The net revenues generated from the fees advertisers pay us when users click on ads that we have delivered to our Google Network members’ web sites represented approximately 15% of our net revenues in 2003, and approximately 21% of our net revenues for the three months ended March 31, 2004, and we expect this percentage to increase in the future.
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If we fail to detect click-through fraud, we could lose the confidence of our advertisers, thereby causing our business to suffer.
We are exposed to the risk of fraudulent clicks on our ads. We have regularly paid refunds related to fraudulent clicks and expect to do so in the future. If we are unable to stop this fraudulent activity, these refunds may increase. If we find new evidence of past fraudulent clicks we may have to issue refunds retroactively of amounts previously paid to our Google Network members. This would negatively affect our profitability, and these types of fraudulent activities could hurt our brand. If fraudulent clicks are not detected, the affected advertisers may experience a reduced return on their investment in our advertising programs because the fraudulent clicks will not lead to potential revenue for the advertisers. This could lead the advertisers to become dissatisfied with our advertising programs, which could lead to loss of advertisers and revenue.
We are susceptible to index spammers who could harm the integrity of our web search results.
There is an ongoing and increasing effort by ‘index spammers’ to develop ways to manipulate our web search results. For example, because our web search technology ranks a web page’s relevance based in part on the importance of the web sites that link to it, people have attempted to link a group of web sites together to manipulate web search results. We take this problem very seriously because providing relevant information to users is critical to our success. If our efforts to combat these and other types of index spamming are unsuccessful, our reputation for delivering relevant information could be diminished. This could result in a decline in user traffic, which would damage our business.
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More individuals are using non-PC devices to access the Internet, and versions of our web search technology developed for these devices may not be widely adopted by users of these devices.
The number of people who access the Internet through devices other than personal computers, including mobile telephones, hand-held calendaring and email assistants, and television set-top devices, has increased dramatically in the past few years. The lower resolution, functionality and memory associated with alternative devices make the use of our products and services through such devices difficult. If we are unable to attract and retain a substantial number of alternative device users to our web search services or if we are slow to develop products and technologies that are more compatible with non-PC communications devices, we will fail to capture a significant share of an increasingly important portion of the market for online services.
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We believe the factors that influence the success of our advertising programs include the following:
‘ The relevance, objectivity and quality of our search results.
‘ The number of searches initiated at our web sites or our Google Network members’ web sites.
‘ The relevance and quality of advertisements displayed with search results on our web sites and of Google Network members’ web sites, or with the content on our Google Network members’ web sites.
‘ The total number of advertisements displayed on our web sites and on web sites of Google Network members.
‘ The rate at which people click on advertisements.
‘ The number of advertisers.
‘ The total and per click advertising spending budgets of an advertiser.
‘ Our minimum fee per click, which is currently $0.05.
‘ The advertisers’ return on investment from advertising campaigns on our web sites or on the web sites of our Google Network members compared to other forms of advertising.
Advertising revenues made up 77%, 92%, 95% and 96% of our net revenues in 2001, 2002, 2003 and in the three months ended March 31, 2004. We derive the balance of our net revenues from the license of our web search technology, the license of our search solutions to enterprises and the sale and license of other products and services.
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We have experienced and expect to continue to experience substantial growth in our operations as we seek to expand our user, advertiser and Google Network members bases and continue to expand our presence in international markets. This growth has required the continued expansion of our human resources and substantial investments in property and equipment. Our full-time employee headcount has grown from 284 at December 31, 2001, to 682 at December 31, 2002, to 1,628 at December 31, 2003 and to 1,907 at March 31, 2004. In addition, we have employed a significant number of temporary employees in the past and expect to continue to do so in the foreseeable future. Our capital expenditures have grown from $13.1 million in 2001, to $37.2 million in 2002, to $176.8 million in 2003 and to $86.0 million in the three months ended March 31, 2004. We currently expect to spend at least $250 million on capital equipment, including information technology infrastructure, to manage our operations during 2004. In addition, we anticipate that the growth rate of our costs and expenses, other than stock-based compensation, may exceed the growth rate of our net revenues during 2004. Management of this growth will continue to require the devotion of significant employee and other resources. We may not be able to manage this growth effectively.
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We expect that international net revenues will continue to grow as a percentage of our total net revenues during 2004 and in future periods. While international revenues accounted for approximately 26% of our total net revenues in 2003 and 30% in the three months ended March 31, 2004, more than half of our user traffic came from outside the U.S.
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[how unautomated is google?]
Sales and marketing expenses increased $6.7 million to $47.9 million (or 12.3% of net revenues) in the three months ended March 31, 2004, from $41.2 million (or 13.4% of net revenues) in the three months ended December 31, 2003. This increase in dollars was primarily due to an increase in labor and facilities related costs of $4.9 million mostly as a result of a 14% increase in sales and marketing headcount. The increase in sales and marketing personnel was a result of our on-going efforts to secure new, and to provide support to our existing, advertisers and Google Network members, on a worldwide basis.
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We have put significant effort into developing our sales and support infrastructure. We maintain 21 sales offices in 11 countries, and we deploy specialized sales teams across 18 vertical markets. We bring businesses into our advertising network through both online and direct sales channels. In all cases, we use technology and automation wherever possible to improve the experience for our advertisers and to grow our business cost-effectively. The vast majority of our advertisers use our automated online AdWords program to establish accounts, create ads, target users and launch and manage their advertising campaigns. Our direct advertising sales team focuses on attracting and supporting companies around the world with sizeable advertising budgets. Our AdSense program follows a similar model. Most of the web sites in the Google Network sign up for AdSense using an automated online process. Our direct sales force focuses on building AdSense relationships with leading Internet companies. Our global support organization concentrates on helping our advertisers and Google Network members get the most out of their relationships with us.
(No mention of how many searches Google performs each day. They’ve convinced the underwriters (and themselves?) that Google is not a search company, but an advertising network.) (more…)
