Google Inc Q1, Q2, Q3, Q4 2008 Earning Calls

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Google Inc. Q3 2008 Earnings Call Transcript
October 16, 2008 | about stocks: GOOG
Google Inc. (GOOG)
Q3 2008 Earnings Call
October 16, 2008 4:30 pm ET
Executives
Krista Bessinger - IR
Eric Schmidt - CEO
Patrick Pichette - CFO
Sergey Brin - Founder & President, Technology
Jonathan Rosenberg - SVP, Product Management
Omid Kordestani - SVP, Global Sales & Operations
Hal Varian - Chief Economist
Analysts
Imran Khan - JPMorgan
Mark Mahaney - Citi
Brian Pitz - Banc of America Securities
Christa Quarles - Thomas Weisel Partners
Ben Schachter - UBS
Doug Anmuth - Barclays Capital
Justin Post - Merrill Lynch
Ross Sandler - RBC Capital Markets
Jeffrey Lindsay - Sanford Bernstein
Youssef Squali - Jefferies
Jeetil Patel - Deutsche Bank
Presentation
Operator
Good day and welcome everyone to the Google Inc. Conference Call. This call is being recorded. At this time I
would like to turn the call over to Ms. Krista Bessinger. Please go ahead, ma'am.
Krista Bessinger
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Good afternoon everyone and welcome to today's third quarter 2008 Earnings Call. With us are Eric Schmidt,
Chief Executive Officer, Patrick Pichette, Chief Financial Officer, Sergey Brin, Founder and President of
Technology, Jonathan Rosenberg, Senior Vice President of Product Management, Omid Kordestani, Senior Vice
President of Global Sales and Operations is joining us from London today, and Hal Varian our Chief Economist.
Eric, Patrick and Sergey will provide us with their thoughts on the quarter and then Jonathan, Omid and Hal will join
us for Q&A. Please note that this call is being webcast from Investor Relations website. Please also refer to our
Investor Relations website for important earnings related documents including our press release issued a few
minutes ago along with slides that accompany today's prepared remarks. A replay of this call will also be available
on our Investor Relations website in a few hours.
Now let me quickly cover the Safe Harbor. Some of the statements we make today maybe considered forward-
looking including statements regarding investments in our core business, traffic acquisition cost, operational
efficiency and cost and our expected level of capital expenditures. These statements involve a number of risks
and uncertainties that could cause actual results to differ materially. Please note that these forward-looking
statements reflect our opinions only as of the date of this presentation. We undertake no obligation to revise or
publicly release the results of any revision to these forward-looking statements in light of new information or future
events.
Please refer to our SEC filings including our quarterly report on form 10-Q for the quarter ended June 30, 2008,
as well as our earnings press release for a more detailed description of the risk factors that may affect our results.
Copies can be obtained from the SEC, or by visiting the Investor Relations section of our website. Also please
note that certain financial measures we use on this call such as EPS, net income, operating margin and operating
income are expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based
compensation. We have also adjusted our net cash provided by operating activities, to remove capital
expenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP reconciliation can
be found in our earnings press release.
With that it is my pleasure to turn the call over to Eric.
Eric Schmidt
Well. Thank you, very much, Krista, and good afternoon everybody. First, let me welcome Patrick, Patrick
Pichette, who is of course our CFO, who is off and hit the ground running. He certainly joined us at an interesting
time. Before he goes into the detail, which of course everyone is quite interested in. Let me just talk about some
of the highlights.
Thanks to everybody's hard work. Google had a good quarter. Traffic and revenue were both solid and we kept
tight control on costs. Year-on-year, for example, search query traffic is growing in almost every vertical. We
believe that these results reflect the fact that as marketing budgets are squeezed, targeted, measurable ads are
becoming more valuable to advertisers. As consumer budgets are squeezed, people use the web for
comparison shopping to hunt for bargains online and in stores.
Regarding the economic situation, I think everybody on the call and listening understands that it is pretty clear the
economic situation today globally is worse than people were predicting just a month ago. So, look at the
difference in the papers. What started off as a financial crisis appears at least according to the consensus around
the world, to be affecting the wider economy.
When I talk to other CEOs in Europe and in America, it is clear that the economic situation is so fluid, that we are
all in uncharted territory. The question is how should Google respond? Our answer, as always, is looking at the
long-term, and we believe that even more today -- more important today than ever.
Search, which of course is Google's core, is where we are putting a lot of our investment -- better search, better
ads, [proof latency]. Our user experience is getting much better. Index size is getting much larger, greater
personalization for better results globally for every user, lots and lots of language support, more highly relevant
ads against as many queries as possible and using more sophisticated tools for advanced bidding and
measurement and optimization. So that advertisers, who understand that advertising is directly correlated with
revenue, can use those tools to maximize revenue based on the terms that they set and based on the budgets,
which is what they care about.
So the opportunities are more than just the search and ads. In Apps, for example, the company is going to cut IT
costs and increase productivity with greater collaboration well. We are there for them. Our enterprise applications
really add value there. In display by improving targeting, we deliver better and more relevant ads for users and for
advertisers, agencies and publishers.
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The DoubleClick integration now going very well. David Rosenblatt from DoubleClick is now President of our
display businesses, says it is going great. YouTube is now running 90% – ads against 90% of all the content
claimed by partners using our content ID tool. We are experimenting with different advertising formats now well
announced in video ads, click-to-buy and pre-roll.
Geo-Mobile another core component and new opportunity for us geographically relevant in location based
advertising is valuable to users in our view, who are working, developing advertising products that match ads to
geographic data. We think that is a big opportunity for us.
So along the way, we are going to stay very close, keep a very close eye on costs. It makes sense given
everything we read in the papers and we have done that effectively in this quarter. It is the right thing to do and
what I like about it. Sergey can talk about this a little bit if he likes. Sergey likes to say scarcity builds clarity. I think
it is a great focusing opportunity for Google as well.
To a very realistic about the macro economic climate, but we are optimistic about Google's future because we are
confident about the enduring value and power of the web. Sergey will talk about this in more, but fundamentally
people are moving to the internet, they are moving to more targeted advertising, are using information in a smarter
way and Google is one of the significant beneficiaries of that.
We fundamentally believe that users will always want information and need to communicate and advertisers will
always value relevant and very measurable advertising, which of course these are Google's core strengths. So,
with that Sergey maybe you would like to – sorry Patrick maybe you talk about our financials first and then we will
go over to Sergey.
Patrick Pichette
Thank you, Eric and good afternoon everyone. So, as Eric said a few minutes ago, we had another solid quarter
despite a challenging economic environment. A few numbers: gross revenue was up 31% year-over-year to $5.5
billion reflecting healthy growth across the Google - both Google.com and our network. Google.com was up 34%
year-over-year to $3.7 billion driven by steady traffic growth and AdSense was up 15% year-over-year to $1.7
billion, also reflecting solid growth across both content and search.
Global aggregate paid click growth was also reasonably good goes up 18% year-over-year and 4% quarter-
over-quarter, reflecting healthy growth across all major properties. We saw also steady growth in the US with
revenues up 22% year-over-year, to $2.7 billion and up 5% quarter-over-quarter.
International revenue also held up reasonably well, accounting for 51% of our total revenue or $2.8 billion. The UK
showed some softness, but up 17% year-over-year to $776 million, but essentially flat quarter-over-quarter
including the impact of the currency. The rest of EMEA performed better driven by relatively good performance in
the Netherlands and Germany.
Asia and Latin America were solid as well, mostly driven by relatively good performance in Brazil and China. From
an advertisers’ spend perspective, we saw a combination of strong relative performance in many verticals
including home appliances, apparels, jobs, but also and not surprisingly some tougher performances in others
such as home financing, auto financing, and real estate as everybody can imagine.
Let me turn to expenses now to traffic acquisition costs were $1.5 billion in Q3 or 27.9% of total advertising
revenue. This is down from $28.4 million in Q2. AdSense TAC was $1.3 billion and Google TAC was $167
million. As we embark on new initiatives, we may see additional pressures on TAC rates going forward.
Other costs of revenue they have increased $4 million over Q2 to $678 million and the largest driver of the
increase was data center related costs and those include depreciation, equipment and operations. All other
operating expenses totaled $1.63 billion, including approximately $269 million in stocks-based compensation and
expenses related to payroll and facilities increased $49 million over Q2 to $859 million.
On the headcount front, we finished a quarter with approximately 20,000 full-time employees. That is
approximately 500 net new employees added in the quarter and over half of these new net hires are in
engineering, and then followed by sales and marketing. We have implemented and continue to follow a
disciplined hiring process in all areas of the organization, but as we have indicated in the past, we continue to
invest in our core business, both in the US and internationally.
In consequence of all this management expense the non-GAAP operating profit, which excludes stock-based
compensation, crossed the $2 billion threshold for the first time in Q3, driving non-GAAP operating profit margins
to 36.5%.
As Eric mentioned a little earlier in his comments, it makes sense on the current economic environment to
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maintain a clear focus on operational efficiency, and cost containment and we have done so, and we will continue
to do so, better positioning Google for healthy long-term growth.
Let me move on to interest income and other, which was $21 million for the quarter. The primary driver for interest
income, and other, are on the positive side, a very strong cash balance, $14.4 billion. The annual interest we earn
on that cash is currently in the 2% to 3% range, and we also had a small realized gain on investment of $11 million
in Q3. These benefits are to large extent offset by the impact of our, the rollout of our hedging program in Q3. So,
in Q3, our hedging expense and related impacts totaled approximately $80 million.
Please note that we amortize the cost for the time value of our cash-flow hedging programs in other income and
expense on a monthly mark-to-market basis, not a straight line basis. As a result, the amount of amortized
expense were recognized in any particular quarter is impacted by how much the option moves in or out of the
money, as well as the underlying currency volatility.
So, in particularly volatile periods, like the ones we are experiencing now, this can result in a front-end loading of
expenses associated with the outstanding hedges, as was in fact the case in Q3. So clearly, currency was
working against us in this quarter, but on the good news, our hedging programs are in fact working well. So, a bit
more on the hedging program, our FX program should be viewed essentially as an insurance policy. Our
programs are designated to protect us against future downside risk to revenue and earnings, reported in US
dollars.
Our largest currency exposures are the euro, the Canadian dollar and the British pound, and are now hedged and
over the coming year. We will rollout incremental hedges to cover much of the remaining exposure. So, how does
the accounting for all these hedging works? It is FAS 133, which is the standard in US accounting and we use
FAS 133 to account for our cash flow hedging programs.
FAS 133 is not a simple standard this by any means. So, it is well worth a time, to take the time to understand the
basics and I encourage you to do so. We walk through some of those basics of FAS 133 in our earnings slides
deck, which I encourage you to reference. It is posted as Krista mentioned on our Investors Relations site. For
the impact on Q3 before hedging, the recent strength of the US dollar relative to other currencies had a negative
impact of $59 million on revenues in Q3.
We were able to recognize as a benefit of approximately $34 million to revenues through the cash flow hedging
this quarter. So, to understand why our hedging does not offset a 100% of the negative impact of currency on
revenue, it is important to remember three key factors.
First, our cash flow hedges are designed to protect against a downside risk to earnings not revenue. Secondly,
our Q3 hedges were made against three major currencies, the Euro, the British pound and the Canadian dollar,
but not all currencies. Finally, our pound hedges were put late in the quarter.
So, with that let me return to our financial results. I am pleased to report that operating cash flow remain strong at
$2.18 billion for the quarter, CapEx for the quarter was $452 million. We have invested very heavily in our data
centers and are continuing to do so. As in previous quarters, the majority of our CapEx was related to IT
infrastructure including data center construction, production of servers and networking equipment.
Because of economies of scale, however, as well as greater efficiencies in our system infrastructure and in some
ways Moore's Law, we can actually do a lot more today with less, which is a positive trend for us. That said, we will
certainly continue to make significant investments in CapEx in future periods.
Finally, free cash flow. A non-GAAP measure, we define the free cash flow from operation less CapEx. It remains
strong at $1.73 billion, up 61% year-over-year. So, in summary, our core business continues to demonstrate
strength, despite a challenging economic environment, while we are focused on operational efficiency, we have
and will continue to make crucial investments that are needed to drive value for our users, our advertisers and our
partners. Before I hand it off to Sergey, I would like to take a moment to share with you some of my early thoughts
on joining Google. So, I thank Eric for the kind words at the front end of the conversation.
First, let me say that I am delighted to be here and to join this company. This is obviously a great team I am
joining, and everything you hear is true. These are super smart people, tremendous integrity, positively ambitious
for the company and without a doubt our great winning combination. It is a great time to join Google and it is a real
pleasure for me.
Yes, the financial and economic environment is going through a lot of uncertainty, but with great uncertainty also
comes tremendous opportunity. I look forward for leveraging my financial and operational background to take
advantage of the tremendous opportunity in front of us and lead with the team the company into the next phase of
growth.
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With that, I would like to thank you for the time and I will turn it over to Sergey for his thoughts on the quarter.
Thank you.
Sergey Brin
Thanks, Patrick. I would like to update you this quarter on many different improvements, we made across the
board. Let me start with our infrastructure and I am talking about both the hardware and software infrastructure, the
powers all of our services.
First of all, this quarter we significantly increased the size of our index. To put this in perspective now, every four
hours we index the same amount of information that is equivalent to the entire US Library of Congress. I would
encourage you, by the way, how can you see this? I encourage you to search for information that might not have
that many references about on the web, whether it is a neighbor or local place, something like that, and just to see
how much more information we have been able to put on the index.
We have also worked a lot on our performance. Particularly, we had a lot of improvements in search, especially if
you use the Google toolbar, which I encourage you to do. In YouTube and also many of our Apps, especially
Calendar. Hopefully you will see the improvements as snappier performance, when you come back and use these
services now.
We have also been working on our overall efficiency from an energy point of view and I should report that our data
centers now use several times less energy than typical facilities that would house and cool the same number of
computers that we would have.
Next moving on, Search of course remains core to our business, and now for the second quarter in a row we have
launched over 100 search improvements during the quarter, so more than one per day. This is obviously
improved things for our users all around the world. Very important feature, Google suggests that we have had
available in a variety of different interfaces and now is on Google.com is running in ten countries. This actually
really helps users and speeds them up much more than you might expect. As you are typing a query, we will fill
out what is likely the query that you might want, spelled correctly and it really significantly speeds the overall
search process.
We also have continue to take our other corpuses that are not just web pages, things such as books and videos,
and we continue to blend more and more of those into the first page of results, across all of our domains. The
numbers of these blended results has increased significantly over the past quarter. I would encourage you to try
searching, for example, for Michael Phelps. You will see video of swimming and whatnot.
This also is very powerful, especially when you look at video, because people think of video as entertainment, but
in fact video is a very compelling reference material. It is a really good way to learn something, to really
understand it. Oftentimes you will not actually think to search for video. So, for us to present it in the first page of
results means people are going to get much higher quality information about what they are looking for than they
otherwise would have.
On the business front of course, advertising remains the vast majority of our revenue. We continued to improve
our ad systems. We have updated our quality based bidding system, which helps weed out underperforming ads
and gives us the opportunity to run better ads, and generate a better return on investment for advertisers.
We have also made some changes to how we rate landing pages in terms of quality and we really want to make
sure that when our users click on ads, they are taken to useful sites. That way, people are encouraged to click on
ads in the future.
In fact, on the whole, I should mention that our ads add a significant amount of high quality material to our search
and we believe it they overall increase our overall search quality experience. We have also been working hard of
course, on display ads as Eric mentioned with David Rosenblatt now heading that entire operation, now with
DoubleClick integrated, and the various properties that we have with potential display inventory. We are really
moving along and we have made about two dozen improvements to our content network over this past quarter.
Just last week, we launched a new category, AdSense for games. Over 200 million people play web-based
games every week. Our network already reaches almost 10% of them, just at launch. So, we are very excited
about that.
Speaking of display inventory, I just want to talk a little bit about YouTube. They have been experimenting with a
number of monetization methods. We have now, the click-to-buy feature that you might have seen, where now if
you watch a YouTube video that is either could be a user uploaded video or uploaded by, for example, a studio
and now people can just click-to-buy either CD or a video or other content that is similar to that video and this is
obviously a benefit to both end users as well as the publishers and presents a great monetization opportunity.
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I should also mention that we have launched full length videos from CBS within stream ads and that means they
can be pre-roll, mid-roll and post-roll. These full length videos really take you to another level of offering
completely different kind of video than one would typically expect on that site.
We have also been investing a lot in geographic and local information and I am sure many or all of you have used
Google Maps and Google Earth. They are really big monetization opportunity because they are such a local
searches and there are many local businesses. Now we have been able to expand just a data available there, so
we can provide a better end user experience by launching Map Maker to over 100 additional countries. This is our
product of lets end users create and edit the maps for their own countries and regions and by doing so the users
have already added over 50,000 kilometers of roads and 75,000 business listings.
I should mention that an increasing percentage of our local search queries now deliver user generated maps
content. We have launched Street View in Japan and Australia, and we saw significant increases in usage there.
Of course free tune as now available on BlackBerries, and many Java enabled phones in addition to the other
phones that already had it. It can be pretty handy, you know, when you do a search for now business or store,
restaurants something like that, you can just click on the Street View and see what it actually looks like and make
sure that is the place you want to go.
As I mentioned before, now with the ability to do that on phones, it is very handy. Now speaking of phones, we of
course had a very important announcement this past quarter, which is our new Android operating system and
which is launching first on the T-Mobile G1. You can get these phones starting next week and at your T-Mobile
store. I have been using mine for a few months now as my primary phone and it is been very helpful. It really
integrates the Google services very nicely on the phone, it has really great web browser.
You know, I am able to search and brows through my Gmail just as if I was at my desk top. The G1 is just the first
of a number of phones that will hopefully be running Android. You should take note of all of the partners we have
built in the open handset alliance. I would encourage you all to try it out and if it suits your need then please, by all
means, get an Android phone.
Moving on, we have been busy at work as Eric mentioned on Enterprise. Now we have over 1 million businesses
using Google Apps. In fact, we have launched Google Video for your business as part of our Apps premiere
edition.
Now you may think of video like YouTube this basically for your business a last thing that might be needed in a
business. In fact we have had great demand for it. Internally we use video quite a bit. We have so many internal
talks that we are able to record and then the people, who miss it, can just watch it online. We have had just a great
amount of demand by businesses for this. I think this will be a very compelling feature to our Google Apps
product.
In addition to businesses, Google Apps are increasingly being adopted by universities. Now over a million
students use Google Apps just a couple of years after the launch, and we have had dozens of universities and
colleges deploy Apps since the New Year just started including Indiana University, University of Virginia, George
Washington, and many others.
Now lastly, I wanted to tell you something I am really excited about. I am sure many of you saw, it is a launch of
Google Chrome, which is our new web browser. As you know, we created a lot of web services, and an increasing
challenge to us is to have a robust enough platform to be able to run those web services quickly, and reliably.
Chrome does both of those things. It has incredibly fast JavaScript engine, which we are really excited about
called V8.
In addition, it has a process model that is much more robust. Now, if you have a problem with one tab in your
browser, you can just kill that tab and your browser just keeps running just fine, whereas in the past, number of
browsers if you had one tab hang you could hang the entire browser.
We are continuing to improve it and we have opened sourced it entirely. So, not just Google, but the whole
community is improving Chrome. We hope that it obviously continues to improve Chrome, but also it raises the
bar for all browsers because we want all the web platforms out there more capable so we can more easily deploy
our services.
All in all, it is been a very busy quarter at Google. We have had so many announcements, launches, so many
improvements; it is really hard to keep track. I appreciate all of you following it. Thank you and talk to you next
quarter.
Eric Schmidt
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Well, thank you very much, Sergey. You are going to stay for the Q&A for a few minutes, too.
Sergey Brin
No problem.
Eric Schmidt
Thank you Patrick as well. We will have Hal, Jonathan, and Omid join us and maybe we would move to questions
Krista.
Krista Bessinger
Yes, we are ready do queue up for questions, operator.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions). We will take our first question from Imran Khan from JPMorgan.
Hi, thank you very much for taking my question. Question about the economy and what the trend you are seeing. I
think Eric, you talked about that the economy seems like weakening over the last four weeks or, so that I have
been hearing the same thing. Can you give us some color like how is your business trend, July, August, versus
September? Did you see the business weakening significantly in the month of September or if you can give us
some color regarding what trends you are seeing in October?
The second question is regarding the network revenue. Excluding TAC, it seems like network revenue growth rate
decelerated quite a bit. I just try to understand that better, thank you.
Eric Schmidt
Thanks, Imran. I am going ask Hal to help me here. We see fluctuations and they are more complex than they
may appear; some things go up, some things go down. Obviously, it is going to change as the global financial
crisis moves through. It also varies by country and by region. Hal?
Hal Varian
Yes, I think I can give you a little color on some of the things that are being going on. As you know we do not give
guidance with respect to our internal numbers, but we have a nice tool out there called Search Insights; we can
take the pulse of the consumer. If you look in the last several weeks, there has been this almost obsession with
financial markets. Huge increases in inquiries on money market, mutual funds, buy gold, 401(k)s, banking crisis,
LIBOR, home safes. So right now, I think it is very difficult to really extrapolate from the current period where you
have got this major event going on, really a once in a lifetime event. Let's all hope it it is once in a lifetime. So, it is
very hard to tell what things are going to look like going forward basis.
Eric Schmidt
Jonathan, do you have a view on this?
Jonathan Rosenberg
Just very quickly on the second question which I did not think Hal got to the network deceleration. , Imran, there
are really two things that you want to look at. Some of it is a function of quality efforts, and the other is basically a
function of deal flow in the large partners that we have that are participating. So, those are the two things that you
need to look at. Our landing page quality which Sergey mentioned in his introductory remarks relates to the quality
issues.
Got it. Thank you. Hal, I agree with that and hope it is a one-time event of our lifetime.
Eric Schmidt
Our next question?
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Operator
We will go next to Mark Mahaney from Citi.
Mark Mahaney - Citi
Thanks. I wanted to ask two questions please. First has to do with the thoughts on cost, Eric. You talked about
being needing to be more cognizant of cost structure in a deteriorating economic environment, and what is going
to be a severe recession. Does that mean you cut back on just on operating costs, or would there be a point
where you would actually delay materially major investment priorities like mobile?
Then a quick question to Sergey. Could you just talk broadly about what in display advertising you think can be
fixed, or what are the major innovations that could be brought to display advertising that we have not seen before?
When you look at that, what do you see that Google could bring to that market? Thank you.
Eric Schmidt
Mark, on the question of investments, Google has shown courage, when we need to. We also intend during this
period to show very responsible management of our expenses. Patrick, do you want to talk a little bit about how
you are structuring this?
Patrick Pichette
Sorry, I got off mute. Yes, absolutely. I mean in these uncertain economic environments, and I think that we have
seen it through to Q3 results. I think that the company is very responsible in managing its cost base to make sure
that we are adapting to the environment in which we are operating.
So, operational efficiencies and cost containment have been in place for couple of quarters already and they
continue to do so. So, we are adapting. We are very nimble and very agile in this and we will continue to be.
Regarding the second question that you have asked. Strategic investments are strategic investments and those
you separate them from day-to-day operations, and every time we have a great opportunity, we are going to jump
on it and as I said in my comments, the basics of CapEx infrastructures and the fundamental infrastructure for the
company we are not going to stop. So, that is the balance we are striving.
Eric Schmidt
Sergey, the second part of the question.
Sergey Brin
Yes, on display; I think there are certainly a lot of opportunities in display, and let's just not forget when we first got
started with AdWords or the predecessors to AdWords, it took us a number of years for those things to even
catch up to what then was the big dollar numbers of the display advertising and finally to show the incredible
power for both advertisers and end users of search-based advertising. So I think we could see the same thing
with display where it actually takes actually while to mature with the new model.
One of the things what I think is very valuable for display, even though it might be more brand focused, you still
really care about targeting and showing the right ads to the right end users at the right times and try to show them
things they might be interested in. You might want to have a return, not be a click necessarily but just be the
branding and having generating awareness. Nonetheless, you really want to reach the right people.
Now another part of that is we have great measurement tools. You know what happens after people might see an
ad and how might they act differently. We also have access now to a vast variety of inventory ranging from our
AdSense network to a variety of our DoubleClick technologies. This can give you access to more inventory and
finally, our properties such as YouTube and Orkut.
So we still see this as an area that is ripe for development and innovation and we think that we can continue to
create great tools for display. This includes, by the way, things like not just – we are not just talking about banner
ads on web pages, includes AdSense for games as I mentioned earlier, it includes feeds, it includes video like
YouTube and other sites. So, it is a big opportunity.
Eric Schmidt
Let's go to our next question.
Operator
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We will take our next question from Brian Pitz from Banc of America Securities.
Thank you. You announced three changes relatively recently in particular replacing minimum with first page bids I
think late in Q3. Would you talk about the early impact these changes are having on the auction process? Thanks.
Jonathan Rosenberg
Yes, sure. This is Jonathan. That particular quality-based bidding effort I think was launched around the first week
of September. Basically, the impact that that has is the quality score is calculated real-time on each query. So,
what was happening previously was that keywords were inactive and not available based on the quality dynamic.
What is happening now is there are keywords that are able to participate in every auction because we are
calculating it real-time. So, it is basically allowing us to get what were previously in active keywords to compete in
the auction more successfully based on the real-time calculation. That is pretty much it.
Any major impact so far that you are seeing as a – how long will it take to really work its way through?
Jonathan Rosenberg
As far as the quality announcements that we typically talk about, it is certainly one of the bigger things we did in the
quarter and typically these things tend to manifest themselves in terms of their impact reasonably, expeditiously
after the launch. So, I think that most of the benefit of the typical quality enhancements is real very quickly.
Eric Schmidt
If you want to remind everybody that we make very – we commonly make 10, 20, 30, 40, 50 quality improvements
in a quarter, these are just some of the better known ones. We are constantly tuning based on our quality testing
and again globally as well.
Great, thanks.
Eric Schmidt
Our next question?
Operator
We will go next to Christa Quarles from Thomas Weisel Partners.
Hi. My question is really related to the Yahoo! deal. Eric, were you surprised by the vitriol in the response from the
advertisers out there? Clearly there is reality in how this thing functions versus perception. I would be curious how
are you approaching the government meddling in your ability to function and operate and how are you responding
as it relates to the Yahoo - Google arrangement?
Eric Schmidt
Well, Christa, thank you. I will let you used the phrase meddling and I am not going to be using that phrase. When
we did the deal, we understood that the deal would be both controversial that our competitors would oppose it,
and they would oppose it using every tactic that they could and also that there was a proper role for the legal
review process. So, we anticipated were turned out to be roughly four-month delay. Literally to give everybody
time to talk about it. We are hopefully during the end of that period and we are obviously in communications with
the Justice Department and the other groups that are doing it.
With respect to the advertiser reaction, we have seen a balance of reactions. We have seen some large
advertisers, complain. We have seen other large advertisers say that this is ultimately good for our businesses. I
obviously have a bias on this question and in my view many of the complaints are based on the fact that people
do not understand how the auctions really work and the benefits that auctions provide.
Auctions provide really a clearing price for accurate value and because the prices in our auction are largely set by
people, who can back-solve to the cost per acquisition. The cost-per-click and the revenue that we get is largely
Стр. 9 из 16 24.10.2008 16:31

