005 and Form 8-K filed January 31, 2006
Provision for Income Taxes
Prior Comment Number 1
30. We note the portion of your response addressing your effective
rate for the first quarter of 2005, which states, in part, that
you
determined the reduction to your provision for income taxes
resulting
from disqualifying dispositions of certain incentive stock options
was considered a "significant unusual or infrequently occurring
item"
as set forth in paragraph 5.a of FASB Interpretation No. 18,
Accounting for Income Taxes in Interim Periods. Please clarify
how
you determined that these tax benefits are unusual in nature or
occur
infrequently. As part of your response, please address the
following:
* If you determined that these tax benefits are unusual in nature,
clarify how the criteria of paragraphs 20.a and 21 of APB Opinion
No.
30, Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual
and
Infrequently Occurring Events and Transactions, have been met.
Specifically, explain why you believe the accounting for tax
benefits
from disqualifying dispositions of incentive stock options is
clearly
unrelated to, or only incidentally related to, your ordinary and
typical activities when it appears that you use share-based
payments
as a significant means to compensate employees.
* If you determined that these tax benefits occur infrequently,
clarify how the criteria of paragraphs 20.b and 22 of APB Opinion
No.
30 have been met. In this respect, we note your disclosure on
page
66 of your Form 10-K for the fiscal year ended December 31, 2005,
which indicates that you have accounted for the impact of
disqualifying dispositions in fiscal year 2004 and 2005, not just
in
the first quarter of fiscal year 2005.
31. We note your response, which indicates, in part, your internal
projections of your effective rate fluctuated between 27% and 28%
through the third quarter of 2005. We further note your actual
effective rate through the six months ended June 30, 2005 was
approximately 25.2%. Clarify why you did not revise your rate at
the
end of the second quarter of 2005 to reflect your best current
estimate of the annual effective rate pursuant to FASB
Interpretation
No. 18, paragraph 8.
32. We note the reconciliation of your estimated annual effective
rate of approximately 28%, based on third quarter 2005 internal
forecast, to your actual rate of 31.6%. Your response indicates,
a
portion of the increase in your 2005 effective rate was caused by
actual revenues in the U.S. and spending in Ireland being higher
than
forecasted and actual spending in the U.S being less than
forecasted.
Your response further states that these factors ultimately
resulted
in a 160 basis point increase in your effective tax rate for the
year
compared to the rate you forecasted in the third quarter 2005.
Clarify whether the full impact of the 160 basis point increase
was
the result of fourth quarter 2005 actual revenues and spending.
If
not, clarify why your annual estimate of such revenues and
spending
were not revised at the end of the third quarter for actual
results
through the nine-months ended September 30, 2005.
33. We note the portion of your response indicating that you
recorded
a liability to provide for likely settlements with the Internal
Revenue Service. Tell us your consideration of the disclosure
requirements of SFAS 5, paragraphs 9 through 12, for this and
other
income tax contingencies, as applicable. In addition, please tell
us
what consideration you have given to the FASB`s July 14, 2005
Proposed Interpretation - Accounting for Uncertain Tax Positions -
An
Interpretation of FASB Statement No. 109 in accounting for any
uncertain tax positions.
Forms 8-K filed January 31, 2006 and April 20, 2006
Prior Comment Number 2
34. We note your response to prior comment number 2 and your
revised
non-GAAP financial measure disclosure provided in Exhibit A. It
is
not clear that you have adequately addressed the usefulness of
your
non-GAAP measure presented. Note, Question 8 of the Frequently
Asked
Questions Regarding the Use of Non-GAAP Financial Measures states,
"companies must meet the burden of demonstrating the usefulness of
any measure that excludes recurring items." Therefore, you must
either demonstrate the usefulness of each non-GAAP measure or
eliminate such measures from your disclosure based on this
guidance.
In this respect, please address the following specific items noted
in
your disclosure:
* We note your revised disclosure, which states that your non-GAAP
financial measures provide meaningful information by excluding
certain expenses and expenditures that many not be indicative of
your
"core business operating results, meaning the Company`s operating
performance from a cash perspective." Please clarify why you
believe
that your non-GAAP financial measures provide your "operating
performance from a cash perspective" when such measures currently
exclude two "one-time" expenditures that have or will be settled
in
cash and only excludes one non-cash expense, namely, stock-based
compensation. Further, please explain why such disclosure does
not
give the impression that your non-GAAP financial measures provide
your results on a cash basis.
* Please further clarify why you believe that your "core business
operating results" do not include stock based-compensation expense
as
they result from your operations. In this respect, your
disclosure
indicates that you believe excluding the impact of stock-based
compensation expense is useful as it allows your management and
investors to compare your core business results over multiple
periods
in a manner that is not distorted by your recent adoption of SFAS
123R. Clarify why you believe that including the impact of a
required GAAP pronouncement provides a "distorted" view of your
financial results. Please explain why such a statement does not
provide the impression that your non-GAAP measures are superior to
your results determined in accordance with GAAP. Further, such a
statement may imply that you are using non-GAAP financial measures
in
attempt to smooth earnings. We refer you to Questions 8 and 9 of
the
June 13, 2003 Frequently Asked Questions Regarding the Use of Non-
GAAP Financial Measures.
* We note you eliminate stock-based compensation from several
financial statement captions. It is not clear how management uses
this non-GAAP information to conduct or evaluate its business in
each
of the areas of its operations. Stock-based compensation is a
form
of compensation similar to cash and is viewed as compensation by
the
recipients. If this form of compensation was removed from the
recipients` overall compensation package, then how does management
determine that an employees performance would remain unchanged
such
that it would not affect the Company`s overall operations? For
instance, would the performance of an employee responsible for
sales
and marketing be changed if a portion of his or her compensation
package were eliminated? If so, then why would management exclude
this compensation in analyzing your business performance?
* Your disclosure indicates that you believe excluding the impact
of
stock-based compensation expense allows management and investors
to
better compare the Company`s results to those of your competitors.
Clarify how your measure provides better comparability when the
items
excluded in your non-GAAP measures may be different than items
excluded in competitors` non-GAAP measures. Therefore, please
explain why this would not be a material limitation in your use of
your non-GAAP measures, not a reason why the information is
useful.
Schedule 14A
Certain Relationships and Related Transactions, page 30
35. Please provide all the information required by Item 404 of
Regulation S-K. For example, we note that you have not discussed
the
perpetual license to the PageRank patent, which patent is held by
Messrs. Brin and Page.
Executive Compensation, page 31
36. We direct your attention to the executive compensation table
on
page 31. Please revise your table to disclose executive
compensation
for the last three completed fiscal years. See Item 402(b)(1) of
Regulation S-K.
Closing
As appropriate, please amend your filing and respond to
these
comments within 10 business days or tell us when you will provide
us
with a response. You may wish to provide us with marked copies of
the amendment to expedite our review. Please furnish a cover
letter
with your amendment that keys your responses to our comments and
provides any requested information. Detailed cover letters
greatly
facilitate our review. Please understand that we may have
additional
comments after reviewing your amendment and responses to our
comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Chris White at (202) 551-3461 or Craig
Wilson,
Senior Assistant Chief Accountant at (202) 551-3226 if you have
questions regarding comments
on the financial statements and related matters. Please contact
Jeffrey Werbitt at (202) 551-3456 or Anne H. Nguyen, Special
Counsel,
at (202) 551-3611 with any other questions.
Sincerely,
Barbara C. Jacobs
Assistant Director
Eric Schmidt
Google Inc.
July 11, 2006
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0303
DIVISION OF
CORPORATION FINANCE