In its unusual S-1, Google famously said it would not offer traditional guidance to Wall Street. But this week the company offered a bit of it anyway, stating in their quarterly filing (filed on Monday) that revenue growth will not continue on the pace it has.
Trends in Our Business
Our business has grown rapidly since inception, and we expect that our business will continue to grow. This growth has been characterized by substantially increased revenues. However, although our revenue growth rate increased in the third quarter of 2004 compared to the second quarter of 2004, our revenue growth rate has generally declined, and we expect it will continue to do so as a result of increasing competition and the inevitable decline in growth rates as our revenues increase to higher levels. Consequently, we believe that our revenue growth rate from the second quarter to the third quarter of 2004 may not be sustainable into the fourth quarter of this year and in future periods. 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, and therefore steps we take to improve the relevance of the ads displayed on our web sites, such as removing ads that generate low click-through rates, could negatively affect our near-term advertising revenues.
Those revenue policies changes are worth watching.
All of this certainly not a surprise (save the guidance, which feels rather like the way MSFT used to always warn, then over perform). The company had under a billion in revenue in all of 2003, and in the first three quarters of 2004 it’s already more than doubled that. As Microsoft has discovered, it’s hard to grow torridly on a large base.
The document, which I’m only getting around to reading today, also has some clues on the size and capital spend of the company (one wonders the meaning of the word “significant” in the temporary employee count…):
Our full-time employee headcount has grown from 1,628 at December 31, 2003 to 2,668 at September 30, 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 $120.3 million in the nine months ended September 30, 2003 to $259.9 million in the nine months ended September 30, 2004. We expect to spend over $300 million on capital equipment, including information technology infrastructure, to manage our operations during 2004. Management of this growth will continue to require the devotion of significant employee and other resources and we may not be able to manage this growth effectively.
The company also notes its ongoing trademark litigation woes:
Certain companies have filed trademark infringement and related claims against the Company over the display of ads in response to user queries that include trademarked terms. The outcomes of these lawsuits have differed from jurisdiction to jurisdiction. A court in France has held the Company liable for allowing advertisers to select certain trademarked terms as keywords. The Company has appealed this decision. The Company is also subject to two lawsuits in Germany on similar matters where the courts held that the Company is not liable for the actions of the Company’s advertisers prior to notification of trademark rights. One of the plaintiffs has appealed the court’s ruling. The Company is litigating similar issues in other cases in the U.S., France, Germany and Italy. Management believes that any adverse results in these lawsuits may result in, or even compel, a change in this practice, which could result in a loss of revenues on a prospective basis. However, the magnitude of any unfavorable outcome cannot be reasonably estimated at this time.
Currently, there is no material litigation pending against the Company other than as described above.
Interesting that the Brian Reid matter is not considered material. That may mean it is close to settlement.