tied all together. Hal in fact wrote a blog post yesterday precisely on this issue because there has been so much
confusion about it. Hal, do you want to comment on that?
Hal Varian
Sure. We have been making a concerted effort to try to educate people more about how our model works. One
thing we were bit surprised in is even people, who had been using AdWords did not necessarily understand how
and why functions the way it does, so we are really trying across the Board to communicate better with all the
sectors that we serve.
Eric Schmidt
So, next question.
Operator
We will go next to Ben Schachter from UBS.
Ben Schachter - UBS
Congratulations on a nice quarter.
Eric Schmidt
Yes. Thanks Ben.
Ben Schachter - UBS
In order for the display strategy to work, do you think you need to offer more inventory on your own sites or can it
become meaningful just through better penetration of the AdSense network. Also on Google Checkout in the past
there have been a lot of discussion around the badges and how they have increased click through rates and
conversions. Seems there is less of an emphasis on that product. Does it make sense to potentially work with
PayPal on moving forward.
Then one last house keeping one. If you look at depreciation and cost of goods less TAC they seem to be flat
quarter-over-quarter, which is never happened before. Any comments on that? Thanks.
Eric Schmidt
So, you asked three questions and so Patrick you will do the third one. Omid can you and thanks Ben for that. Can
you talk a little bit about display and Checkout?
Omid Kordestani
Sure. Ben I am calling from London so please let me know if the voice is not getting through correctly. As far as
we mentioned earlier we put a concerted effort across all the regions in our product teams and brought Dave
Rosenblatt into the position with his vast experience from DoubleClick to help us really pieces all together, and
bring a great focus in our execution.
Simply, our objective here is that we want to marry the art of display, which is the engagement it offers with the
science of search advertising relevancy and measurability. We have a lot of inventory, great inventory both across
our Content Network already and across YouTube and that our goal really is to focus both on the advertisers and
publishers here for advertisers, really scaling the advertising process for media planning, buying, selling, all the
way to optimization and for publishers helping with increasing the yield, and that they are experiencing.
We have great, great headways already in Q3. We had NBCOlympics.com using DoubleClick serving ads over
30 million unique users. In Europe, they use the platform very effectively to increase the number of transactions
and reduce the cost per transaction by 33%. So, this measurability and reach is already very effective across our
network and our existing properties. As Sergey mentioned a long-term focus for us to get all the pieces together
and execute and grow the business.
As far as Checkout goes, I think again, we continue to evaluate what is the best ways to focus and utilize the
existing headway we have made. There is really nothing, really new to announce here other than we are
considering how best to apply the service, going forward. We are open to all kinds of options and we will evaluate
it as and we see the results.
Eric Schmidt
Стр. 10 из 16 24.10.2008 16:31

Patrick, do you want to handle the last question?
Patrick Pichette
Yes, I would just like a clarification. You said about D&A specifically or is it OpEx excluding D&A and TAC that
was a question?
Ben Schachter - UBS
No, I was really looking at the depreciation and looking at the cost of goods less the TAC. If you look at those
excluding stock and they are both flat quarter-over-quarter and that has never happened.
Patrick Pichette
Yes, what we have done is in the first part of the year, we had been accelerated some depreciation amortization in
the bunch of equipment now is flow through. That is really the core driver of that.
Ben Schachter - UBS
Thanks.
Eric Schmidt
Okay, thanks. Next question?
Operator
We will go next to Doug Anmuth from Barclays Capital.
Doug Anmuth - Barclays Capital
Thanks for taking my question. First one for Sergey, you made some comments last quarter indicating the
coverage may have dipped too low. Can you talk about what you did with coverage during 3Q and a little bit on
your updated view on that?
A second one for Hal, can you just talk about how advertisers are changing their behavior and strategy in terms of
keyword bidding in this environment, and what is happening with average cost-per-click and what is happening with
ROIs as well. Thank you.
Hal Varian
Sure. Hi, Doug, I can start briefly on coverage and maybe Sergey can follow-up. I think one of the things that we
have probably done a better job in the last year or so, is we have done a much better job of eliminating the bad
ads than we have introducing functionality that makes it particularly easy to enable, good ads. This is not really a
dial that we just want to turn. We have a very clear goal, which is to show as many high relevant ads against
queries as possible and there are lots and lots of queries still out there that we can do better on.
We have a good list of those, particularly complicated long queries, or queries that have very diverse meaning.
Queries with modifiers, for example if you look on 'Wee Games', we have ads. However, if you type in 'best Wee
Games', we do not. Your plumber is not on AdWords. So, the goal is not really too explicitly we try to figure out
how we get coverage up. The goal is to figure out how we add the bidding functionality, so that advertisers can
serve better ads. If you are actually looking at your components of the RPM equation, which we do not really
break out much. Generally you are seeing what we have said in the past, which is the coverage is in the ballpark of
the historic lows.
Jonathan Rosenberg
With respect to the advertiser behavioral side, people focus on this aggregate cost-per-click measure. As we
have said before, it is misleading, because it is aggregating across the entire world, and it is aggregating across
AdWords and AdSense So relatively small changes in the mix can show up in that number. We do not really think
it reflects the actual advertiser behavior, in a very clear way.
Our experience is advertisers are willing to take all the clicks we can give them at the current CPC, and even in
tough times. We think that will continue to be true because nobody wants to turn away a customer. So, we think
that is actually a pretty solid number and will continue to be so and thank you.
Sergey Brin
Стр. 11 из 16 24.10.2008 16:31

Yes. This is Sergey. You are exactly right, that is what I know in the last quarter. I should mention that we have
made progress. For example the quality-based bidding launch that we talked about earlier increased our
coverage significantly and fundamentally as Jonathan says look at page of our web search results. I think we are
far from the ideal set of advertisements and there are many advertisers that I think ought to be showing up certain
situations that that are not for variety of reasons. So, I think there is certainly opportunity to give end users better
higher quality, advertisers they are going to add their overall search quality experience.
Eric Schmidt
Okay. Thank you. Thanks Sergey. Next question?
Operator
We will go next to Justin Post from Merrill Lynch.
Thanks. Now you have had a bunch of mobile phone launches. I am wondering if you can give us an update on
what you are seeing on the query volumes and maybe an estimate on when that could be maybe 5% of your total
volumes and then on the currency I think you said it cost you $80 million in the quarter. Is that one time as you
established the hedges or this is ongoing thing that could last a few more quarters?
Eric Schmidt
This is Eric. We said publicly for the last few months that we are seeing an explosion in mobile search volume. It
is a lot of it has been enabled by the fact that these new sets of devices have much more powerful browsers. So,
they are on 3G or E-Video networks and they have more powerful browsers and people are busy browsing. You
know just an amazing amount of time. We do not show the exact numbers, but I can tell you that the compound
growth rate is one of the fastest growing things in the company.
Patrick, you want to answer the second part?
Patrick Pichette
Yes, the $80 million was – in both Q2 and Q3 because we have launched these programs and put them in place,
they are much higher than what you can expect in the future. In fact, we have got the 18-month programs mostly in
place for the three big currencies I talked about and now we are going to be in maintenance mode. So, from that
perspective it will be less.
If the US dollar keeps appreciating will you continue to see a revenue benefit.
Patrick Pichette
As you put hedges over the long-term, yes, the answer is yes.
Thank you.
Eric Schmidt
You are assuming it will or will not. So, we never know. I will say, yes, we never know, whether currency is going to
go up or down. Let's move to our next question.
Operator
We will go next to Ross Sandler from RBC Capital Markets.
Thanks for taking my question, just two quick questions. First on the retail category, so eBay painted a pretty
disastrous picture for ecommerce and the consumer in general last night, stating that there was a meaningful
slowdown in activity beginning in August and deteriorating in the mid-October.
Clearly that company is having some specific issues, but you did not mention retail as a category of weakness in
Стр. 12 из 16 24.10.2008 16:31

your prepared remarks and judging by your numbers, especially in the US that would suggest that you are pretty
well diversified.
So, can you comment on the current trends in the retail category and then second on the UK?, Google changed
its policy on bidding on gambling keywords this morning and it appears that those ads go live tomorrow. So, unlike
prior policy changes this one was delivered with a little advanced notice, agencies got the criteria this morning,
and campaigns go live right away. So, any reason for the quick rollout there? Thanks very much.
Eric Schmidt
Thank you. We will have Omid, since he is in London, he will answer the second question. The first question, we
have looked at what we think will happen in the next few quarters. The problem is, there is so much uncertainty
now in the financial markets, in the press, and in potential government action, and so forth.
It is very hard for us to give you a sense of what is going to happen in retail or any category between now and the
Christmas season or over the next 12 months or so forth. Hal, you have looked at the various categories, if you
want to can you give some macro comments about categories for us?
Hal Varian
Well, when you look at the US aggregate statistics, we definitely saw weakness in US offline retail the numbers
that are reported by the government. One thing that we think at Google is that when there is a recessionary
environment, people are counting their pennies, they are going to be researching their purchases, looking for
bargains, and this potentially has something of an upside for Google. We referred to this last time I called it the
Wal-Mart effect that as people shop more carefully they are going to be researching the things they buy. So as
Eric said, we do not really know what is going to happen. This is a speculative statement but we think that this
effect could actually work to Google's benefit potentially.
Eric Schmidt
Omid, do you want to comment on the UK.
Omid Kordestani
Sure. I think to be honest with you, this is one of the benefits we have now of much tighter attention to every
aspect of our international operations. We now have both Nikesh, our Head of EMEA and Tim Armstrong, Head of
Americas attending our executives meetings, and they are frankly upset of policies and questions that the market
had put on us, and we really are being much more responsive to these things to our sales organization and
change these policies, very quickly to address to the market demands. So, I think you – we will definitely work with
our agency partners and customers to make the transition as smooth as possible.
Eric Schmidt
Thanks. So our next question?
Operator
We will go next to Jeffrey Lindsay from Sanford Bernstein.
Hello and thanks for taking my question. We just wanted to talk a little bit clarification on the improvement in
margins. Was this due in any way to improved terms on the AdSense deals or was it primarily expense control? If
it was expense control was that really through avoided hiring or was there actually any staff reduction? Thank you.
Patrick Pichette
I can answer on the expense side. Across all categories of expenses, people have been very diligent over the
last 90 days and I can – and on the specifics of hiring, I mean, we have continued to hire. We just hire in many
areas. We are continuing to hire because we have a lot of needs and then what we are doing is just doing
responsibly. So there – we will continue to hire, that is why you see the net improvement in headcount but it is truly
broadly across all categories of expenses that we are focusing let it be AdSense, it covers it.
Eric Schmidt
I am not aware of changes that would – on the ad or ad partnership side that would result in margin change.
Omid?
Стр. 13 из 16 24.10.2008 16:31

Omid Kordestani
No.
Eric Schmidt
Okay. The next question?
Operator
We will take our next question from Youssef Squali from Jefferies.
Hi, thank you very much. Two quick ones; first on CapEx, if I look at CapEx this quarter, so $450 million was the
lowest we have seen since Q1 of 2006. Are we at a point, well, basically the bulk of the infrastructure is already
built and now any incremental is all that much smaller. Is CapEx starting to normalize?
Second, a question for Sergey. You talked earlier about GeoLocal with product like Maps and Earth is big
monetization opportunity, so we have talked about them for a long time and they remain opportunities. One of the
issues there has been this direct access to the advertisers to the local merchant. Have you – are we any – are we
closer to cracking the code on that?
Eric Schmidt
Patrick, do you want to give a sense of CapEx?
Patrick Pichette
Yes, with pleasure. I mean essentially, CapEx is a lumpy business in many instances. So think of data centers
going up and down I mean one quarter you have it, one quarter you do not, so we are going to continue to invest
in CapEx, we are going to continue to invest heavily in CapEx, so we have no plans of slowing down. What you
see here is just a nature of that lumpiness. We are obviously getting better at it, so with efficiencies every extra
unit of capacity is cheaper for us, so we are going to benefit back.
Were there any costs pushed out into CapEx into Q4?
Patrick Pichette
No, none.
Okay.
Eric Schmidt
Sergey and maybe Jonathan you want to have a look about the GeoLocal ad opportunities?
Sergey Brin
Yes, let me talk about it. Certainly GeoLocal has been a substantial source of investments on the part of our
company and you are absolutely right. I think it is a really big monetization opportunity but it is going to have a
pretty long bootstrap time because there are so many small businesses and you have to get them all in the loop.
Technology is evolving quickly with respect to things shifting to mobile phones and some of them will have GPS
now, some of them do not, some have cell ID different device and things. I do think that this is an investment that
we are going to have to keep investing in for some time till we get really big payoff.
I should mention we already have fairly substantial revenues from geo local, so it is not the case but somehow this
is I mean this is a good chunk of our business and I expect that when we do finally bootstrap lots and lots of local
advertisers. When there is some settling of the best user experiences for doing this both on mobile devices as
well as on the desktops, I think you will see a substantial ramp there.
Jonathan Rosenberg
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Eric, do you want me to add anything. Yes? This is Jonathan. The biggest thing I would reinforce from Sergey's
comments is, this is an area where we are winning. Maps is the most popular mapping site in the world. We have
got all sorts of data now for over 160 countries. We are also doing some very exciting things in terms of ramping
our ability to get data for areas where there are not very good maps, where we are harnessing the power of users
to enter information in.
On the local side, what we are doing really goes beyond the traditional Yellow Page types of activities and I mean
we are taking all the information that a business would want or a user to see; reviews, hours of operations, photos,
web results, and we are embedding all of those on to these maps which have a great deal of traffic. So, if you just
run a query, steakhouse in Chicago or something like that and when you click on the map and select a particular
listing, you can now do things like click on Street View and actually see the restaurant. So we are very pleased
with the traffic that is being driven.
One other thing I would actually suggest you try one of the coolest maps applications I saw. Go to swisstrains.ch
to see the precision of Swiss trains in real-time and you will actually get a visceral sense of what it is going to be
like for people when all of this stuff works on their browsers and works in mobile devices.
Eric Schmidt
Let’s go ahead and Krista I think we – this is – we are sure of running out of time, maybe this should be our last
question.
Krista Bessinger
Yes, this is our last question. Please.
Operator
Our last question comes from Jeetil Patel from Deutsche Bank.
Great, thank you. Just one last question; on your AdSense syndication network, can you talk about the rollout of
the quality score initiative? Is it still at first half '09 rollout or perhaps a little longer and have you learned anything
around the testing that you are doing there or still tweaking that? Thanks.
Eric Schmidt
So, again, you are using the word quality score. Could you just be precisely define what you mean?
The scoring index you are looking at for your syndication network, so rating each partner out there; just curious
how that –how that initiative or program that you are looking at launching is progressing?
Eric Schmidt
It is actually in the process of being launched. A number of partners already working with it and the plan is to get it
done in early next year. Yes, so and obviously we spent a lot of time with them to make sure that their sites are
done properly, our system responds properly to their query traffic and so forth.
Got it. How often will the scoring system change? Will it be real-time or will it take a month at a time or quarter at a
time?
Eric Schmidt
We tend to be very dynamic because these systems have feedback in them. So, as they learn, they get better at
judging, what is a higher quality click and as they learn they get better and better and that is why such a nice
model.
Sergey Brin
This is Sergey. Probably I think we have had this system in place for AdSense for Content for a long, long time.
Now it is the extension of that into AdSense for search. These are obviously some of our larger customers that
have significant implementations and we are taking our time to roll it out in a way that is have sensible for both us
Стр. 15 из 16 24.10.2008 16:31

and them. This is something that we have been doing for a long time within AdSense for Content, now that will be
applied more broadly.
Eric Schmidt
So, why don't we go ahead and just finish up? I want to thank everybody for spending time. Everybody is very
busy with all the things going on around the world. Thank you for our panelists and our call in today. From my
perspective, there is an awful lot of stuff going on in the world, there is an awful lot of actions that we hope will be
taken correctly by governments around the world, by the bankers and by the institutions that are there to make
sure our systems run well.
We have a duty and responsibility to run Google well. We take a long term view. We have the opportunity before
us and we have the time and the patience to build a great future which is what we hope will happen for everybody.
So thank you very much.
Operator
This concludes today's conference. We thank you for your participation. You may now disconnect.
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Стр. 16 из 16 24.10.2008 16:31

