The founders of Google summed up the company and their initial public offering in a letter that attempted to explain to investors exactly what they're getting into:
"Google is not a conventional company," wrote co-founders Sergey Brin and Larry Page, in the letter found in the S1 filing to the Securities and Exchange Commission, the first in a series of yearly missives they plan to write to shareholders. "We do not intend to become one."
Indeed. The document, filed Thursday, is remarkable for the candor the founders express. In fact, one can sense a profound contempt for Wall Street types and their clubby ways. Sure, the filing has a lot of figures and tables. But it also has some delightful zingers that come close to giving Wall Street the middle finger. Read on for some examples:
Profitable, but not all-powerful: For the first quarter of the year, Google made less money than Yahoo. Google posted a profit of $64 million in the first three months of 2004, and drew in revenue of $390 million. That compares with first-quarter earnings of $101 million and sales of $758 million at Yahoo, the company Google cites as a chief competitor. But Google's earnings are up sharply from a year ago, when Google posted revenue of just $179 million and a profit of $26 million.
It also means Google makes about the same amount of profit from each dollar of revenue as Yahoo.
Action from abroad: Most of Google's traffic comes from outside the United States: In the first three months of the year, more than half of its user traffic originated from abroad. At the same time, foreign companies accounted for just 30 percent of Google's net revenue.
Slowing down: Google expects its growth rate will slow this year. After more than doubling revenues from the first quarter of 2003 to 2004, the company believes sales and profit growth is poised to decelerate. "We believe our revenue growth rate will decline as a result of anticipated changes to our advertising program revenue mix, increasing competition and the inevitable decline in growth rates as our net revenues increase to higher levels," the company said in the filing. Google also said it expects its operating profit margin will decline in 2004 compared to 2003.
Hiring binge: Nearly 2,000 people work at Google. As of March 31, Google employed 1,907 people in addition to temporary employees. At the end of 2001, Google employed just 284 people.
In their letter, Brin and Page said they intend to continue offering many of the perks that, in addition to stock options, have kept employees hanging around. These include free meals, washing machines and doctor visits.
Advertising rules: OK, so this is probably one of the more obvious facts, but Google makes almost all of its money -- 95 percent -- from advertising. Still, Google's dependence on ad revenue may be even greater than previously thought.
Benefits of ownership: Profit margins are far lower for ads Google places on websites it doesn't own. As Google expands its keyword advertising business to encompass ads placed on other websites in addition to its own, it expects to see a drop in profit margins.
The company said profit margins on ads placed on sites owned by partners through its AdSense program are "generally significantly less than the margin on revenue we generate from advertising on our websites."
We're the boss: A dual-class stock structure will keep control of Google in the hands of its founders. After the IPO, Google common stock will be split into two categories: Class A and Class B. Class B common stock will have 10 votes per share while Class A common stock, which is the stock being sold to the public, will have one vote per share. Newspaper companies controlled by families often use this dual structure to keep control of the publications.
Because of the dual-class structure, Google founders, directors, executives and employees will continue to control all matters submitted to stockholders for approval, even if they come to own less than 50 percent of the outstanding shares of common stock.
You're on your own: Google won't spoon-feed earnings figures to Wall Street analysts -- unlike almost every other public company on the planet. In the letter, Brin and Page state they won't be issuing estimates to investors and analysts about quarterly earnings. Writes Page:
"Many companies are under pressure to keep their earnings in line with analysts' forecasts. Therefore, they often accept smaller, but predictable, earnings rather than larger and more unpredictable returns. Sergey and I feel this is harmful, and we intend to steer in the opposite direction."
Bravo.
More refreshing candor: The search engine company is taking an unusual approach to its $2.7 billion IPO, doling out shares to the public through an auction process. In almost every other IPO, the lead underwriting investment banks hand out shares to a handful of clients -- usually fat-cat investors or mutual funds -- who promptly dump their shares on the public. Often, the favored clients make a fortune while the public bears far more risk.
In Google's auction, the public can get in on the first round of the action like the fat cats. But the Google founders warned that there can also be a negative side effect, known as the "winner's curse":
"We caution investors that submitting successful bids and receiving allocations may be followed by a significant decline in the value of their investment."
Warren, we're not worthy: Google founders are huge fans of Warren Buffett, the legendary stock picker and the world's second-wealthiest man. Brin and Page say their approach to managing Google as a public company is inspired by Buffett, who has made a decades-long practice of writing detailed annual letters to shareholders. The Google founders say they also drew inspiration from Buffett's one-time promise that he "won't 'smooth' quarterly or annual results: If earnings figures are lumpy when they reach headquarters, they will be lumpy when they reach you."
It's with a capital G, dammit: The use of the term "google" as a synonym for "search" -- a phenomenon that on the surface seems no more than a tribute to the popularity of Google -- could have drawbacks for the company. In its IPO filing, Google said it faces the risk of losing trademark rights to its name if too many people use "google" as a verb or "googling" as a gerund.
Grayhairs and anklebiters: Google's executive team spans in age from 30 to 57. The youngest officer or director on Google's management team is Brin, co-founder and president of technology, who is 30. The oldest is Wayne Rossing, vice president of engineering, at 57.
Geek humor: If you take a close look at the form Google filed with the Securities and Exchange Commission, the exact value of its planned offering is $2,718,281,828 dollars, which some would immediately recognize as the mathematical constant e.
E, for those not blessed with a Ph.D. and a job at Google, is Euler's number, which is used as the base for natural logarithms.
Screw the trends: Google is generous with stock options. While many technology firms scaled back employee stock grants in the face of impending accounting rule changes and corporate scandals, Google is bucking the trend. The company expects stock-based compensation to total $205 million this year, $96 million in 2005 and $48 million in 2006.
Schmidt on top: The Google executive with the highest salary is CEO Eric Schmidt, with an annual salary of $250,000 and a bonus this year of $301,000. But don't feel sorry for him.
Schmidt was also granted an option to purchase 14,331,708 shares of Class B common stock at an exercise price of 30 cents per share pursuant to this agreement and was permitted to purchase 426,892 shares of Series C preferred stock at a purchase price of $2.3425 per share.