Google, Inc. Q2 2008 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/85608-google-inc-q2-2008-earning...
Google, Inc. Q2 2008 Earnings Call Transcript
July 17, 2008 | about stocks: GOOG
Google, Inc (GOOG)
July 17, 2008 4:30 pm ET
Executives
Krista Bessinger - Director of Investor Relations
Eric Schmidt - CEO
George Reyes - CFO
Sergey Brin - Founder and President of Technology
Jonathan Rosenberg - SVP of Product Management
Omid Kordestani - SVP of Global Sales and Operations
Hal Varian - Chief Economist
Analysts
Imran Khan - JP Morgan
James Mitchell - Goldman Sachs
Douglas Anmuth - Lehman Brothers
Ben Schachter - UBS
Mark Mahaney - Citi
David Joseph - Morgan Stanley
Presentation
Operator
Welcome, everyone to the Google Inc. conference call. This call is being recorded. At this time, I would like to
turn the call over to Ms. Krista Bessinger, Director of Investor Relations. Please go ahead, ma’am.
Krista Bessinger
Стр. 1 из 15 24.10.2008 16:32

Good afternoon, everyone and welcome to today’s Q2 2008 earnings conference call. We have a slightly
different line-up today. With us are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer;
Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, SVP of Product Management; Omid
Kordestani, SVP of Global Sales and Operations; and Hal Varian, Chief Economist. Eric, George, Hal and Sergey
will provide us with their thoughts on the quarter and then Jonathan and Omid will join us for Q&A.
Please note that this call is being webcast from our investor relations website and our press release, issued a few
minutes ago, is also posted on the website along with slides that accompany today’s prepared remarks. A replay
of this call will also be available on our investor relations website in a few hours.
Now let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward-
looking, including statements regarding investments in our core business; seasonality; traffic acquisition costs;
increases in the cost of sales; international growth; statements regarding the benefits of our acquisition of
DoubleClick; and our expected level of capital expenditures.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and
we undertake no obligation to revise or publicly release the results of any revision to these forward-looking
statements in light of new information or future events.
Please refer to our SEC filings including our quarterly report on Form 10-Q for the quarter ended March 31, 2008
Copies can be obtained from the SEC or by visiting the investor relations section of our website.
Also, please note that certain financial measures that we use on this call such as EPS, net income, operating
margin and operating income are expressed on a non-GAAP basis and have been adjusted to exclude charges
relating to stock-based compensation. We have also adjusted our net cash provided by operating activities to
remove capital expenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP
reconciliation can be found in our earnings press release.
With that, it is my pleasure to turn the call over to Eric.
Eric Schmidt
Thank you very much, Krista. We’re obviously very pleased with what we believe are good results in one of the
weaker quarters in our normal yearly cycle. The traffic and revenue growth was strong across all regions and
verticals. Traffic and revenue have held up well despite uncertain economic conditions, as everybody knows.
International, of course, a big emphasis where Google is once again contributing more than 50% of our revenue;
good growth in rapidly growing markets such as Brazil and China.
We continue, of course, to make critical and fundamental investments in the infrastructure of the things that are
most important, and in particular, search. We continue to scale our index; we continue to make sure that our
information is the freshest possible and we are reducing latency or delays that people experience. So as a result,
we are continuing to deliver on our fundamental mission of the most relevant and fastest results of web and other
kind of information.
In ads, in addition to all of the normal ad improvements that we see, the partnership with Yahoo! was obviously the
signature event. David Drummond testified two days ago, both for the House and Senate. I liked it so much I
wanted to read it.
The internet is a dynamic and competitive environment and that is due to the openness that has been a hallmark
since its inception. Our non-exclusive commercial agreement – that is very important, by the way, non-exclusive --
with Yahoo! will maintain and expand that competition. It creates new efficiencies that will benefit consumers,
advertisers and publishers as well as protecting privacy and spurring innovation.
Google and Yahoo! will remain fierce competitors. This continuing competition will help fuel innovation that is
good for the internet, users; good for the internet, good for the economy. Openness, interoperability and
competition are central to our culture at Google, central to the vibrancy of the internet and central to the growth of
a free market.
We believe that the non-exclusive ad deal – remember it is not a search deal -- that was done with Yahoo! is a win
for the industry primarily because it allows Yahoo! to remain independent, which we believe is very
pro-competitive.
DoubleClick of course, is the other big piece of news. Integration is now underway and going very smoothly, with
Стр. 2 из 15 24.10.2008 16:32

display as a big opportunity. And big opportunity, by the way, because the strategy of offering value to advertisers
and publishers is one that we can offer very much worldwide.
Putting our team together, of course, we've really now delivered on this global organization that everybody here
knows about, and it is beginning to bear fruit. [Angalore] for example, developed some great new ad tools that
were delivered last quarter; [Zurich] created our new Insight feature on YouTube which lets anyone who uploads
videos see traffic information. [Hifa] developed another great new YouTube feature called Imitations.
My point here is not to highlight the hundreds and hundreds of ones that happen all the time, every quarter, but to
say it really is a global company. So we now have more than 30 products that support more than 30 languages, up
from five products and 30 languages just a year ago. So people want to use Google in their own language and we
are delivering on that.
Just to finish up my hopefully short comments, we are very, very happy to have Patrick Pichette on board as our
new CFO with 20 years experience in financial operations and management in the telco industry. I've talked to
him; he is coming up to speed. He is going to be a tremendous contributor at Google for many years to come. I
am very, very excited about that.
I want to make sure that we thank once again George Reyes, my friend and colleague for more than 20 years.
George stayed on board even more than a year after he announced his intent to retire. This shows you the kind of
person that he is, to try to help Google and to help all of us meet our objectives. He has made a tremendous
contribution to Google, which we have highlighted before. We are going to miss him, and we are very much
looking forward to working with Patrick.
In our order today we are going to have George, who I have just highlighted, if I can boast about him some more
without making him too embarrassed; and then we will have him followed by Hal Varian. Larry is out this week. Hal
is our Chief Economist and there have been so many questions about Yahoo!/Google economics and so forth.
Hal is the perfect person to talk about how does the auction really work and what does the global environment
mean for Google?
George, do you want to take it away?
George Reyes
We had another strong quarter, with gross revenue increasing 39% over Q2 of 2007 to $5.4 billion. Google.com
performed well, up 42% year over year to $3.5 billion, driven by strong traffic growth and to a lesser extent,
monetization.
AdSense revenue grew 22% over Q2 of 2007 but was down slightly on a sequential basis, reflecting a continued
focus on delivering high quality traffic to our advertisers and typical Q2 seasonality.
Now let’s take a look at aggregate paid clicks. Aggregate paid clicks include clicks related to ads served on
Google properties, as well as ads served on our partner sites. Aggregate paid clicks grew approximately 19%
over Q2 of 2007 and were down slightly on a sequential basis, again reflecting a continued focus on delivering
high quality traffic to our advertisers and typical Q2 seasonality.
Now I’ll discuss our international performance. International revenue accounted for 52% of revenue, or $2.8
billion. The UK was solid with revenues of $774 million, up 29% year over year but down 4% sequentially,
reflecting typical Q2 seasonality and negligible FX impact.
Revenue growth in EMEA was strong, primarily driven by strong performance in Benelux, Ireland and parts of
Western Continental Europe including Germany, France, Spain and Italy, fueled by relatively strong performance
in automotive and consumer packaged goods. Asia and Latin America continue to show impressive growth as
well with Japan, Argentina, Australia, Brazil and China being notably strong in Q2.
Now turning to expenses, traffic acquisition costs were $1.5 billion, or 28.4% of total advertising revenue, down
from 29.2% in Q1. AdSense TAC was $1.3 billion, while TAC related to distribution partners and others who
direct traffic to our websites totaled $154 million in the quarter. As we grow our AdSense Partner Network and
embark on new initiatives, we may see additional pressure on TAC rates going forward.
Other cost of revenue, which includes $9 million in stock-based compensation, increased $49 million over Q1 to
$674 million. The largest driver of the increase was the increase in costs related to our data centers, including
depreciation, equipment and operations. We continue to anticipate that other cost of sales could increase going
forward.
Other than cost of revenue, operating expenses totaled $1.64 billion, including approximately $264 million in
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stock-based compensation. Expenses related to payroll and facilities increased $1 million over Q1 to $810
million.
At the end of the quarter, we had a full-time employee base of 19,604. We added 448 net new employees in Q2
with roughly half the new non-DoubleClick hires coming on board in engineering, followed by sales and marketing.
We have implemented and continue to follow a discipline hiring process in all areas of our organization. But as we
have indicated in the past, we will continue to invest in our core business both in the U.S. and internationally.
Remember also that we usually see an uptick in starts over the summer, coinciding with the end of the academic
year.
Turning to non-GAAP operating profit which excludes stock-based compensation, it increased to $1.9 billion in
Q2, with non-GAAP operating margins of 34.5%. Note that interest income and other in Q2 was $58 million, down
$109 million from Q1. To be clear, this was not a writedown nor was this due to any losses. Instead it was
primarily due to lower yields on our cash balance; lower average cash balances as a result of cash used in the
first quarter to acquired DoubleClick; lower net realized gains on the sale of our marketable securities; and an
increase in expenses as a result of more activity under our foreign exchange hedging programs.
Finally, turning to cash, operating cash flow remained strong at $1.77 billion, with CapEx for the quarter of $698
million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments, including
data center construction, production of servers and networking equipment. We expect to continue to make
significant investments in CapEx in future quarters. Free cash flow, a non-GAAP measure which we define as
cash flow from operations less CapEx, remained strong at $1.7 billion, up 63% year over year.
In summary, we believe our core business continues to demonstrate strength while we make key investments to
pursue long-term growth opportunities.
At this point I want to take a moment to thank Eric, Larry, Sergey and the rest of the management team for having
had the privilege of working with all of them. This is an opportunity that I will never forget.
Let me turn it over to Hal.
Hal Varian
Thanks, George. Eric asked me to comment on the state of the economic environment and how that’s impacting
Google.
When we look across sectors of the United States we see that on a year-on-year basis, the query growth has
been positive in every sector we track, even including those sectors that are generally economically sensitive
such as automotive, real estate and travel. We also see that year-on-year revenue growth is positive in every
major sector expect for real estate, and even that one is only down by a small amount.
When we look at the sub-sectors, we see some interesting patterns. The weaker components are just the ones
you would expect to see based on the macroeconomic climate: auto financing, home financing and real estate
agencies. These are the sorts of queries you would expect to see when auto or real estate transactions have
already taken place, and we see, as we all know, fewer transactions are taking place in those sectors.
It is interesting to note that year-over-year automotive ad spend is up, even though the growth in auto financing is
down. I interpret this as saying that auto advertisers are willing to spend on clicks, but the weakness is on the
consumer side. However, I should emphasis this behavior is not universal. Spending seems to be holding up
pretty well in other consumer durable categories such as home appliances and home furnishings.
When we turn to Europe, we see a similar pattern. In the UK we had across-the-board year-to-year growth in both
revenue and queries, with the sole expectation being real estate. Continental Europe grew in both queries and
revenue in every major vertical.
So to summarize, when we look across verticals we see that consumers are being cautious in their online
spending patterns just as they are in their offline spending. Despite the weakness in the economy, advertising
revenue seems to be holding up remarkably well in most sectors. I think this illustrates the point that we have
made several times. During periods of slow economic growth, the last thing an advertiser wants to cut is its
spending on search-based advertising.
So with that, let me pass the mic to Sergey, who is going to talk about what he will be doing in products.
Sergey Brin
Hello, everyone. It is really exciting for me to update you over the past quarter. We have had a lot of substantial
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improvements, new launches. Let me just start with search. We have substantially increased the size of our index,
and in particular, actually the index of documents that we refresh every few minutes has also grown tremendously.
So now, our users get much fresher and faster results, across a greater range of sources.
We have -- just all told, to give you a sense for this -- launched over 100 search quality improvements this quarter,
so roughly one a day. Some of the highlights:
Again, we have increased coverage in universal search, which means you get your web pages mixed in with video
and images, news, books, all of those things we are able to show more and more. That improves our search
results and it pays us a double dividend for all of the work we have been doing on corpuses such as book search.
We also just added blog results at the bottom of the page in the past quarter, and our blending of Maps results we
have put into 130 more countries than we had in the past.
We have also been running more one box; for example those of you in Europe might have enjoyed our Euro 2008
one box in June during the soccer tournament.
Let me just take a step away from just the basic search. Many of you, I know, use iGoogle and in fact we know that
because we have had such tremendous growth, especially internationally. More than 60% of iGoogle users are
now outside of the U.S.
We had some very important developments, in particular with themes this quarter. You might have seen our
iGoogle artist campaign where 68 artists across 22 countries created new themes for the product. This
encouraged hundreds of thousands of people to sign up for iGoogle, and of course the good thing is so many of
them changed their themes to these artist themes. I have personally set my iGoogle page now to go do a rotation
across the top themes, and that is really fun. Everyday I get a new feel and they are aesthetically pretty exciting
and varied.
If you are listening to me right now you probably speak English pretty well, though of course if you are reading a
transcript that has been translated using Google Translate then you might not. It is very important to be able to
have access to information in languages that you don’t speak, especially if you are a non-English speaker. I mean,
the amount of information that’s out there that can be useful to you that’s not necessarily in your native language is
huge.
To this end, we have been of course working on Google Translate. It now covers over 20 languages. We’ve
added 10 just in this past quarter alone and now we let you translate from any one of those languages to any other
of those languages. We’ve been able to improve the performance and have tremendous growth in usage as well.
We’ve also been working on our cross language search so we don’t necessarily just search literally in the
language that you search; we are able to produce translated results in other languages now, more automatically.
You can expect us to continue to expand that work.
In ads I should highlight a notable development. Our AdSense Network now allows third parties to host and serve
ads, and this has been important to many advertisers. Just as one example, Lenovo is now advertising with us
because we can support this kind of third-party ad serving.
Now advertisers find out more about where they should be advertising because we’ve launch the Google Ad
Planner. That lets you see what kind of sites a particular audience that is interested in whatever the advertisers’
are advertising, which sites do they visit? What are the breakdowns of demographics? It lets you do very
complicated statistical analysis and I encourage you all to try it out, even if you are not an advertiser, it is pretty fun
to be able to play with that data.
Let me just jump a little bit onto YouTube. Probably most of you have had a chance to try to watch some YouTube
videos, and in fact, our data suggest that more and more of you are. We now have 13 hours of video uploaded
every single minute, so as you can imagine, it would take quite a many lifetimes to watch all the YouTube videos.
It also gives you the opportunity, of course, to watch video on very specific topics that may be of interest to you.
We've also been experimenting on YouTube with a variety of advertising formats and we have had some great
successes. Lionsgate marked the opening of the film “The Forbidden Kingdom”, for example, and it had over 4
million video views on YouTube just from that promotion. So that was very exciting for us and for Lionsgate.
I should mention that mobile search has been growing quite a bit, and of course you may have heard about our
partnership that we've launched in this past quarter with NTT DoCoMo in Japan. Japan is a very strong market for
mobile search because of the devices, because of the culture it is just a really tremendous environment. People
do many, many mobile searches. We have a robust advertising market there for mobile search. We are certainly
optimistic that many of these advances which may initiate in Japan will carry over to the rest of the world as the
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devices and culture catch up.
I want to also mention that our mobile search experience, which we have now rolled out to more countries and we
have made substantially faster, is also causing a lot of growth in that segment for us.
One of things that I am most excited to tell you about today is our progress with Apps. I should mention first of all
that our enterprise business with respect to Apps has been growing very rapidly. There are now more than half a
million businesses that are using Google Apps for their day-to-day productivity, and that is just a tremendous
number.
Just to give you color on what some of these businesses include, in this past quarter Valeo, one of the world’s
leading automotive suppliers now has 32,000 users using Google Apps, including of course Gmail, Calendar,
Docs and so forth.
The Government of Washington D.C. has 38,000 users on Google Apps. General Electric has adopted the
security side of the Apps products which was formerly Postini, and that’s running on over 300,000 users. Just to
call out a few other highlights, the Telegraph Media Group and Sanmina both also adopted Google Apps.
So, it’s been a very exciting quarter for that. Starting from these half a million businesses, including some of these
incredibly successful businesses, we really expect this to be an important area for growth and development.
I just want to tell you, we don’t view Google Apps and what not as we don’t want to create a closed environment or
a walled garden. We really want to encourage more and more cloud computing and we want to see more and
more companies out there successful in deploying cloud solutions.
One of the things we launched in this past quarter is the Google Apps Engine which basically means that
developers can easily write an application and deploy it on our scaled infrastructure rather than having to try to put
together all of their own computers, data centers, networking, all of that stuff. We handled all of that for the
developers.
We have a rapidly growing base. Just a few fun examples: we had a nine-year-old boy who contacted us with a
bunch of questions, and then he has been able to develop his app on the Google Apps Engine. He said that he
has been able to do it now because previously he was spending all of his allowance on hosting, and he could no
longer afford that.
Other, more commercial ventures include PixVerse, a chat application that switched to Google Apps Engine after
we launched it, and it was subsequently purchased by the social network Hi5. As well as for those of you who are
into poking, BuddyPoke, a very popular open social app which is running on Orkut and MySpace has also been
developed on the Google Apps Engine.
We expect that we're going to have a lot of uptake of our various developer products and APIs, including the
Google Apps Engine, and ultimately we think that the cloud is just a really great place to deploy Apps because of
the simplicity for end users to access them, the ease of updating and maintaining them; it is really a great
environment. We obviously live it everyday and we believe it really helps people be more effective and productive
with their day-to-day lives.
Anyway, all told, a great quarter, lots and lots of progress and it has been a pleasure to talk to you about it.
Eric Schmidt
Thank you very much, Sergey. Why don’t we go straight to everybody’s questions? So are we ready? Let’s hear
the first question.
Operator
(Operator Instructions) We’ll take our first question from Imran Khan - JP Morgan.
First, if I look at that UK growth rate, it seems like on a year-over-year basis the growth rate decelerated 10 points.
I was trying to better understand, is it because of the law of large numbers, or are you seeing any specific
weakness that’s dragging the growth down there?
My second question is related to the mobile search. Sergey, you talked about the mobile search opportunity. Do
you think that the mobile search will expand the search volume? What kind of impact do you expect on your
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revenue per queries with that? Also, have you have seen any impact from Apple iPhone yet? Thank you.
Eric Schmidt
Jonathan, do you want to go ahead and answer the UK question?
Jonathan Rosenberg
Sure. Thanks, Imran. I think basically we are just seeing the typical Q2 seasonality. If you look back at Q1, that of
course was very big. I think we talked in the Q1 call about some of the verticals like travel.
The other point would be that we have very, very high market share in the UK. As our market share grows, I think in
past quarters when you looked at seasonality, the gains in market share may have been masking some of the
seasonality. Now what we’re seeing is just the typical, appropriate Q2 seasonality. [Inaudible] the impact was
negligible.
Eric Schmidt
Sergey?
Sergey Brin
On mobile I certainly expect to see an uptick in search volume due to mobile because you are obviously not
always at your desktop, but you pretty much always want to know something.
With respect to the revenues per query I think that will vary from market to market and I think it will also vary as we
develop more specialized monetization programs for mobile phones. You know, in some respects you can’t fit as
much advertising, obviously, on a really small screen. On the other hand, the queries are very localized. I mean,
you might be standing right next to that pizza place that wants to entice you to become a customer, or something
like that. So I think there’s an opportunity for much more fine-tuned targeting. Both of those things are going to
balance out.
With respect to the iPhone, I don’t have data off the top of my head with respect to the latest iPhone 3G launch
but certainly the iPhone, much as I mentioned also the maturity of the Japan market, these better devices --
devices with great browsers like the iPhone that make it easy for people to search and then view the results -- they
definitely have much higher usage per device than other kinds of devices.
On a rough order of magnitude, imagine that by 30 times as many searches per user might be done by an iPhone
user as compared to a conventional cell phone. So I think as you see more iPhones out there, as you see more
other phones that also start to have capable browsers and input methods, I think you’re going to see tremendous
growth there.
Operator
Your next question comes from Brian Pitz - Banc of America Securities.
We have a couple of questions around ad coverage. Clearly you’ve intentionally reduced coverage on
Google.com over the last number of quarters to improve ad quality. Would you give us a sense for how far you
are in this process?
On a related note, you extended Auto Match to more advertisers this quarter. Do you see this as a significant
driver of coverage going forward? Any other comments on coverage would be great. Thanks.
Eric Schmidt
Jonathan?
Jonathan Rosenberg
Sure. So basically coverage, you know, coverage I think from a quarter-to-quarter basis has been going down. It’s
pretty much at an all-time low relative to the last few quarters. That’s basically our continued focus on quality. I
don’t really see that changing significantly. Larry often says that we’d be best off if we just showed one ad, the
perfect ad. So I really don’t think that coverage is going to change much.
Eric Schmidt
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The second question was?
Pertaining to Auto Match, traction there. Do you see this potentially as a driver of coverage?
Jonathan Rosenberg
Yes, sure. We only just started expanding Auto Match. It was in beta so we only expanded it, I think, to a slightly
bigger group of advertisers this quarter. Certainly Auto Match can help increase coverage because it helps find
more keywords that a query will trigger on, but we’re going to apply the same quality efforts to the output of Auto
Match. Overall I think that the net result in terms of total coverage would not be significantly greater. I do think the
impact on revenue would be positive.
Any sense on what percentage of advertisers aren’t really optimizing their budgets that Auto Match could help
with?
Jonathan Rosenberg
Wow. A large number.
Eric Schmidt
I think it’s really too early to give you. The answer is it should apply to everybody. Sergey, do you want to add a
little bit about coverage?
Sergey Brin
I just want to talk a little bit about that. There is some evidence that I think we’ve been probably a little bit more
aggressive in decreasing coverage than we ought to have been. Historically we’ve had this 50/50 rough notion
that when we have an improvement in advertising targeting we try to split the benefit, if you will. We try to reduce
our coverage at the same time as improving the monetization.
But clearly that’s not the ideal strategy indefinitely, because we don’t want to end up with no ads. And in fact from
a quality point of view, we now find our ads are a significant addition quality-wise to our page. They are just a very
important source of information. We’ve been actually re-examining some of that. There was some evidence
internally that perhaps we were a little overly aggressive in decreasing coverage in this past quarter.
Operator
Your next question comes from James Mitchell - Goldman Sachs.
Hal, I think you mentioned that queries were up year on year in every major sector, but erratic within subsectors;
for example, in auto finance as opposed to autos. If queries are down in a particular subsector, do advertisers
generally respond by bidding up the keywords that are available so they can fully spend their budgets? Or is that
not the case and budgets go unspent?
Hal Varian
Sometimes we see that happening where advertisers are competing more and more aggressively for a smaller
set of consumers. So we typically do see a price response to this slackening in the sector. We’ve seen that even
in automotive, for example, in the Spring when there were a lot of deals offered to get cars off the lot and the
automakers were advertising quite aggressively in all media to try to convince consumers to buy. So this is an
effect that we sometimes encounter.
Operator
Your next question comes from Justin Post - Merrill Lynch.
Eric, on the press release you chose to highlight that you are seeing some economic weakness and I don’t think
the company was talking much about that last quarter. Are you seeing things kind of deteriorate a little bit further
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than where we were a quarter ago? Can you give some color on that?
On the YouTube acquisition, I am just wondering where you are at with some press comments out recently.
Where you are at on that versus your deal model at this point?
Eric Schmidt
I’m going to have Hal actually talk a little bit about the nature of the environment, because I think all of us have
anecdotal evidence but in fact Google has continued to do well. There is obviously evidence of a slowdown in the
U.S. and Europe; you read it in the paper every day. We continue to believe that we are very, very well-positioned
in such a slowdown and especially if it gets worse.
The reason is there’s a flight to quality and in particular a flight to measurability. So our economics are more driven
by, for example, if people stop searching for something we might not be able to do ads against it. Maybe Hal can
articulate that a little bit better than I can.
On the YouTube side, we are enormously happy with YouTube. YouTube is a cultural and end user success that
is far, far greater than we ever expected. On the revenue side, we are working on revenue scenarios and new
revenue products. I personally do not believe that the perfect ad product for YouTube has been invented yet.
We’ve just brought out some little in-video ads which look very good.
Hal, maybe you want to talk about the economics and maybe Omid, you can talk a little bit about YouTube sales?
Hal Varian
Sure. On the consumer side I already mentioned that some durables like consumer appliances and furnishings
were holding up pretty well. In fact, if you look at apparel and shopping people are still spending money online in a
pretty strong way.
I think part of what is happening is that as times get a little uncertain price-sensitive consumers are going to shop
more carefully to try to make every dollar count. That means they are going to be doing research online and they
are going to be doing shopping online. So I think we have a little bit of the Wal-Mart Effect going on that as times
get tough, people are going to watch their dollars. In many cases that means doing more shopping online.
Omid Kordestani
I wanted to add to Eric’s comments about YouTube. I think we are spending a lot of time internally on
understanding how to streamline and integrate DoubleClick, improve the sales process as well as just pure
customer activity. We are having great success.
Again, as usual, I’d like to highlight some of our advertising names from Lenovo, Foot Locker, Lionsgate, Oreo,
Kraft Foods, Ikea, and Lipton Tea. I mean these are the kinds of advertisers that we really did not have access or
the proper types of advertising opportunities for before, as much as we do now.
The Foot Locker example is a particularly good one as the media they use on Google was extremely broad from
YouTube search, the content network, within the content network, also access to MySpace, Gadget ads, print ads
and audio ads. So you can just see the way that our salesforce and our product teams are working with a broader
set of advertisers, a broader set of offerings and a very much integrated platform approach.
Search has taken a long time for us to develop and it still takes a lot of time for us and a lot of hard work. We’re
putting a lot of energy on getting the right approach on YouTube and display advertising.
Operator
Your next question comes from Christa Quarles - Thomas Weisel Partners.
A couple of questions on DoubleClick. First I was wondering if you could outline how much it contributed in the
quarter?
Second, if you could indicate if you’re seeing any macroeconomic impact there. Obviously you made some
comments about search specifically, but I was wondering if you could highlight it for DoubleClick?
Third, some comments about how you are changing the buying process around display and where you see the
innovations coming in display over the next year or two?
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Eric Schmidt
We are not going to break out DoubleClick. Basically it’s early and so far we’re very pleased with it. It looks like it
was a very, very sharp decision on our part to go ahead and get the integration, the team looks very strong.
The strategy, once the acquisition was approved and so forth and so on, was to develop a broad product line that
went from the large customer, large advertiser which was the traditional DoubleClick customer all the way down to
the very small advertiser through Ad Words and essentially integrate all of that offering. This is public information;
we’ve said this for the previous year during the regulatory strategy. Indeed, that’s happening now.
So the theory here is that an advertiser will be able to advertise across all of the different sized publishers with
one mechanism; that’s the goal. We think we can achieve that, and it will be fairly soon. Some number of months,
not years.
The macro?
Eric Schmidt
No particular change in the macro environment. DoubleClick is doing well. Omid, do you want to emphasize any of
this?
Omid Kordestani
I agree with Eric. I think we have anecdotal experiences. Some customers that act erratically I think are really
affected maybe by the macro environments and stop the spending but then we see that pick up again the
following month. So it’s very hard to judge this. I don’t think we have any trends that we can comment on.
Jonathan Rosenberg
Some of the innovation has already started. We have an internal roadmap in terms of the innovations for the next
couple of years which I obviously can’t go through here. But just this quarter we launched the Ad Planner which
basically lets advertisers designate target audiences and see exactly which sites they want to attract for an
audience. We’ve got the Google Ad Manager in test which is basically a free tool that helps publishers sell,
schedule, deliver and measure their inventory. Sergey I think mentioned in his script the third-party serving and
we’ve also got some new features to let advertisers select target sites and keywords.
So all of that, I think, is really addressing the big problem in display which is the highly fragmented market. That’s
the focus of most of the innovations that you’ll see coming out in the next year or so.
Operator
Your next question comes from Doug Anmuth - Lehman Brothers.
A question for George, we’re not letting you off the hook quite yet. On the interest income, you detailed four
pieces actually that contributed to the decrease in the interest income quarter to quarter. Could you provide a little
bit more color there? In particular, how should we think about that going forward? Is this a one quarter effect, or is
it something that we’re likely to see continue over the next couple of quarters? Thank you.
George Reyes
I think what we’re trying to portray here is that in fact we have a very healthy business and we have been investing
in the business. The lower yield on our cash balances is what has really brought down what you’ve seen thus far,
all the way through the average cash balances. As a result, that cash is used first. DoubleClick is also a consumer
of that as well.
In terms of the marketable securities and the FX hedging, are you implying that those two are less significant
factors to the impact this quarter?
George Reyes
No, we’re actually in the process of building our internal portfolio here so it’s hard for me to say more than that.
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Operator
Your next question comes from Ben Schachter - UBS.
Ben Schachter - UBS
The headcount growth was really among its lowest levels in a long time. Is that 500 new net employees a number
you are comfortable with on a quarterly basis? Where are you still looking to add and what areas are you
comfortable with headcount?
Eric Schmidt
In the first place, we won’t suggest a number going forward. The company is now a reasonably large company by
comparison to its peers and we don’t need massive new people in large communities that were not there before.
We’ve largely built out a good management structure globally so it’s really dependent upon the kind of quality of
people we can hire.
You’ll remember a few quarters ago we actually allowed the hiring engine to get ahead of things and we said that
we would focus on that a little bit more carefully and we have indeed done so. So I think what you’ll see going
forward is prudent management of headcount growth. The company is going to continue to grow. This number
may or may not be a specific number going forward but the important point is we are paying a lot of attention to
headcount. We want to make sure that we maintain the quality and of course also as a larger company we need to
make sure that we can use the resource effectively. We never want to misuse somebody’s talents as an
employee.
Ben Schachter - UBS
If I could just follow up on a question on mobile, Sergey, you had discussed the evolution of the marketplace. At
some point, can we expect to see a completely separate marketplace for mobile ads that comes with its own
auction? Or will it continue to be an extension of the current model?
Sergey Brin
Currently we do allow advertisers to place separate ads for mobile. In fact, I see them converging more in the
future because once you start to get these phones that have fully capable browsers and things like that, then
there’s not that much reason for disparity.
Now, at the same time as I mentioned, phones in some sense will have new capabilities that the desktop doesn’t
such as location, things like that. We may add some capability beyond the basic desktop advertising capability
that we have. I think it will be a more fluid experience for advertisers in terms of you can select “please run on
mobile too”, or “don’t”, rather than trying to have completely separate worlds.
Jonathan Rosenberg
Just adding to Sergey’s comments, I agree with him. I’d just like to give you an example of one of the dynamics
that will be different on the mobile phones. We’ve been talking for awhile about the fact that when you are on a
mobile phone, you are much more likely to be interested in consummating a transaction if you run a search.
One of the winners of the 1,700 applications submitted for the Android Developer Challenge was a product that
was developed called Android Scan. Basically what it allows a user to do is take a picture of a product with a
barcode and then they can research the product on their mobile browser. They can do price comparisons, they
can figure out how far a store that can actually sell that product might be, or they could actually figure out who to
buy it from online. Imagine the value of an ad in that kind of a scenario.
So the bidding mechanisms for some of the local ads will differ in terms of the efforts that we have to scale to get
them onto mobile but in many ways, they could be much, much more valuable.
Operator
Your next question comes from Mark Mahaney - Citi.
Mark Mahaney - Citi
On the G&A line it seemed a little bit ahead of expectations. Were there any one-time integration-related costs in
that G&A line?
Back to YouTube, Eric you made a comment about not having yet found maybe the ideal ad solution. Could you
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just talk about what the technical challenge is there? Or is it finding the right format or figuring out a way to best
target ads against, or trying to figure out what the real content of a video is? Thank you very much.
Eric Schmidt
On the YouTube side, we basically are innovators in advertising and we’ve tried post-roll, pre-roll, in the roll kind of
ads. We’re having a great deal of success now with these in-view ads where the ads are essentially in the bottom
and embedded inside of the video. That looks like a pretty good winner right there.
We’ve also had some significant success with gadget ads and gadget video ads are likely to be particularly
effective because they allow you to tell a story. If you look, the advertisers that we are working with and the
content that we are working with are also using the format differently. As a typical example, the Lionsgate deal
which was announced yesterday, Lionsgate works with people who upload segments of the Lionsgate movies that
they like and they capture them using our ClaimWare content product, and then they can run ads against them.
So again, here’s a community that’s busy making copies that are not authorized of content, and Lionsgate has the
good judgment to say rather than go and sue those customers, instead let’s go capture that, show an ad against
them and get them even more excited about our content, our other content.
So we think those kinds of models are sustainable and scalable on the Internet and are likely to be very, very
significant sources of revenue. I think it’s axiomatic that a new form -- and I view YouTube as a new form of video
entertainment -- will not ultimately use the old forms to monetize.
There will be new monetization forms that will go for the new entertainment form, and that’s what we’re seeking.
That is the Holy Grail. When we find it or the combination of it, it’s likely to be very, very large because of the scale
and scope of YouTube.
On the G&A line, I want to make sure we answer that question.
George Reyes
Mark, this is George Reyes. The main increase was due to legal and professional and outsourcing services, as
well as fees. That’s your answer. As you know, we also don’t give guidance.
Mark Mahaney - Citi
One-time or generally sustainable?
George Reyes
Generally sustainable? No.
Eric Schmidt
Unfortunately, the legal stuff is bursty because we have suits. It’s “welcome to the information economy.” Next
question?
Operator
Your next question comes from Jeetil Patel - Deutsche Bank.
First of all, you talked earlier about basically your ad coverage may have come down a little too much, and Larry’s
idea is to be a little bit more targeting oriented, serving the right ad. Can you talk about in terms of that evolution or
phase of the business, how far along are you in trying to better optimize the ads against the intent of the consumer
across the entire network and platform today?
Second, on the AdSense for content side of the business, how difficult or easy would it be to convert it into a
display ad network? Is this something that you would look to do? How does display ads around AdSense for
content, do those two things marry up nicely or not?
Sergey Brin
Great questions. Let me take them in the reverse order. With respect to display in AdSense for content, we
actually allow for display in AdSense for content today. That’s a publisher setting that publishers need to choose.
In those cases where they are chosen then we will run display ads to the extent that their yield is higher than the
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text ads that we can run in that space. So that’s something that we are doing today and we are looking to grow and
we are certainly excited about.
In general, let me just take a step back. Looking at the evolution of our overall search, text ad system from its
initial start when we could barely feed the ad team pizza with the money that we were able to generate off the first
iteration of our ads to several iterations down the road, over a number of years, and through the maturation and
the attraction of the advertiser base and them being able to set up really good campaigns for them. I mean, that’s
a multi-year process to get to where we are now and we obviously are continuing to improve, to attract new
advertisers, to improve the targeting and so forth.
Now that we have the advertiser base, we don’t necessarily need to wait quite as long to attract the advertiser
base to begin with. But for advertisers to create new types of ads for new mediums and what not, these things do
take time for us to go through all the experimentation of what formats and systems might work best, that also
takes time.
Just me looking back going from ‘98, ‘99, 2000 where we were then with search ads, I feel some of these areas --
YouTube ads, content ads, display and what not -- are actually progressing at a faster pace.
You made a point earlier that you may have gone too far on the ad coverage side and the ad relevance. Are you
seeing, basically, that it’s affecting the frequency of usage or search frequency because you may have dialed
down the ad coverage a little too much? Is that where the impact you are seeing? And if you dial it back up a bit
you may see greater usage from a consumer standpoint in terms of frequency of searching across the entire
network?
Sergey Brin
First of all, we certainly run plenty of experiments. We’re all the time running experiments. We run some people
without any ads at all, and we know that our ads add value so we know that we’re happy about having them.
Now, I don’t know it’s the case that we necessarily decreased them past, below the optimal point, but I know that
we will do that in the near future if we continue with the system that we had in place. That’s what we’ve really had to
have second thoughts about.
What makes more sense to me is to go for the optimal coverage, if you will. That’s what we’re trying to figure out
exactly how to do now.
Operator
Your next question comes from David Joseph - Morgan Stanley.
Universal search, it seems like you have been ramping it up or you ramped it up more during the quarter. I’m just
wondering what percentage of total search results universal search is today? Also, what different user behavior is
seen with universal search versus traditional text search?
George, it looks like the incremental margin for Google improved pretty nicely sequentially and year over year.
We do know that you had an easier comparison with the year-ago period, but I’m wondering if you also have been
implementing or if some of the programs that you have been implementing for increased financial discipline are
actually starting to work now? Thank you.
George Reyes
Yes, we have actually made a very concerted effort to drive more accountability into the business. That’s a theme
that will carry forward.
Eric Schmidt
Sergey, do you want to answer the universal question?
Sergey Brin
Yes, universal search. So we’ve got a bit under one-third of all queries now have some kind of universal search
component in them. By comparison, in the first quarter it was more like one-tenth; so it’s a big, big improvement.
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Our feeling is definitely that this, and experiments by the way, also justify this, but this is significantly improved
information for our end users. It’s amazing to me just if I look at the video, for example, video universal which
alone is at about 10% now of queries, I mean people have videos for things that you wouldn’t expect.
I mentioned before, I was looking to buy a RAID, like an array of disks to store stuff on. It’s not the kind of query
you would expect might have good videos about it. But in fact, the particular RAID I was interested in, somebody
had put together a video. This is how you take it out of the box; this is how you swap a drive on it; all those things.
And in fact, that compelled me to buy that particular RAID.
I think that you’ll find increasing universal coverage in purposes that you wouldn’t expect, and that source
particularly would be valuable because the user would not have thought to click on the separate video tab in that
query. We have to bring that information to the user; that’s what we’re doing.
So are you seeing click-through rates a little bit less on universal search? Does this actually present a little bit of a
different model for search, where you’re going to be able to monetize video a little bit differently? Or images, for
that matter?
Sergey Brin
Less than universal search?
Eric Schmidt
No, again, the system in aggregate is actually where you are seeing --
Sergey Brin
I see. You are saying “how would it affect”. We monitor these things pretty closely when we launch them and it’s
not that we are unwilling to launch things that might adversely affect the ad click-through rates or what not, but in
sum total the launches that we’ve done I don’t think are negative. I think it’s positive.
Operator
Your final question comes from Jeffrey Lindsay - Sanford Bernstein.
Could you give us more detail about your wireless strategy and indicate just how you intend to participate in
wireless in the U.S. over the next four to five years? Could you give us any updates on the Android alliance?
When are Android devices expected?
Could you give us an indication of, do you have to share revenues with Apple and/or AT&T to get Google onto the
iPhone? Thank you.
Eric Schmidt
Sergey, do you want to start on wireless, overall wireless strategy?
Sergey Brin
Overall wireless is very simple. We want our products and the internet and the web as a whole available on as
many devices in as many different markets as possible, so it’s very easy. We have a two-fold approach for that.
First, we write our Apps and try to make them available on many different platforms like the iPhone that you
mentioned, or we put them on Symbian devices, on BlackBerries, on Windows Mobile devices, all those we have
Google Apps for.
We’ve also, because we’ve had some challenge sometimes getting things out like necessarily easily being able
to get access to location data to make maps work really well or things like that, we’ve developed this Android
platform. We’ve had the same calling from carriers, from handset makers and other application makers that they
just want to be able to get these things out more easily.
So we are very excited about Android. We are still expecting phones before the end of the year to ship with
Android.
Eric Schmidt
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Jonathan, do you want to talk a little bit about some of the partner stuff?
Jonathan Rosenberg
The main data point in terms of Android, there are 34 companies in the Open Handset Alliance so we are doing
pretty well there and I already alluded to the contest that we ran and the results there with that example of the
Android Scan barcode. There are others that we are very excited about. I think there’s a Weather Channel
application that will alert people and wake them up when there’s a severe weather alert that they need to be aware
of. There are some fantastic ones, one called GWalk that helps people take city tours dynamically, and it adjusts
to your location and shows points of interest. So there are already very, very significant efforts going on in the
developer community in anticipation of the launches later this year.
Eric Schmidt
Let’s finish up. Thank you very much, Jonathan and everybody else. I want to thank everybody for spending so
much time with us. We look forward to talking to you next quarter and please have a good summer. Thank you
very much.

Стр. 15 из 15 24.10.2008 16:32

Google, Inc Q1 2008 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/72846-google-inc-q1-2008-earning...
Google, Inc Q1 2008 Earnings Call Transcript
April 18, 2008 | about stocks: GOOG
Google, Inc (GOOG)
April 17, 2008 4:30 pm ET
Executives
Krista Bessinger - Director of Investor Relations
Eric Schmidt - CEO
George Reyes - CFO
Sergey Brin - Founder and President of Technology
Larry Page - Founder and President of Products
Jonathan Rosenberg - SVP of Product Management
Omid Kordestani - SVP of Global Sales and Operations
Analysts
Ben Schachter - UBS Securities
Doug Anmuth - Lehman Brothers
Mark Mahaney - Citi
Brian Pitz - BoA Securities
Heath Terry - Credit Suisse
Mark May - Needham & Company
Presentation
Operator
Good day and welcome everyone to the Google, Inc conference call. Today’s call is being recorded. At this time,
I would like to turn the call over to Ms. Krista Bessinger, Director of Investor Relations. Please go ahead, ma’am.
Стр. 1 из 16 24.10.2008 16:32

Krista Bessinger
Good afternoon, everyone and welcome to today’s first quarter 2008 earnings conference call. With us are Eric
Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of
Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of
Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Operations. Eric,
George, Larry, and Sergey will provide their thoughts on the quarter and then Jonathan and Omid will join us for
Q&A.
Please note that this call is being webcast from our investor relations website. Our press release issued a few
minutes ago is also posted on the website, along with the slides that accompany today’s prepared remarks. A
replay of this call will also be available on our investor relations website in a few hours.
Now let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward
looking, including statements regarding our investments, seasonality, traffic acquisition costs, increase in the cost
of sales, international growth, operating margins, growth in headcount and our expected level of capital
expenditures. These statements involve a number of risks and uncertainties that could cause actual results to
differ materially.
Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2007
Copies can be obtained from the SEC or by visiting the investor relations section of our website.
Also please note that certain financial measures we use on this call such as EPS, net income, operating margin
and operating income are expressed on a non-GAAP basis and have been adjusted to exclude charges relating
to stock-based compensation. We have also adjusted our net cash provided by operating activities to remove
capital expenditures which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP
reconciliation can be found in our earnings press release.
With that, it’s my pleasure to turn the call over to Eric.
Eric Schmidt
Well thank you very much, Krista, and we’re obviously very pleased with another strong quarter for Google. It’s
clear to us that we’re well-positioned for 2008 and beyond, regardless of the business environment that we find
ourselves surrounded by.
The Search, Ads and Apps strategy that we articulated last year is beginning to show transformative effects;
literally things that people could not do before the products and services that we’ve offered in each of the
categories. The business model continues to work very well and we’ve had good, disciplined management of our
operating expenses, so thank you very much for the management team. It’s also interesting to note that paid
clicks growth is much higher than has been speculated by third parties.
In Search, we continue to invest in quality, particularly internationally. Quality improvements lead to increased
traffic and share. Quality here means better algorithms, more content – deeper, if you will -- into the web; a larger
index, faster response, all that surfing. But it also implies things like Maps and Earth and geospatial information,
it’s all integrated in a way that people can find things and see things that they could never do before.
In Ads, we continue to increase value for advertisers and publishers; again, broader and deeper solutions. Better
tools for advertisers, many, many quality improvements in advertising which has the interesting effect, which
means that we’re showing fewer but much better ads in each cycle. That’s a key part of the Google success story.
We’re putting more and more flexibility and control in the hands of advertisers so they can decide exactly where
their ad should go and measure it in the way using Analytics that they could not do before. It’s also important to
note that DoubleClick has been added now to the portfolio and DoubleClick is hugely strategic for us. It allows us
to offer a much more comprehensive solution for advertisers and publishers. This has been asked for long time
and now we are able to do it.
In the Apps case, we are working to build out a whole new online web experience and we’re beginning to have all
of the pieces now in place. For example, the recently announced Salesforce.com partnership allows us to
integrate for an enterprise customer with the Salesforce.com products as well as all of the Google application
services and sold through their direct sales operation.
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By doing these partnerships and by investing heavily in new applications models we think people will spend more
and more time online and they will able to do things like sharing documents, sharing calendars, dealing with
photos and all those kinds of things in a way that had not been possible before.
This has all been possible because of the many, many talented Googlers and the executive leadership that we’ve
seen in the last quarter and I want to thank everybody for that. The Google model really does rely on technology
and innovation. The repeatable and scalable business that we have built is really poised for global growth.
So with that, George, do you want to take us through the numbers?
George Reyes
Thanks, Eric and good afternoon, everyone. Before we begin, please note that our consolidated results as
reported today include the results of DoubleClick from March 11, the date of the acquisition, through the end of
the quarter. The overall effect was immaterial to revenue and only slightly dilutive to operating income, net income
and earnings per share.
Turning to our results, we had another strong quarter with gross revenue increasing 42% over Q1 2007 to $5.2
billion. Goggle.com performed very well, up 49% year over year to $3.4 billion, driven by strong traffic growth and
to a lesser extent, monetization growth. AdSense revenue grew 25% over Q1 2007, reflecting solid performance
across both the Content and Search networks.
Now let’s look at aggregate paid clicks growth. Aggregate paid clicks include clicks related to ads served on
Google properties, as well as ads served on our partner sites. Aggregate paid clicks grew approximately 20%
over Q1 2007 and approximately 4% over Q4. Paid click growth on Google.com in the U.S. remains healthy and
other markets are showing strong growth as well.
Now I’ll discuss our international performance. International revenue increased to $2.65 billion, now accounting for
51% of total revenue. International markets have tremendous potential for growth. As is typical in the first quarter,
the UK was strong with revenues of $803 million and 16% sequential growth as the travel and finance verticals
rebounded as expected from Q4.
Revenue growth in EMEA was primarily driven by strong performance in the UK, Benelux and the Nordic countries
fueled by strong pan-European performance in travel. We also saw solid gains in relatively smaller markets such
Ireland, Spain and Italy. Asia and Latin America continue to show impressive growth as well with India, Argentina
Australia and Japan being notable performers in the quarter.
Now turning to expenses, traffic acquisition costs were $1.5 billion or 29% of total advertising revenue, down from
30% in Q4. AdSense TAC was $1.3 billion, while TAC related to distribution partners and others who direct traffic
to our websites totaled $143 million in the quarter. Other cost of revenue, which included $9 million in stock-based
compensation increased $108 million over Q4 to $624 million. The largest driver of the increase was the increase
in costs related to our data centers including depreciation, equipment and operations. We continue to anticipate
that other cost of sales could increase going forward.
Other than cost of revenue, operating expenses in Q1 totaled $1.5 billion, including approximately $272 million in
stock-based compensation. Expenses related to payroll and facilities increased $53 million over Q4 to $809
million.
At the end of the quarter we had a full-time employee base of 19,156 including more than 1,500 heads from
DoubleClick. Since the close of the acquisition we’ve conducted a review of our ongoing headcount requirements
and approximately 10% of the US DoubleClick workforce was laid off in early April. An additional 15%,
approximately, are expected to leave the company in the U.S. in the near to intermediate term, because they are
in a transitional role as they move through the system. These headcount reductions apply only to the U.S. and do
not include employees associated with the future planned divestitures of the Performics SEM business. To-date
there have been no headcount reductions outside the U.S.
On an organic basis, excluding DoubleClick, we added approximately 800 employees in Q1 with the majority of
new hires in engineering, followed by sales and marketing. We have implemented and continue to follow a
disciplined hiring process in all areas of the organization, but as we’ve indicated in the past, we will continue to
invest in our core business both in the US and internationally.
Non-GAAP operating profit, which excludes stock-based compensation, increased to $1.8 billion in Q1, with
non-GAAP operating margins of 35.2%, approximately 30 basis points above Q4.
Turning to tax, our effective tax rate for Q1 was 24%, down from 25% in Q4 of ‘07, reflecting the mix of foreign
versus domestic earnings.
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Finally turning to cash, operating cash flow remained strong at $1.78 billion with CapEx for the quarter at $842
million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments including
data center construction, production of servers and networking equipment. We expect to continue to make
significant investments in CapEx in future quarters.
Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, remained
strong at $938 million, up 50% year over year.
So in summary, we believe our results reflect the strength of our core business across our three primary initiatives
-- Search, Ads, and Apps -- with disciplined investments that position us very well to capitalize on the long-term
opportunities we see for Google.
Now I’ll turn it over to Sergey.
Sergey Brin
Thanks, George. We are obviously very excited about this past quarter and in listening to the results you’ve heard
so far, let me highlight some of the incredible Search improvements we’ve made in the past 90 days.
We have launched almost 100 Search quality improvements just in this quarter, so we’re talking about over more
than one per day, including weekends. A lot of these have been international Search quality improvements. You
will note just on the more visible things, our new tailored homepages in Asian markets. Japan now has a
completely new homepage that is tailored to Japan and our Korean Search now has the universal search results
that you’ve seen in some other countries.
Now we’ve also done a much better job selecting local country results and demoting foreign results in those
countries. As a result, we’ve actually seen our Search quality measures uptick significantly in several countries.
Also, I just wanted to highlight some of the user interface improvements we’ve been doing. You’ll notice that you
can now search within a site directly from the Google Search results. So, you’ll get a top level site in your search
results, but if you want to further search within that site there is a box right on the search results page and you can
quickly do a query. If you search for something like NASA or a IMDb you’ll see examples of this.
Now I’ve told you in the past year how we have deployed Universal Search and I mentioned a number of times but
the work wasn’t done with the initial launch. In fact, over the past year since we launched it we’ve been able to
double the number of queries where we show these blended results especially in images, video and books. I’m
sure many of you are seeing these all the time. This has really improved our ability to answer questions. We’ve
also deployed Universal Search in a number a of countries; we just added 17 countries that support the Maps
Universal Search feature.
I wanted to also just highlight to you on the subject of Maps how we’ve been developing there. We’ve deployed
Street View in 30 cities now, up 12 from the past quarter. Our new Street View API has got other sites integrating
Street View with them.
We are also at the same as we are spending a lot of effort collecting this data ourselves from Apps, we’re
including user contributed data. In fact, we now allow users to correct information about local entities and locations
on their maps. In fact you can see recent changes as they happen right now if you go to
maps.google.com/recentedits.
I also want to quickly highlight that we have been working on difficult queries, the challenging ones and we had a
substantial initiative over this past quarter where we were able to make a very large improvement in what we
consider the hardest 20% of our queries. That was a big achievement and it really stands out in my mind.
Finally, let me just tell you a little bit of our progress on Mobile, because more and more people are accessing our
Search and other services through mobile devices. We’ve now launched a much faster Search experience and
it’s now available in Mobile in 40 languages. Our Mobile Search traffic, as a result, and just due to market growth,
is growing very rapidly. That’s for Search, but actually across other properties also, we’ve now launched a new
version of our YouTube mobile site and mobile users now can access the entire library of videos. If you
remember in the past it was a subset because there was little bit of delay in transcoding, but now all the videos
are available. We’ve had mobile playbacks increase tremendously.
We also just wanted to highlight that we’re pleased with our participation in the recent 700 megahertz spectrum
auction; I know we did not come back within any spectrum wins in that but I feel this has been an important
experience for us and we are also very pleased with the results that winners will be adopting these great open
access concepts that I think will benefit consumers and developers alike.
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Anyhow, those are the highlights in Search and Apps and mobile. Now Larry, over to you
Larry Page
Thank you, Sergey. I’m very excited about the quarter as well and I’m going to talk to you a little bit about ads and
applications. So, in ads we did a bunch of things in the last quarter. One of the main areas was AdSense where
we made improvements for both publishers and advertisers. We launched Google Ad Manager for Publishers,
which helps publishers make their entire inventory available on the AdSense network. In testing, publishers greatly
increased their revenue with this, so we are really excited about it.
We also launched demographic targeting on social networks which uses gender and age information from over
30 social networks to help advertisers place ads.
Now switching gears to AdWords, one of the things we launched was a tool that gives customer’s better control
and more data and those things are the Conversion Optimizer which we first launched in 3Q07. We are now
seeing really rapid adoption across our advertiser base. What that Conversion Optimizer does is let the
customers bid per customer conversion rather than per click. You can pay basically when someone buys
something rather than when someone clicks something.
As you can imagine, that really lets people optimize a lot better and we’re really excited about getting wider and
wider adoption of that and it has really been taking off like we had hoped.
In Analytics we’ve added industry benchmarking. Google Analytics, if you don’t know what it is, lets you track
visitors to your website and your overall traffic and how you are doing, and so on. Industry benchmarking is a new
feature we launched so you can tell how you’re doing against others in your same industry, and that’s been a very
popular feature. We find that Analytics’ customers, people who adopt Google Analytics, really just end up
increasing their advertising spend with us as they better understand their metrics.
Now let me switch gears and talk about YouTube. YouTube obviously we are very excited about, it keeps growing
extremely fast. We are up to about ten hours of video uploaded every minute on YouTube. So you can imagine
just the rate of that is incredible.
We have in-video ads, which have great adoption on YouTube and customers are increasing the size of their
campaigns. We’ve now launched AdSense for videos, so now these in-video ads can run on sites besides
YouTube and they may perform very well; we are seeing much better click-through ads than banner ads and that’s
a really big deal and we’re really excited about that.
Now we completed our acquisition of DoubleClick and we’re very, very excited about that. They are a technology
and networking partner, a tremendous asset and we’re very excited about what we can do together. We’re working
on combining our ad network with DoubleClick display ad management products. Together that really helps
publishers and advertisers generate more revenue, and we can put much more richer and diverse content on the
Internet. So, I think there are huge opportunities there and we’re very excited about how thing are going so far.
Now in Apps, I will switch gears to Apps, we launched Google sites which is based on the JobSpot Technology
we acquired and makes it easy for anyone to create and manage a website. It makes it easy to add an entry as
Wiki. We use it for teams, projects, companies, schools and we’re already seeing a lot of interest in that.
We also rolled out Offline Docs using a new browser technology Google Gears where you get offline access to
your Google Docs. I think people assume with this cloud applications they’re really great, they are easy to run with,
no installation of software they but you wouldn’t be able to run them offline. We have a great new technology
Google Gears as I mentioned that lets you run these new web applications even when you are not connected to
the Internet. I think that’s a very big deal.
We’re also very excited about our Salesforce.com partnership. Salesforce has integrated our Google Apps
products into Salesforce. Now their users have a very seamless, nice access to Google Apps within their
Salesforce.com experience. We are very, very excited about that, as they are, as well.
Finally I just want to mention a quick note on our culture. We were really proud to win Fortune’s Best Place to
Work Award for two years in a row. This is an amazing honor to have, I don’t think we expected it, but it is a really
great thing. We’re also tops on Fast Company’s Most Innovative Companies List. So we work very hard to
maintain the best possible environment for our employees and I think that’s part of why you see the results that
you do out of Google.
Now I will go to Eric.
Eric Schmidt
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Thank you very much, Larry. Why don’t we go ahead and go to your questions and comments. We are very
interested in your thoughts on the quarter and any other insights you all might have. Krista, shall we get started?
Krista Bessinger
Yes, operator, we are ready to go ahead and queue-up for questions.
Operator
(Operator Instructions) We’ll take our first question from Ben Schachter - UBS Securities.
Ben Schachter - UBS Securities
Guys, congratulations on a nice quarter. I was wondering if you could talk about some of the key initiatives at
DoubleClick? What are the areas of integration that you think will be most difficult?
Related to that, if you could just give us an update on display and video ads and what types of ads you think are
performing better and worse than expected? Finally, any update on the CFO search? Thanks.
Eric Schmidt
Ben, on the CFO search we are very pleased that George has remained and is doing a great job, of course. We
have a whole bunch of interesting candidates that we are reasonably close to. We have not made any offers yet
and again, it’s an important position for us to fill but we’re very hopeful in the short term.
We also have the benefit of having Omid and Jonathan joining us as usual. Omid, do you want to answer the
DoubleClick questions to get started, and Jonathan maybe he can help you?
Omid Kordestani
Sure. We are just going through a very complete analysis of all the products and salesforce and service activities.
Fundamentally we are looking at maintaining the customer momentum that DoubleClick has had and benefited
from. Looking at, in a simple way, how do we get more of the advertising into their network and more of their
publishers benefiting from the advertising systems and infrastructure that we are assembling together now.
The overall goal here is basically bringing more effectiveness, more accountability more measurements that
we’ve been asked for to deliver on. This process in fact was exhaustively reviewed yesterday and there is a
strategy in place and you’ll hear of their product announcements in the coming months.
From a customer relationship standpoint, on the display side we are very, very active in taking advantage of our
properties, especially YouTube and the content network to increase the customer engagements. Just this past
quarter, I can just name a few of these names which I think will indicate to you perhaps the nature of how we’re
utilizing the salesforce to reach significant types of customers that we haven’t had as advertisers before: Nature
Valley, an incredible campaign through YouTube, utilizing everything from the contest platform, brand channel,
Contest Gadgets, the content network, FeedBurner so the complete host of our products. Other names like Forex
which used CPC placement targeting; Toyota, we actually even had the World Economic Forum at Davos using
the YouTube platform; Dunkin’ Donuts, VeriSign. So quite a diversity of advertisers now that we are working with
through this integrated relationship across all the properties.
Jonathan Rosenberg
Thanks Omid. Hi Ben, it’s Jonathan. In terms of display and the type of ads that are doing well, if you think about it
from a big picture perspective, we really feel we’re in a position to become the world’s largest display ads
provider. Over 90% of the daily impressions that we have are eligible for display ads and pretty much all of the
publishers accept our new format. The gadget and the rich media creative which are served by third parties are
pretty much all being adopted by folks.
I think that the biggest thing that we are seeing that Omid alluded to in terms of the examples is the concept of an
advertiser owning a concept across the entire web and finding their whole audience. Another example is
Activision. I think they use seven Google products to support the launch of the Tony Hawks Proving Ground
Game and Search, AFC, the YouTube homepage and I think the in-video format is working particularly well. The
one thing I would also add there is they are creating traction on mobile ads.
Operator
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Your next question comes from Justin Post - Merrill Lynch.
Thanks, two quick questions. First could you talk about your display model? Do you really see yourself being able
to make really interesting profitability on network sites or do you plan to maybe put some display advertising on
your own websites, which appear to be growing quite rapidly?
The second question may be for George, just the other cost of revenue growth is really about 80% if I back out
some of the stock-based comp. I am just wondering what’s driving that, and is that YouTube related at all?
Eric Schmidt
Jonathan and Sergey, maybe you want to talk a little bit about display and how we are going to use it in our
network in our own sites?
Sergey Brin
This is Sergey. Just real quickly, I mean there are certainly already sites that are Google-owned sites that run
display such as YouTube, for example, is a very obviously prominent one. It has a lot of inventory and obviously
that’s going beyond traditional display with the in-video kinds of ads that Jonathan mentioned.
I think there are some other Google properties that might be good fits though we haven’t made clear decisions; I
mean obviously more visual sites like Orkut there is some potential in Google Images but we don’t have any
specific plans to announce today in that respect.
I also think that we are certainly making progress on display in our network also and so I’m pretty optimistic on
both fronts.
Jonathan Rosenberg
The only thing I would add to that is now that we have got the DoubleClick acquisition behind us, we will also offer
the AdSense sites a media planning tool integrated with Dart for Advertisers by DoubleClick. I think you’ll see that
will substantially increase the lift that we are getting there.
Eric Schmidt
George did you want to answer the second question?
George Reyes
The driver that you are alluding to is basically driven by data center related expenses, the associated depreciation
that comes with that and bandwidth costs as well as some DoubleClick amortization.
Operator
Your next question comes from Doug Anmuth - Lehman Brothers.
Thank you very much for taking my question. You mentioned 100 quality improvements were implemented during
the quarter. Can you talk about the degree to which you’re already getting the price per click benefit and whether
that’s up to your expectations thus far?
Also, do you still stand by your previous view that Google really isn’t seeing any impact from the macro situation?
Thank you.
Eric Schmidt
On the macro side, we look at this really carefully and we do not see an impact as of this time. We’ve also had the
internal conversation of, what would happen if it were to occur? Our conclusion is that we’re well positioned should
economics change to continue to do well because our model is so targeted. Targeted advertising does well in
pretty much most scenarios, we think.
Sergey or Jonathan, do you want to talk a little bit about the other?
Sergey Brin
Стр. 7 из 16 24.10.2008 16:32

Let me just mention, the 100 search quality improvements I mentioned were to the search quality. I wasn’t
referring to the advertising quality experience. But we’ve also made improvements there, of course. If you recall
the clickable backgrounds that we eliminated recently which while they reduced clicks a little bit increased the
quality of clicks, and I think our advertisers certainly appreciate that.
But there are likewise -- I don’t know the exact number -- but there are certainly dozens, if not 100 improvements
in advertising quality that we also launched over this quarter. That’s going to benefit advertisers and it’s going to
benefit end users who are going to see more relevant, interesting advertising and obviously because those
connections can be more fruitful, ultimately that benefits publishers as well.
Jonathan Rosenberg
Are you asking about what the specific ads quality improvements were or are you asking whether or not the
scope, the degree to which the scope impacted pricing and RPM, what specifically are you asking about the
quality?
Well, obviously, as much as you are willing to share Jon. Honestly I am asking which quality improvements on the
advertising side would you say have had the biggest benefits thus far?
Jonathan Rosenberg
Sure.
Are they driving price per click, to the degree to which you expected them too?
Jonathan Rosenberg
Sure, quality improvements intra quarter, so Sergey mentioned there were quite a few. I think they were relatively
fewer in terms of impact in the quarter than we typically have. I think that was primarily not due to the number but it
was due to the fact that more of them came relatively late in the quarter compared to previous quarters.
I think the biggest ones that we alluded to publicly that Sergey did mention are the landing page quality
improvements; we’ve removed a lot of the need for ad pages so there has been substantial improvements there.
There also have been some policy changes, the visible and final URL policy matching so that users always know
where they end up when they’re clicking on an ad which we think in the long run is very positive. I think we also
announced the change in the UK trademarks policy so that we now removed the restrictions on ads on trademark
keywords in the UK, which is the way that we had it to-date. These are all things that are great for users.
I think that UK piece isn’t going to go live until Q2 so I am not sure it had much impact in the quarter. But the one
other thing that I saw, some folks have noticed was just a very modest test which was our automatic matching beta
test and that’s basically trying to extend an advertiser campaign’s reach by finding ads on relevant searches that
aren’t triggered by the advertiser’s keyword. But that’s really relatively modest because that’s just an initial test that
we just started.
Eric Schmidt
Just to add one more clarification. We often don’t know the exact improvement that we are going to see in the
very short term so at least from my perspective, I’m more concerned that the improvements be put in place and
that they work well and then of course we’ll get the benefit as the advertiser see those and as the network takes
advantage of it. We can take the long view of that.
Operator
Your next question comes from Mark Mahaney - Citi.
Mark Mahaney - Citi
I wanted to ask Sergey about some of the mobile data points. Are there enough data points, do you have enough
experience particularly in the international markets now to know what the economics of mobile search could like
relative to the PC search? Are the leads being generated off of mobile devices as qualified -- more so or less
so? Are advertisers willing to pay more or less for that?
I wanted to ask another question on the paid clicks. 20% year-over-year growth is obviously much better than was
Стр. 8 из 16 24.10.2008 16:32

feared. There still is a pretty clear level of deceleration in the paid click growth on a year-over-year basis even if
you trend line it going back a year-and-a-half. Part of that must be due to your quality initiatives. Do you think about
it terms of trying to get to a paid click growth at a certain anniversarying of these paid click quality improvements
whereby that growth will remain in the 20% or low double-digit rate at a more sustainable basis because of these
quality improvements? Thank you.
Eric Schmidt
Sergey do you want to talk about mobile?
Sergey Brin
On mobile, I don’t how the hard stats in front of me right this very second. I can tell you kind of anecdotally what
I’ve seen in the countries and markets where mobile has developed in the sense that devices have high
resolution, networks have low latency, the experience works which basically like Japan and a few others that are
up and coming, the mobile search and ads work very well.
I don’t have the exact data in front of me right now, as I said, but there is certainly nothing to dissuade me that it
would be substantially worse than traditional desktop search.
I think that if you look in the US and Europe which are a little bit behind those but I think are progressing, I think
you’ll increasingly a greater volume and a greater quality of mobile usage and consequently advertising
conversion ultimately.
Now, you have a significant challenge in mobile in that the screens are much smaller so you just can’t go
displaying nearly as much advertising or take as much space. On the other hand, you have much more relevant
and timely information like what location the person might be in and so that on balance leaves me quite optimistic.
Eric Schmidt
The short answer to your deceleration question is the answer is no. We look at the problem of paid clicks as one
of the components of an overall quality improvement. We know that if we can improve aggregate quality we know
that the value of a click, number of clicks and so forth will grow, and will grow at whatever the technology will allow.
So if you look, our absolute growth rate has been very, very significant and we’re very, very optimistic that this
model of staying focused on quality will give us not only the strongest ad network but a much broader set of
solutions for advertisers and it works well.
Operator
Your next question comes from James Mitchell - Goldman Sachs.
Great, thank you very much for taking the question. One question was with regard to the user response to
Universal Search in non-US territories, have you rolled it out? In particular, why do you think Universal Search can
help you gain share in those countries where you are not the market leader and where the incumbent lacks
comparable functionality?
The other question, I was just looking back over the past few quarters, I believe you stated your business was
less seasonally affected in the summer months in 2007 than in prior years. Do you think that something is
structurally changing your business to reduce seasonality or do you think that 2007 was erratic in someway?
Eric Schmidt
On the seasonality I’m not sure I agree with that characterization. There are so many variables that have to do with
product improvements, product launches, customer deals, renewing and change in TAC rates, all of those kinds
of things, it’s very difficult to say that looking at an aggregate number, in particular a change in seasonal growth
rate, was a very big deal.
We know there is a seasonality in the business; it’s very difficult for us to know exactly where it is. As you correctly
pointed out, Q2 and Q3 are traditionally weaker quarters and my guess is that that will be simply true because the
majority of Internet users are still in the Northern Hemisphere which is where people tend to take summer
vacations.
Sergey, do you want to talk about Universal Search?
Sergey Brin
Стр. 9 из 16 24.10.2008 16:32

On the Universal Search I think Universal Search is a very big win from the point of view of the Search experience.
Now in some of these international markets like if you look at Korea in fact the local competitors there do have
something that’s very much akin to Universal Search. So in fact I think the people’s expectations there are already
to have Universal Search results and so its not necessarily something new we are introducing to them there. I
think our ability to rank and bring in these diverse corpuses that we have will surprise people and they will be
impressed by how good it is.
In other markets you are right, I think that these additional corpuses and our ability to blend is a substantial
distinction and I think we are going to benefit from that in fact and obviously we have lots of international or foreign
language videos and images and so forth and we have a certain number of books as well in there. I think we are
going to benefit from all that hard work that we’ve put in those corpuses.
Jonathan Rosenberg
This is Jonathan adding one narrow point and one broad point on your question about seasonality. Narrowly within
each quarter, there are things that make one year significantly different from another; this year you had Easter
falling actual in Q1 whereas in previous years it has fallen in Q2. On the other hand offsetting that this year you had
a leap year which in this year was actually on a Friday although since it added one more day in the quarter, the net
results of leap year was giving us one more Monday in the quarter. When you think about that, that actually
equates to something in the ballpark of about 1%.
The broader question in terms of the business moving forward with respect to seasonality is highly dependent on
market share. In many markets if you look historically we were gaining share and in some cases in previous years
that’s significantly masked seasonality. In markets where we have very, very high share then the business starts
become, it starts to look more seasonal in nature than it has in the past.
Operator
Your next question comes from Imran Khan - JP Morgan.
Larry, you talked about a monetization improvement for social networking, how you are doing more demographic
targeting. Could you please give us some color like what kind of progress you made monetizing social networking
compared to Q4?
The second question is regarding how you’re improving the search quality in the international market. Can you
give us some sense in terms of the frequency of search in your lesser developed countries like Continental
Europe compared to more developed like US and UK, the frequency of search volume per person? Thank you.
Larry Page
On social networking monetization, I think its been an area where we have really applied a lot of new technologies
and then some of the demographic targeting and so on, which has been very successful. I think the challenge and
the opportunity there is there is a huge amount of inventory. We have obviously MySpace, Orkut, Inner Network
and a number of other social networks. There is a lot of usage of those. So there is a tremendous amount of
inventory and so part of it is just getting that advertiser ecosystem built up and people targeting that inventory and
doing it in a way that makes sense for those advertisers.
So I think we’ve made a lot of improvements and I’m optimistic that there are improvements to be made. That’s
balanced against tremendous inventory levels in those areas which it takes some time for advertisers to really
realize they are there and start targeting effectively.
Sergey Brin
This is Sergey. I don’t think we consider Continental Europe less developed. I do think that in the advertising
space, we have seen that they are sort of coming up on the ramps that the US and UK might have been a year or
two ago. So that obviously gives us great opportunity for growth advertising-wise.
But in terms of basic Internet usage and searches per user, while once again I don’t have the data in front of me,
what we’ve seen is it typically just depends on broadband penetration and quality of broadband and the more
people have access to great networks and computers to use them the more searches and overall internet usage
they will do. That’s why you see this skew during the week, that Monday to Friday we do tend to get a lot more
usage than on weekends. Obviously part of that’s because people are relaxing off the Internet on weekends, but
part of it also is that typically often people at home don’t have as good connectivity and Internet access as they do
at the office.
Стр. 10 из 16 24.10.2008 16:32

Operator
Your next question comes from Christa Quarles - Thomas Weisel Partners.
You mentioned in the UK that travel and finance has rebounded, I was just wondering if you could discuss travel,
finance and hopefully retail more broadly across the US and some of your other geographies in terms of strength
or any relative weakness?
The second question is should Yahoo! choose to outsource part of Search to you, I was wondering if you can
discuss philosophically what the benefit would be to Google’s own property in the sense that you have a broader,
deeper ad network, broader advertising if you will, coming to the site?
Eric Schmidt
On the Yahoo! question we are very excited to be participating in this test, at the beginning of the second week on
the test. I don’t think it’s really appropriate to speculate beyond that but its nice to be working with Yahoo! and we
like them very much. Omid, do you want to answer the UK question, or Jonathan?
Omid Kordestani
We will both probably take this on. I mean in general what we are seeing is that these verticals really behave by
region as you are indicating, and they are the factors that determine for example in each geography we have
talked about this in the past, renewal rates for finance or travel reservations that get done in UK drive those
verticals.
I think, in general we saw in Q1 a bit of a slowdown in retail, some postponement of budgets but we haven’t seen
anything that kind of significantly indicates to us that one vertical or another is at risk here. We are just going
deeper into these accounts, and in some cases when the budgets are delayed its made up by other online
categories.
Jonathan Rosenberg
I think if you think about what economists would typically theorize in a macroeconomic climate that was slowing
they look at sectors like some of the ones you’ve mentioned – automotive, luxury goods, we also track travel and
finance -- and you look for the ones that are more sensitive to macro-economic conditions, and look to see what’s
going on with them.
What we tend to see is that clicks in some of those sensitive areas do grow a little less rapidly than our overall
growth so the share of their total queries is actually down but on an absolute basis, they are all showing healthy
growth in ad revenue.
In the UK, for example, people are clicking on travel and local ads at a higher rate than they do in the US. In
finance, although certain components of finance are down, foreclosures are up and even more mortgages do
pretty well, if you think about foreclosures, every foreclosure at some point becomes a home sale and a
mortgage to somebody.
So generally what we are seeing is absolute growth even in those areas that are otherwise adversely impacted by
macroeconomic conditions.
You’re basically indicating that you tend to see price improvements in these areas as the conversions continue?
Jonathan Rosenberg
It varies.
Eric Schmidt
I think the best way to say it is that it’s possible that prices grow up in that situation simply because of the great
value of targeted advertising.
Operator
Your next question comes from Brian Pitz - BoA Securities.
Стр. 11 из 16 24.10.2008 16:32

Can you talk about how much of your international growth is really due to the sunsetting of European best practice
funding?
Separately, would you provide any updates on China and perhaps discuss any new initiatives that Kai-Fu Lee and
team may be working on over there? Thanks.
Eric Schmidt
Sorry, could you repeat the second question?
Sure, just updates on China and the team Kai-Fu Lee, things that they’re working on over there, some new
initiatives we may not have heard about?
Eric Schmidt
On the China side, things are going well. Why don’t we move to our next question?
Operator
Your next question comes from Ross Sandler - RBC Capital Markets.
Great, thanks for taking my question guys. Looking at the US growth rate of 30% approximately in the first quarter,
if you had to characterize your small, medium-sized self sign-up advertisers versus your large agency or direct
enterprise-sized advertisers, which segment was growing faster in the quarter relative to that 30%? Thanks.
Eric Schmidt
Again, I’m sorry we had a phone problem here. Could you just repeat the substance of the question again?
Sure. The growth rate in the U.S. is 30 % year over year. If you had to characterize which area was growing faster
between the small to medium-sized self-signup advertisers on your platform versus the larger agency or direct
enterprise type clients, which was the faster growing segment in the quarter?
Omid Kordestani
I don’t have the actual breakdown in front of me right now. What I will say is we are doing very interesting
collaboration between both of our channels; in fact, in some regions we have three with some resellers involved.
One of the things we tend to do is just try to put our relationships with the customers into the right channels. So in
many cases where we find that we can in a very effective way service our clients through our online organization
we do that and that organization in fact has top-tier clients now that are even some brand names that are
well-served by our organization.
What we’re trying to do with the direct sales organization is really focus on those higher-end calls into the C-level if
you will, to the CMO level where also we are presenting the full suite of products and integrated campaigns
between YouTube. In the US obviously we’re also experimenting with a lot of the new initiatives from TV, radio,
advertising, and so perhaps on a follow-up call we can get you more specific stats on the different geographies
and the ratios between those two channels.
But, there is a lot of movement of customers that we do again to optimize the relationship with the customers.
Jonathan Rosenberg
Just trying to add little more to color to Omid. We definitely tend to see that it is the larger customers that are the
bigger drivers of growth, whether or not on a relative basis in the previous year they were bigger drivers I think is
unclear. But we have released a lot of tools like Analytics and the Conversion Optimizer and those are the type of
things that tend to get adopted disproportionately by the larger, more sophisticated advertisers and we do see
that as advertisers adopt those tools it substantially fuels growth. So there certainly is significant growth with the
larger advertisers.
Стр. 12 из 16 24.10.2008 16:32

Operator
Your next question comes from Heath Terry - Credit Suisse.
You mentioned that you are seeing much better click-throughs on the overlay ads versus your normal banner ad.
By our measure, we’re only seeing running overlay ads running on content where you have clear relationships like
the NBA and Universal Music. What are the barriers to running ads on a broader spectrum of YouTube’s inventory,
particularly the user generated content that you’ve got?
Omid Kordestani
What we’re really focused on right now is working with YouTube management channel team to really actually go
from the, if you will the plumbing, and work all the way up with the customer’s advertiser fee; there is a lot of
integration work going on. YouTube was already a large DoubleClick customer and we are trying to basically
streamline how the integration of DoubleClick and YouTube can be improved and how we can take advantage of
our ad networks so that more of these advertisers could be represented.
How do we work with the owners of content, user-generated or otherwise, to actually find the right match-up with
the right advertiser so if we basically have a much better targeting of ads and also promotion of the right types of
content.
So it’s a very comprehensive plan that we have put in place. We have a 2008 plan that has a very specific
milestones again all the way from the systems and infrastructure that we need to provide that integration all the
way to the different types of ads.
I think it’s very early to make any kind of a judgment about which ads are working well and which ones are that
we’re really trying to have these integrated campaigns, try it out with the salesforce and our customers and do a lot
of learning and settle in to a product roadmap.
Eric Schmidt
Thank you. Let’s have a couple more questions. It looks like we missed a question so maybe we could get that
caller to call back in as well. Operator, let’s go ahead, next question.
Operator
Your next question comes from David Joseph - Morgan Stanley.
As you integrate DoubleClick into AdSense should we expect that to be a growth driver in addition to contextual
ads or is it possible that it actually starts to cannibalize contextual advertising?
Also, how is Google Ad Manager going to coexist with the DoubleClick Technology or ad serving technology?
Also, should we assume that obviously DoubleClick is running AdSense revenue from here on out? Thank you.
Omid Kordestani
In terms of the DoubleClick products, we really are optimistic that where we are headed to is where our Head of
Sales in the US, Tim Armstrong, calls the CMO dashboard. What our hope is that by basically providing the
integration across the board here we end up having in a simple way again a lot of DoubleClick access more
towards advertisers and having the DoubleClick advertisers have access to the AdSense network.
That’s our goal and so we’re really hoping that all of this will be incremental and that ultimately we get to a point
where the CMOs can have a very effective way to measure the effectiveness of the advertisers and do the right
allocation of their ad budgets across the board here.
Eric Schmidt
Jon, did you want to add anything to that?
Jonathan Rosenberg
I think the only obvious thing to add is that adding more display creates more competition among advertisers; we’ll
Стр. 13 из 16 24.10.2008 16:32

have more premium inventory from publishers and those things will certainly be added to fuel each other. We
certainly don’t think [inaudible] ads are going to result in any kind of cannibalization.
There is plenty of reasons to believe that they are positive dynamics and its unclear that there are any negative
ones.
Operator
Your next question comes from Brian Pitz - BOA Securities.
Eric Schmidt
Thanks, Brian. It appears as though we didn’t hear your question because there was a phone problem so I
apologize. Maybe you could ask your question again, and we will restart up.
Sure, no problem. I’m just wondering how much of your international growth was due to the sunsetting of the
European best practices funding that you guys had talked about before.
Separately, you mentioned 90% of impressions are eligible for display. Can you talk about the effective CPM
difference between display and formats versus text links on your network? Thanks.
Eric Schmidt
On the first question, Omid, do you want to talk about -- could you repeat your China question for me?
Just an update on China. We just wanted to get a sense for any new initiatives the company was working on over
in China, there have been some articles out.
Eric Schmidt
Let me give you a sense on the China situation. We are seeing market share growth and good revenue growth as
we have learned to operate in that environment. Although the advertising business is nascent in China, the fact of
the matter is that the Chinese Internet is so large that even on a small basis the numbers add up to quite
significant with good growth rate. We believe that China will continue to be a good market for us. As we hopefully
gain share we have significant new products for the Chinese, Knowledge Chinese, Users Chinese Language,
Chinese Search and that’s our core growth, so the message there is good.
Omid, do you want to talk about the international?
Omid Kordestani
Yeah on the ETS really it was something we announced a while back and our goal really is to have a very
successful relationship with agencies across the world. We just felt that the previous program and actually the
goal of the program is really to reward the way we engage properly together in servicing advertisers and also
going after these new initiatives.
The real performance in Europe comes from the great work that the European team is doing and really
understanding the dynamics of the business, putting the right customers in the right channels in each region really
understanding the dynamics of each industry vertical that we are selling into and paying attention to the seasonality
effects and where to put the resources and servicing and selling clients.
On the CPM and CPC question really our goal there is simply to allow again the advertisers to pay the way they
wish between the display products and the text products. Ultimately the goal here is to focus on conversions for
them so how they can best measure and achieve their campaign objectives.
Eric Schmidt
Jonathan do you want to talk about display?
Jonathan Rosenberg
The question specifically related to content and display and the dynamics in terms of how they interact and how
that works and how that’s going?
Стр. 14 из 16 24.10.2008 16:32

It was more along the lines of just the effect of CPM difference between display formats and text links on the
network.
Jonathan Rosenberg
I mean basically what we are doing is we are trying to come up with a way to manage the auction so that you can
have the display ads competing with the text ads and multiple text ads basically in the auction have to compete in
such a manner that they trump the value of the display ads. So typically three text ads versus one display ad unit.
We’re still basically working through that. So that’s basically how it works, I am not quite sure what else you were
asking.
Eric Schmidt
Why don’t we go ahead and get our last question. Thank you very much, Brian.
Thank you.
Operator
Your next question comes from Mark May - Needham & Company.
Mark May - Needham & Company
My question is focused on the US revenues which grew $29 million sequentially. If one could make an estimate of
DoubleClick’s contribution, one might conclude that the US revenues were flat to maybe up, marginally,
sequentially. Eric I think earlier you said you’re not really seeing a meaningful impact on the business from the
macroeconomic environment. I think it was also mentioned that the majority of these search quality improvements
occurred outside the US.
So the question is, is the sequential growth that you put up this quarter which is far lower than what it has been in
the past, is that more a reflection of where we are in the search cycle, search out cycle in the US or given that it’s
not really macroeconomic… that would be great.
Eric Schmidt
Well we know what it’s not. We know that it is not macroeconomic. It can have as much to do with the timing of
deals, partner activity, the timing of product rollouts and the maturity as you pointed out of the US market; also the
rate at which both search quality improvements play out within the quarter as well as advertising quality, because
again they don’t necessarily implement exactly linearly in the quarter across every geography.
Jonathan, do you want to add any perspective to that?
Jonathan Rosenberg
I think the only obvious thing to look at is you have to be very careful when you look at the annualized
year-over-year comparisons to try to isolate the impact in a quarter. The biggest thing that you would separate out
there from the US relative to international, is that in the base quarter that you are comparing to which would be this
quarter of last year we added a lot of really big partners in Q1 of last year to AdSense and so relative to that year
this year we didn’t have that many incremental partners to add so I think that’s everything else being constant
otherwise leading you to see what appears to be a relative reduction in the US.
But it’s primarily a factor of that. There is also the AdSense for domains cleanup, which we talked about earlier.
Eric Schmidt
And my guess is that the two that Jonathan described are the primary cause and we have to go back and really
match it all to be sure.
Let’s finish up by saying first thank you very much for everybody spending -- your time is valuable, spending more
than an hour listening to us and talking about Google.
I also wanted to take a minute to thank Omid for something, I don’t Omid if you remember but right after I started
here I told you to go get on an airplane and go build some international operations. You flew to London and the
Стр. 15 из 16 24.10.2008 16:32

rest is history. This is the quarter where we are now 51% international revenue. I don’t think that percentage is
going to go down; the world is a very big place. Congratulations to our international sales teams, the international
leadership for making Google a truly global company.
Thank you all.

Стр. 16 из 16 24.10.2008 16:32

Google Q4 2007 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/62591-google-q4-2007-earnings-cal...
Google Q4 2007 Earnings Call Transcript
January 31, 2008 | about stocks: GOOG
Google Inc. (GOOG)
January 31, 2008 4:30 pm ET
Executives
Krista Bessinger - Investor Relations
Eric E. Schmidt - Chairman of the Executive Committee, Chief Executive Officer,
George Reyes - Chief Financial Officer, Senior Vice President
Lawrence Page - President, Products
Sergey Brin - President, Technology
Jonathan Rosenberg - Senior Vice President, Product Management
Omid Kordestani - Senior Vice President, Global Sales & Business Development
Analysts
Imran Khan - J.P. Morgan
Jennifer Watson - Goldman Sachs
Mark Mahaney - Citigroup
Christa Sober Quarles - Thomas Weisel Partners
Robert Peck - Bear Stearns
Benjamin Schachter - UBS
Mary Meeker - Morgan Stanley
Sandeep Aggarwal - Oppenheimer & Co.
Brian Pitz - Bank of America
Marianne Wolk - Susquehanna
Presentation
Operator
Стр. 1 из 17 24.10.2008 16:32

Good day and welcome, everyone, to the Google Inc. Conference call. Today’s call is being recorded. At this
time, I would like to turn the call over to Ms. Krista Bessinger. Please go ahead, Madam.
Krista Bessinger
Good afternoon, everyone and welcome to today’s third quarter 2007 earnings conference call. With us are: Eric
Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of
Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of
Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Operations.
Eric, George, Larry, and Sergey will provide their thoughts on the quarter and then Jonathan and Omid will join us
for Q&A.
Please note that this call is being webcast from our investor relations website. Our press release, issued a few
minutes ago, is also posted on the website, along with the slides that accompany today’s prepared remarks.
A replay of this call will also be available on our investor relations website in a few hours.
Now, let me quickly cover the Safe Harbor statement. Some of the statements we make today may be considered
forward-looking, including statements regarding our investments, seasonality, traffic acquisition costs, increase in
the cost of sales, international growth, operating margins, growth in headcount, and our expected level of capital
expenditures.
These statements involve a number of risks and uncertainties that could cause actual results to differ materially.
Please refer to our SEC filings, including our quarterly report on Form 10-Q, for the quarter ended September 30,
2007, as well as our earnings press release posted a few minutes ago for a more detailed description of the risk
factors that may affect our results. Copies can be obtained from the SEC or by visiting the investor relations
section of our website.
Also, please note that certain financial measures we use on this call, such as EPS, net income, operating margin,
and operating income, are expressed on a non-GAAP basis and have been adjusted to exclude charges relating
to stock-based compensation. We’ve also adjusted our net cash provided by operating activities to remove
capital expenditures, which we refer to as free cash flow.
Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release on our
website.
With that, it is my pleasure to turn the call over to Eric.
Eric E. Schmidt
Thank you very much, Krista and in looking at 2007, we are very, very pleased with our year and also with the
quarter that’s just ended. If you look at 2007, a strong financial performance across the board, reflecting a
performance and a focus here at Google on both growth and profitability, with of course very strong revenue,
operating income, and earnings.
I want to call out strong international growth. More than half of our search traffic is now outside the United States,
more than 150 domains and still growing. The international market is still very nascent with tremendous potential
for what we could do over time.
And of course, the model at Google about product improvements and innovation continues. Hundreds of search
quality launches, greater advertiser control and transparency, obviously higher ROI as a result, lots of new ads
formats, YouTube video ads, from example, contests, branded channels.
We’re working hard, by the way, to promote open mobile and developer platforms and we’re completing an
application suite, [inaudible] integration, presentations, et cetera, and in concert with both product and international
focus, we have a global team. We now have offices in more than 20 countries. We are working on having a local
presence across global markets and this global local focus is reflected both in our organization and our products
and in the way we run the company.
Of course in Q4, a solid quarter without a question, pleased with traffic growth across the board even in the
relatively mature markets which is always exciting. And obviously we are very happy with gross revenue on both
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google.com and on our AdSense partners.
I think we are going to have Larry and Sergey take you through product highlights. My emphasis area is search,
infrastructure investments, things we don’t talk that much about, leading to improved quality as seen by end users
that we can measure, and of course giving advertisers more control as the product matures and obviously, as a
result, improving their return on investment.
The APP strategy, which we announced earlier in the year, now fully visible -- more innovation, data portability, all
the apps now either in place or coming and mobile, which we are very excited with Android, the My Location
service as part of Maps and many other new features that are both out and coming.
So we are optimistic about 2008. We have growing revenue streams across a broad range of verticals and
markets. As I mentioned, this international market which is central to our global rule, still relatively nascent with a
tremendous potential. Ad dollars continuing to move from offline to online, a trend which is not going to reverse,
and of course our ability to use our strong position in markets in order to essentially offer more services to end
users and get people even more to see the new benefits of the new Internet world.
So with that, rather than me talking about more of the details, why don’t we hear from George and then Larry and
Sergey on some of the amazing things that have been happening. George.
George Reyes
Thanks, Eric and good afternoon, everyone. At a high level, we had another strong quarter, with gross revenue
increasing 51% over Q4 of 2006 to $4.8 billion. Our google.com properties increased 58% year over year,
reflecting strong traffic growth during the holiday retail season and, to a lesser extent, monetization growth.
AdSense revenue grew 37% over Q4 of 2006, driven by particularly solid performance among our AdSense
research partners, including e-commerce and search partners. Offsetting this growth was the impact of a quality
improvement to AdSense for content. This changed the clickable area around the text-based ads to only the title
and URL, reducing the number of accidental clicks and increasing advertiser ROI.
Now let’s look at aggregate paid clicks growth. Aggregate paid clicks includes clicks related to ads served on
Google properties, as well as ads served on partner sits. Aggregate paid clicks grew approximately 30% over Q4
of 2006 and approximately 9% over Q3.
Let me now discuss our international performance. International revenue increased to $2.3 billion, or 48% of
revenue in Q4. Revenue in the U.K. grew 5% this quarter to $692 million, reflecting the usual Q4 seasonal
slowdown in the finance and travel verticals.
Revenue growth in EMEA was primarily driven by a strong performance in France and Germany, where gains
were made in the retail, technology, and finance verticals.
We also saw solid gains in relatively smaller markets, such as Canada, Ireland, Spain, and the Nordics. Asia and
Latin America continue to show impressive growth rates as well, with Brazil, Mexico, Argentina, and China being
notable performers in the quarter.
Now turning to expenses, traffic acquisition costs were $1.4 billion, or roughly 30.3% of total advertising revenue,
down 40 basis points year over year but up from 29.1% in Q3. The increase in overall TAC rate was primarily
related to the performance of a few AdSense partner sites, for which we are required to make guaranteed
payments. We have found that social networking inventory is not monetizing as well as expected.
AdSense TAC was $1.3 billion, while TAC related to distribution partners and others who direct traffic to our
websites totaled $125 million in the quarter.
Turning to other costs of revenue, which includes $6 million in stock-based compensation, increased $75 million
over Q3 to $516 million. The largest driver of the increase was the increase in costs related to our data centers,
including depreciation, equipment, and operations. We continue to anticipate that other cost of sales could
increase going forward.
Other than cost of revenues, operating expenses in Q4 totaled $1.4 billion, including approximately $239 million
stock-based compensation. Expenses related to payroll and facilities increased $97 million to $756 million. At the
end of the quarter, we had a full-time employee base of 16,805 employees. We added 889 employees in Q4,
with over half the new hires being in engineering, followed by sales and marketing.
We have implemented and continue to follow a disciplined hiring process in all areas of our organization. Hiring in
Q4 tends to be slower due to the holidays but as we’ve indicated in the past, we will continue to invest in our core
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business, both in the U.S. and internationally.
Turning to non-GAAP operating income, which excludes stock-based compensation, increased to $1.7 billion in
Q4, with non-GAAP operating margins of 35%, compared to 36% in Q3. The sequential decrease in margins was
driven primarily by the increase in overall TAC, as discussed earlier. As we have said before, margins may
decline in the future as we continue to make ongoing investments in our business.
Turning to tax, our effective tax rate for Q4 was 25%. Our Q4 rate was more favorably impacted by an R&D tax
credit in Q4 compared to Q3 as a result of stock option activity. This was the primary driver of the difference in tax
rates between Q3 and Q4.
And finally, turning to cash, operating cash flow remained strong at $1.7 billion, with CapEx for the quarter of $678
million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments, including
data center construction, production of servers, and networking equipment. We expect to continue to make these
significant investments in CapEx in future quarters.
Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, was also strong
at $1 billion.
So in summary, we believe our results reflect the strength of our core business across our three primary initiatives
-- search, ads, and apps, with disciplined investments that position us very well to capitalize on the long-term
opportunities we see for Google.
With that, I would like to turn the conversation over to Larry.
Lawrence Page
Thank you, George. I’m really excited to tell you about some key new things that we did in both search and
advertising. So to begin with in search, we had over 100 launches in Q4 with focus on our internationalization and
investing in our quality.
One of those was universal search, which is now available in 15 languages, up six in Q4. We also launched the
universal navigation bar in all languages, which gives our users easier access to all of our Google properties. And
book results are now blended in all domains.
We also made some behind the scenes infrastructure improvements to improve our quality, and the biggest of
those was increased index size, which really improved relevancy, especially for non-English results. We also had
substantial improvements in latency and freshness, particularly in Europe, Middle East, and Asia-Pacific.
Now, we also made it easier for webmasters to make their site searchable. There’s two things there. The first was
webmaster tools. We have several million sites now using and actually doubled our user base over last year, and
that basically lets webmasters easily tell what’s being crawled from their site and what’s being indexed and so
forth. And we added a bunch of new features to that in Q4.
We also have our site maps product, which is another tool to let webmasters make their sites easier to crawl and
we added Florida, District of Columbia, and U.K. National Archives, among many other sites, and added many,
many thousands of pages there.
Now in ads, that’s obviously where we get a large portion of our revenue. We launched some key features there
that really drove performance for advertisers and really helped us gain traction.
First of those in AdWords was call the AdWords Conversion Optimizer, which we launched in early January and
that lets customers big by specifying a cost per acquisition rather than a cost per click. So for example, you could
pay only when someone actually buys something rather than just when someone clicks on your ads.
AdWords actually, the system actually optimizes their click-based bids to approximate that cost per acquisition for
each auction, and that’s really gotten strong adoption, particularly among our larger clients and we’re really excited
about that. That really improves the advertiser return on investment. That gives them more conversions which is
really what they care about when they actually make money at a lower cost per conversion.
In AdSense, we also launched cost-per-click on placement targeted campaigns, such as campaigns that are on a
particular website. And this got really strong adoption and it really helped drive better performance and increased
spend for our [directory] advertisers, so we are really excited about that too.
Now I’m going to turn it over to Sergey.
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Sergey Brin
Thanks, Larry. I want to talk to you about some of our relatively newer initiatives. I want to start with Google Apps
and related products. G-mail -- G-mail launched an important new infrastructure in Q4 and this has really increased
performance. For those of you who are G-mail users, you may have noticed how it loads a little bit snappier, you
can switch between conversations a little bit faster. It’s really improved my productivity and I hope you see that as
well.
In addition to that, this new infrastructure has really made development easier and in fact, we were able after that
to launch eight new features within a span of eight weeks.
A couple of new features that also makes G-mail more open, we’ve added IMAP support, so you can use all of
your favorite e-mail clients, including, of course, devices like the iPhone and you don’t have to use POP3
anymore, you can now use IMAP, which is the better way to go, if you have the choice.
You can also now chat with AOL instant messaging users, so this is great now in the Google chat little screen in
G-mail. You can connect not just to other Google Talk users but also AIM users, which is a really large population.
I want to jump now from G-mail to YouTube. YouTube has continued to have a really strong user growth. In fact,
we had a few special events that just demonstrate this. We hosted the CNN Republican debate together with CNN
and in fact, almost as many people saw it on YouTube as did on CNN. We consider this a great milestone and we
hope to continue to do great partnerships with CNN and others to jointly grow audience for events.
We also, I should mention that YouTube is now available in 17 languages, eight more than last quarter, and so we
are seeing a lot of international growth. We are really excited about that.
In enterprise, we’ve gotten a lot of increased interest, trial, and adoption of Google Apps in larger companies.
First of all, we’ve signed an agreement with Taylor Woodrow, which is the construction services division of Taylor
Wimpey, a FTSE 100 company in the U.K. We are also finalizing an agreement to deploy Google Apps at
Genentech, and those are just a couple of the really big ones we have. We are talking to many, many companies
and many are adopting it all the time.
In addition, the universities that have deployed this quarter includes the University of Southern California, the North
Carolina Greensboro, Florida International, and Clemson.
Now jumping a little bit aside in mobile, we’ve really been revving the Google Maps for mobile, among other
applications, and Google Maps is just really useful on your cell-phone now. Some of you might have seen our
launch of the My Location, which allows you to see where you are on your cell-phone even if you do not have a
GPS-enabled phone, and that’s really amazing. In fact, even if you have a GPS in your phone, the My Location
can give you a first cut much faster than you can usually get a GPS signal, and it will work indoors.
I was just using this, I was at a conference in Switzerland, I was able to find a really small hotel and then even
switch over to the satellite view on my phone to figure out that I needed to take a vernicular to get up there. It was
just a really amazing experience and we continue to add features and reliability to it all the time.
I should mention My Location is available now in 21 countries and it works on four different platforms altogether.
We also launched a new rev of apps for the iPhone. We call it Grand Prix internally, but basically you get access
that’s really fast and integrated to the major Google products, including search, G-mail, calendar reader, and
others. And it’s really had great uptake. I use it personally myself. Many people have really been enjoying this
product. It’s growing very rapidly.
Last but not least, I’m going to do a shout out to Android, which is the operating system that we are developing for
mobile phones, and it’s completely open, of course. It’s going to really solve a lot of the challenges the
company’s in the mobile industry have. We’ve released the SDK for it. We formed the Open Handset Alliance,
which has now 34 industry leaders in it, and we really think that this is going to make Internet on mobile hopefully
as frictionless as it is on your desktop normal Internet experience. This is going to spawn lots more activity and
what we love, it’s to see lots of great, open access to the Internet wherever and whenever you are.
Anyway, that’s what we’ve been doing on those fronts and now, back to you, Eric.
Eric E. Schmidt
Well, thank you very much, George, Larry, Sergey. As you can see, not only did we have a very good 2007 but we
are quite optimistic about ’08 and our model continues to work very well.
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Why don’t we go ahead and move to your questions and I would also like to bring in Omid and Jonathan,
previously introduced, to help us answer your questions on this or anything else. So could we go ahead and get
our first question?
Operator
(Operator Instructions) We’ll take our first question from Imran Khan from J.P. Morgan.
Imran Khan - J.P. Morgan
Two questions; first of all, paid click growth rate declined 15 percentage points sequentially year over year, growth
rate, so I’m trying to understand how much of that growth rate decline was due to the changes you made and if
you see any improvement in the price-per-click because of increased customers return on investment, because
your year-over-year revenue growth rate decelerated 10 points as well on your website, so to better understand
the relationship between price-per-click and paid clicks growth rate.
And secondly, social network monetization is difficult. You talked about that and I believe it’s with News Corp that
you signed a long-term contract, so how should we think about that contract and what does that mean for your
TAC rate going forward? Thank you.
Eric E. Schmidt
Why don’t we start with Jonathan? Why don’t you take the first part of Imran’s question?
Jonathan Rosenberg
Sure, Imran. Basically paid click growth, which you referred to, tracks the traffic growth rate and the traffic growth
rate did decelerate. The number of search ads basically grew faster than the number of content ads, so I think
one of the things that you have to look at there is what is the mix issue. And then I think there were probably some
secondary factors there. Some factors would include things like the focus that we’ve had on weeding out the low
CPC, high click-thru rate low quality advertiser, so that’s probably a component.
The other thing that we did was there was probably some impact from the non-clickable backgrounds which we
launched on AdSense for content, so those were probably the biggest things.
I think there was also a little bit of an issue with the timing of the holiday. Monday and Tuesday were Christmas
and Christmas Eve, which are conventionally our biggest days, so that was probably a component.
On the CPC side, generally CPCs have been going up, click-thru rates have been going up, and coverage has
been going down. I’m not sure I could add much more there.
Sergey Brin
I just wanted to follow-up on the social networking question. We don’t talk about individual partners’ performance
or anything like that. Now I do want to highlight though, we have had a challenge in Q4 with social networking
inventory as a whole and some of the monetization work we were doing there didn’t pan out as well as we had
hoped. But we are continuing the efforts and we are still optimistic about future quarters.
Operator
We’ll take our next question from Douglas Anmuth from Lehman Brothers.
Thank you. My question is regarding the U.K. it looks like your growth Q2 was about 5% in the U.K. and that
compares to about 11% in the fourth quarter of last year. Could you talk about what you are seeing there beyond
the usual categories that you may see weakness in typically during 4Q and what you are seeing there from a
macro perspective as well? Thank you.
Eric E. Schmidt
Omid, do you want to go ahead and handle that?
Omid Kordestani
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In general, we are very pleased with our performance in Europe. And actually, I know you asked about the U.K.,
but very quickly we are seeing great results in France and Germany as well in the retail category. I think in the
U.K., we saw the typical seasonal patterns but we were -- there are certain categories that we believe the auction
is in effect fully sold out and we are working on clever ideas and conversion analysis for our partners to really
improve their understanding of how they should spend and how they should price their bids.
But overall, we are very satisfied with the penetration we have with the major accounts. We are at CEOCM tables.
I was there throughout Q4 and overall, we’ve seen a lot of strength in the market.
And are those two categories, travel and financial, that are typically seasonally weak? I mean, do you feel like
there is an additional macro impact there?
Omid Kordestani
No, those two were the primary ones.
Eric E. Schmidt
Jonathan, do you want to add anything to that?
Jonathan Rosenberg
I was just going to add that it was finance and travel. Maybe the only other point to look at there is if you look at the
total percentage of advertising spend in the U.K., some of the public data says that it’s roughly 15%, 16%, 17%
on search, whereas in the United States it’s more like 6%. So one of the things that you see there is that the
seasonality, particularly in those two verticals, is much more marked because they are spending a
disproportionately greater amount of money in total on search engine efforts.
Eric E. Schmidt
Let’s go to our next question.
Operator
We’ll go next to Jennifer Watson with Goldman Sachs.
Jennifer Watson - Goldman Sachs
Thank you. Can you give us a little bit more detail on the feedback that you are getting from both advertisers and
consumers on the YouTube advertisements that you guys rolled out?
Eric E. Schmidt
Omid.
Omid Kordestani
We were doing what I can best characterize as just a lot of touch points with our -- both publisher partners as well
as advertisers. We are trying different formats. The in-video ads have been very successful. We’ve had a number
of campaigns and the way we are also approaching this which I think is unique for Google is really from an
integrated and scalable fashion.
In the case of -- for example, if I may name some clients, General Motors, for example, Chevrolet Europe, we did
what I think is a really truly possible with the advantage that Google has, you know, running the campaigns across
multiple countries, delivering large numbers of impressions from YouTube to the content network to the search
campaigns. Adobe, for example, ran one of the biggest homepage campaigns we’ve had in the history of
YouTube.
So all in all, we are doing a lot of experimentation. We are starting to do it globally and we are doing it in every
integrated fashion and by adding the other key assets that we have.
Eric E. Schmidt
Let me add a couple of other things. YouTube is doing extremely well, growing very, very quickly and doing so
internationally as well as in the United States. There’s been an issue around standardizing ad formats for
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advertisers who would like to be able to do industry buys and so forth.
So as these new ad formats are being developed, we are also looking to make sure they get standardized into a
common buying pool and pattern so that people feel comfortable that they can get real value.
The next generation of projects are actually very, very sophisticated ad products and it looks like they are going to
do extremely well.
Next question.
Operator
We’ll go next --
Krista Bessinger
Operator?
Operator
We’ll go next to Mark Mahaney from Citigroup.
Thank you. I wanted to ask a question about mobile, particularly for you, Eric. You’ve got a very interesting
perspective from two companies on what’s happening with mobile Internet usage, particularly off the iPhones.
How much of a ramp are you seeing? Is there any way you could quantify it and is there a way you think about how
mobile search as a percentage of overall search could be in two to three years? Thank you.
Eric E. Schmidt
It’s very difficult to estimate the percentage in a few years. We have already said in a number of public statements
that it is growing significantly faster on a percentage basis than other categories, and as you mentioned, iPhone is
the first of a whole generation of products that will be much more search intensive, and so there’s much more
likely to be many more search opportunities and with those search opportunities comes ad monetization.
We have done a number of deals for mobile devices already, KTTI and DoCoMo, for example. DoCoMo just
announced by Omid in Japan, which are very, very strategic for us.
It’s difficult to estimate what percentage it could ultimately be long term, and when I say long term, I mean
perhaps 10 or 20 years. It’s reasonable to assume that a majority of searches would be on mobile or personal
devices, simply because over a long enough period of time, they will take on the tremendous power that’s
represented in the PC and Mac platform. And the wireless networks are getting to the point where they can offer
performance similar to the wireline.
Jonathan, do you want to add anything?
Jonathan Rosenberg
We’ve been tracking the data very carefully. We are particularly interested in looking at the iPhone, particularly
because the experience on web browsing is so good and because of the optimization efforts which we did. We
saw a very significant spike in December with the optimization that we did on both the iPhone and it was well over
double I think within about a month in terms of increased usage.
If I can do a quick follow-up on macro trends -- to the extent that you would see weakness related to a softening
consumer, do you think you would see it more on the supply or the demand side -- i.e. ad budgets being trimmed
or less consumer commercially oriented searches? Thank you.
Eric E. Schmidt
Sergey.
Sergey Brin
We’ve been really studying these questions really in depth and near as we can tell, we just offer such a great ROI
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for advertisers that they can directly see and measures that advertisers in maybe even difficult markets and what
not just have great incentive to get as much profitable inventory as they can from Google and the other different
kinds of ROI advertising that we offer.
So we have not been able to detect any such effects from macroeconomic trends.
Eric E. Schmidt
Jonathan.
Jonathan Rosenberg
I think some of you have observed that direct marketing tends to be less affected by economic downturns than
brand marketing, given a time measurability. I think that’s been true in past recessions. I think we’ll probably see
that again.
I think one thing we may see is consumers comparison shopping more and that would certainly create more
clicks. It might create modestly lower conversion rates but we think overall, if people are doing more comparison
shopping and looking for bargains, that’s probably positive.
Clearly if there’s less overall commerce in the economy in general, then that could adversely impact overall
demand, but we really think that relative to most organizations, we are pretty much tracking the diversity of the
overall economy and search-based efforts will fare pretty well.
Eric E. Schmidt
Let’s move to our next question.
Operator
We’ll go next to Christa Quarles from Thomas Weisel Partners.
The main question I guess is on the C-block I guess passed the reserve price today. Obviously you can’t mention
whether or not you are bidding, but can you just talk about what those open access measures ultimately mean for
you, and especially with Verizon moving toward open access toward the end of 2008? And also, if you can kind of
highlight your WiMax stance.
And then a total separate quick question -- I was just wondering if you could give the impact on checkout to COGS
in Q4. Thanks.
Eric E. Schmidt
On the first part of the question, we’ve concluded we cannot answer any questions in that category because of
legislative rules with respect to how the auction is working, so I’m afraid we’re going to only be able to answer the
second question, so could you repeat it again?
Well, can you make any comment on WiMax at all, with a separate --
Eric E. Schmidt
As I indicated, I think it’s best practice for us just to move to the second question.
The second question was just on Checkout and whether it had a big impact on the COGS in Q4.
Eric E. Schmidt
Jonathan.
Jonathan Rosenberg
I think it’s the same answer that we’ve given in the previous calls -- the impact was immaterial. I think one of the
strongest observations that I could give you there is that the organic growth in terms of Checkout overtook the
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promotion efforts this quarter, so I think that’s a good sign in terms of the general traction that we are getting.
The other things that we are seeing there, that the click-thru rates on the [badge] are up as much as 10%, so I
think that’s going pretty well.
Sergey Brin
If I may, also in addition to the click-thru rates, I think we are starting to get some anecdotal and some actual real
studies that demonstrate that the conversions are also up, very substantially and hopefully we’ll be able to share
more of that with you in the coming weeks. But there is really good evidence now that Checkout is able to get
consumers through the process more quickly and more reliably.
Okay. Thanks.
Eric E. Schmidt
Why don’t we go ahead to our next question?
Operator
We’ll go next to Robert Peck from Bear Stearns.
As we think about the margin levels this quarter, should analysts be thinking that based on what you are seeing as
far as the social networking side, is this more of a new run-rate level, or do you think the margins were somewhat
suppressed by the MySpace relationship in Q4?
And then number two, could you also talk to us about timing of a DoubleClick closing and any sort of impact you
can see to the numbers for 2008?
Eric E. Schmidt
Let me do the DoubleClick question. So everybody knows, we had FTC clearance in the United States in
December, which is great, and we are working with the European Commission. We are obviously very hopeful that
they will clear as well and that’s probably all we can really say about DoubleClick at this time, but we are certainly
hopeful that it will get cleared. We are working with them pretty closely. George, did you want to answer the first
question?
George Reyes
Bob, could you repeat the question again?
It’s really more of was the impact of social a one-time impact for 4Q or should we think about this as being more
of a normalized EBITDA margin run-rate going forward, particularly as other projects continue to build --
George Reyes
We’re still in the learning stages of how we monetize social networking and this is going to evolve over a period of
months, so this is sort of early stage at this point.
Any idea on a replacement for CFO?
George Reyes
Maybe.
Eric E. Schmidt
We’ve got a number of very good candidates and we are very happy to have George is still doing the job here
and has agreed to continue to do this until we find the right replacement and it’s a hard position to replace, given
George’s incredible performance. Let’s go to our next question.
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Operator
We’ll go next to Benjamin Schachter from UBS.
Benjamin Schachter - UBS
A few questions; I was wondering if you could go into a little more detail on the social networking issues and
specifically maybe talk about differences you are seeing with your non-text-based ads versus your text-based ads
on social networking.
And then another question on TAC associated with Google.com revenue. It continues to move higher, it’s about
4% now. I was wondering if you could talk about the key drivers and if there is a target rate internally for where that
may go.
And then finally, on healthcare, in the past, Sergey, I think you’ve specifically said that you don’t really think about
Google's efforts in healthcare as really a driver for P&L and Eric, I know you are speaking at a healthcare
conference in February. Any updates to that? Any change in how you are thinking about healthcare, how it might
be a business opportunity? Thanks.
Eric E. Schmidt
On the healthcare side, we don’t have any products to announce at this time, so why don’t we answer the first part
of your question, Jonathan and Sergey -- social networking and TAC.
Sergey Brin
I’m afraid I’m not sure off the bat what the stats were on the image versus text ads. We did have some changes
relating to allowing certain kinds of CPC ads, which were only allowed to be bid on a CPM previously, which may
have contributed to some cannibalization, or at least for now.
But as I said, on the whole I’m not sure what the data is for image versus text.
Jonathan Rosenberg
I don’t have too much to add. We’ve certainly seen adoption of both the text and the image ads on social. I think
the thing we have to figure out there is how to optimize the look and feel of the ads against the inventory that we
have, how to slice the inventory up in alternative ways to try to figure out how to make it work and we’ve got some
demos that we’ve just developed that are going to change the way we are doing some of the targeting, so I think
we are basically going to have to look at that and try to figure out how do you find people of particular
demographics that are comparable to what you might find in the New York Times or in a particular publication that
you might have been previously familiar with.
Sergey Brin
If I may summarize on the whole, we have a huge amount of social networking inventory, including the MySpace
relationship, including of course Orkut, our own network, which is very, very successful and probably like 20
others, or something like that. I don’t know the exact number. But we have an incredible amount of this inventory
and in fact, it varies quite a bit in how it all monetizes, based on a number of factors, some of which we
understand, some of which we don’t.
I don’t think we have the killer best way to advertise and monetize the social networks yet. We’re running lots of
experiments. We had some significant improvements but as I said, some of the things we were working on in Q4
didn’t really pan out and there were some disappointments there. I hope to be able to report more progress in the
future but it’s a big opportunity because it’s so much inventory.
Eric E. Schmidt
Why don’t we move to our next question?
Operator
We’ll go next to Mary Meeker from Morgan Stanley.
Thanks. Dave and I wanted to revisit Imran’s question from the beginning of the call. Our worry going into the
fourth quarter about Google was related to monetization levels, or cost-per-click growth, given what was going on
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in financial services, retail, and travel. We weren’t worried about query growth. Now you’ve reported your numbers
and by our math, the cost-per-click growth was about 16%, so very robust, the highest we’ve seen in a long time,
but by your math, the paid click growth was only about 9% sequentially in what is typically a seasonally strong
quarter.
And as we were thinking about it, just as we read in the press release before the call started, we thought issues
might relate to the fact that it’s tougher to gain share, given how high your share already is, given there might be
some share loss, issues about a recession, something geographic, or much slower market growth.
And George mentioned then changes in the algorithm impacted, reduced accidental clicks. So our question, and
it may be for George, is 9% sequential growth the kind of growth to potentially think about in the December
quarter, or did the algorithm have a really material effect on the sequential query growth, or was it something else?
Eric E. Schmidt
Again, we have to be very careful here not to project any guidance here with all the math, so Sergey, do you want
to try to describe what you thought the components of all of this were?
Sergey Brin
I should mention that we were reluctant to even start reporting that particular metric and it’s because unfortunately,
there’s just a lot of complexity in our business and as we try to get the best possible, most useful ads to our end
users, and hence get the most promising customers to our advertisers, we trade off a lot of things. So one
example is the one that George mentioned, the one that you just talked about -- for example, getting rid of the
clickable backgrounds.
But there are also factors like we might want to reduce the number of low cost clicks, or perhaps low likelihood to
convert clicks, in favor of a smaller number of higher quality clicks. There are many, many trade-offs that we make.
So I just -- I would hesitate in inferring too much from just that one metric alone.
But was some of the -- was the change or some of the unusual things that happened that related to what you just
mentioned and what George mentioned, were they global and did they take place through most of the quarter, or
were they U.S. based? And then I’m done. Thanks.
Eric E. Schmidt
Jonathan.
Jonathan Rosenberg
I’m not sure to what degree I can separate out the international component. It certainly is true that prices rise as
advertisers get higher conversion rates, particularly over the holidays, and Hal Varian posted a blog that sort of
takes you through some of that.
The other thing which I think you said which I’m pretty clear is not the case, we’re generally doing very well from a
market share perspective domestically and internationally, so the trend there is almost uniformly a gain in market
share.
I guess the one last observation is given that the changes probably had impact throughout most of the quarter and
were perhaps global, that potential slowdown could be -- it could be a blip.
Eric E. Schmidt
Again, you’re using the term potential slowdown, which is not a term we have used on this call, so again that’s your
view, not necessarily ours.
Jonathan Rosenberg
Mary, the click growth in the quarter beat our internal forecast.
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Yeah, and it was certainly strong.
Eric E. Schmidt
Why don’t we move on? Thank you very much. Next question.
Operator
We’ll go next to Sandeep Aggarwal from Oppenheimer.
Thanks. Two questions; one is can you talk about how you are viewing the partnerships you have with some of the
big AdSense partners? And basically, it’s clear that you did see some impact in that -- acquisition cost because of
the minimum guarantees. I just wanted to know how would you hedge that kind of situation going forward?
And secondly, George mentioned about investments which may drive down the margins. I just wanted to hear
from you or get some sense of where these investments will be made -- will this be more of enhancing your
existing products and infrastructure, or some new initiatives? Thank you.
Eric E. Schmidt
Omid.
Omid Kordestani
I’ll take the first part of the question. I think in relation to partnerships, we enter all of these with a view to having
very successful [inaudible] before going to the partner, as well as ourselves. We would like to have very profitable
deals.
I think in certain areas, as we’ve been talking about social networking, we make bigger bets to be able to
understand that space. We think that’s an important category. We have our own products in that space and we
want to understand the monetization, which is again more challenging area for us to figure out, but we are
confident given the innovation model that we have and the roadmap that we have that we’ll be able to perform
better there.
So our goal in all of these deals is to again make the proper levels of investment, proper levels of guarantees and
over time, in areas that are newer to us, to understand them better and have better products.
Lawrence Page
I was going to add we’ve had I think in many of these areas with great partners, we’ve had very significant
improvements in monetization and social networking in different areas. And like Sergey mentioned, I think there’s
large opportunities still there. There’s tremendous amounts of inventory and the monetization levels are relatively
low compared to other things. And we’ve seen the ability to make significant gains, so we are very optimistic about
those areas still.
I’m sorry, what about the investments, future investments?
Eric E. Schmidt
You might want to repeat your question, because I’m not sure I agreed with the premise of your question. Go
ahead.
I just wanted to hear basically in terms of I -- basically if you can provide some color in terms of future
investments. Are they going to be more focused in terms of the enhancements to the existing product portfolio
and improving your infrastructure versus some of the new initiatives?
Eric E. Schmidt
Well, the general answer is that’s where we see big opportunities and our primary focus on investments is in fact
in our core business, and you see the success we had in 2007 and in Q4, the vast majority of that was actually not
in all the things that generates all the exciting new announcements that we are happy to talk about, but in
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investments in core search and core advertising globally, which I’m incredibly proud of.
George, do you want to add anything on this?
George Reyes
So in terms of your comments around margins going forward, as you know we don’t give guidance. We are going
to continue to higher the talented people that we always have. We are going to continue our investments in CapEx
and we are going to be very careful around how we proceed with making investments.
Thank you.
Operator
We’ll take our next question from Brian Pitz from Bank of America.
Can you provide some additional color on why we observed more of a deceleration in Google AdWords versus
AdSense? And maybe this is a point of clarification but I think we heard you say that quality changes were made
to AdSense and in addition, our assumption is that it was the social networking revenue also falls in the AdSense
bucket. And then just a quick second question to Larry on licensing revenue -- should we assume most of the
increase is due to the Postini acquisition? And that’s it. Thanks.
Eric E. Schmidt
Jonathan, AdSense and --
Jonathan Rosenberg
I think we’ve pretty much answered that with the discussion that we had earlier on the mix issues. I’m not sure I
can offer you anymore color. We said that the Google.com traffic was stronger than our own internal expectations.
We also -- if you look back at Q3, which I think we talked about on the call then, Q3 was a very, very good quarter,
so if you are looking at the sequential growth rate, you are comparing it to a quarter in which we did
disproportionately well, relative to what we’ve done in the past but I’m not sure how much color I can really give
you there.
Lawrence Page
Perhaps it is worth mentioning, I do believe that we include the social networking revenue within the AdSense for
content bucket, which is within AdSense as a whole. And perhaps it’s worth [also a note on the side], it’s not
necessarily a financial metric, but we have had great partnerships with these social networks now. We’ve now
launched Open Social and we have now at least 20 partners on that. We have applications being developed so
we have networks who are participating, so we are really excited about all the progress innovation there and even
though Q4 for us was a little bit of a disappointment in terms of the kinds of improvements in monetization we
were able to generate, that’s -- Q3 was fine for us in that light, as was Q2 and we are optimistic about the future.
Eric E. Schmidt
And remember that the Google model is one of experimentation. We keep trying and we keep trying new ideas
until we find the ones that really generate phenomenal ROI and not only do we go with them but they grow very
quickly.
Jonathan Rosenberg
I didn’t want to miss your second question, it was about enterprise growth and Postini?
Yes.
Jonathan Rosenberg
And what specifically were you looking for?
Стр. 14 из 17 24.10.2008 16:32

Well, should we assume that most of the growth in licensing was due to the Postini acquisition in the quarter?
Jonathan Rosenberg
I think we’ve had a lot of success to date with small businesses. We added a lot of ISPs, which tend to drive a lot
of the traffic. We also pushed a lot of the education efforts, which I think had a pretty significant component.
Beyond that, it’s hard to --
Eric E. Schmidt
The answer to your question is yes. It’s easier that way. Why don’t we go to our next question?
Operator
We’ll go next to Marianne Wolk from Susquehanna.
Marianne Wolk - Susquehanna
Thanks. I wanted to focus back on the economy. Can I confirm that when you called the weakness in the U.K.
related to travel and finance seasonal, that you have already seen the normal seasonal rebound here in January?
And then as a follow-up, a few retailers we actually spoke to in Q4 said that they increased their spending in online
advertising as a way to bolster the slower offline sales. Have you noticed any counter-cyclicality in the business?
Could a weaker economy actually accelerate the shift in ad dollars online?
Eric E. Schmidt
Again, you have a thesis here which we don’t necessarily agree with and in any case, we are not going to talk
about the current quarter. We are talking about the quarter that ended in December. I’m happy to say that we have
not yet seen any negative impact from the rumors of future recessions. We’ll see what happens.
Sergey Brin
But if I may add, I do think that certainly like you’ve seen from several of your contacts, it makes a lot of sense for
advertisers if they want to be careful about their spending and they want to make sure they are getting a good
ROI, to use the exact kind of advertising that we are offering. I think that makes a lot of sense and I think lots of
advertisers recognize that.
Operator
We’ll go next to Justin Post from Merrill Lynch.
Thank you. Most of my questions have been asked, but one about your future -- when you think about revenue
sources beyond search, what do you think your biggest opportunity is among software as a service -- video or
display? Do you prioritize those? And do you think any of them could be material within the next two years?
Lawrence Page
I think it’s hard to prioritize the exact ones. I think we are making tremendous strides in apps, as we talked about.
There’s tremendous -- those are of tremendous importance to people and we are also getting revenue from
multiple sources there from advertising and from people paying for the service itself.
And we’ve obviously seen tremendous growth in YouTube, which we already mentioned, which is great. I think
we’ll be -- there’s going to be significant amounts of advertising there also.
I’m pretty optimistic about all the new areas we are pursuing and the opportunities there will take -- you tend to
underestimate the long term and overestimate the short term for any new thing and I think you want to be careful
about that, but I’m very optimistic long-term.
Eric E. Schmidt
There’s reasons to be optimistic about all the categories that you described. The display business is literally right
in front of us and the DoubleClick acquisition is an essential part of that strategy, so we’ll see. But of course, we
Стр. 15 из 17 24.10.2008 16:32

have a sales force that is perfectly capable of selling those, customers are purchasing those already, and it’s a
market that would benefit from the kind of technology that Google can bring to market.
In the case of YouTube, you have a huge forward opportunity just because of the scale of the audience,
globalization and so forth, so to the degree that we can develop the ad formats that we describe, it again should
become very significant -- exactly when is very difficult to predict.
Some more questions?
Operator
We’ll take our next question from Heath Terry from Credit Suisse.
I was wondering if first you could update us on the local business and exactly where you are in continuing to try
and attract advertisers to monetize the tremendous traffic that you’ve built within Google Maps, particularly what
kind of progress that you’ve seen out of the local business referral model?
Eric E. Schmidt
Jonathan.
Jonathan Rosenberg
I guess the biggest thing that happened this last quarter was the Local Plus Box, which we launched I think in late
November. Basically that was an improvement to the local ads on Google.com. I think it’s only available for the top
ads but basically what happens is we show a plus box for the local ads and it expands and basically gives you the
advertiser’s address, the phone number, a map, and this is the kind of thing that you’ll see us moving more
towards as we try to make our efforts there and our ads more consistent with what is going on with universal
search, convey as much information as we possibly can in the ad related to what happens if you click through to it
and try to figure out how to capture the local opportunity.
Great, and on the local business referral program?
Omid Kordestani
We’re not breaking any of those components out now. We are right now really focused on getting the right
content, as Jonathan mentioned. A lot of the success of these areas will depend on having the most
comprehensive listings and the right format and we are experimenting with all that, building the right relationships,
and it’s still kind of early for us to break it out and really talk about the revenue performance.
Jonathan Rosenberg
The one other thing that you could look at is I also believe that we have pretty much completely revamped the
regional targeting system and how that works for the advertisers, and I would expect that there will be significant
improvement from that as well.
Krista Bessinger
We have time for just one more question.
Operator
We’ll go next to Jeffrey Lindsay from Sanford Bernstein.
We’d like to ask two things. First of all, could you give us any breakdown of the 889 new staff, geographically
and/or by function?
And then second, it looks like the TAC rate increased in the fourth quarter to 88%. Why did the TAC rate go up?
What were the drivers behind this and were they one-off factors or were they factors that you expect would
continue? Thank you.
Стр. 16 из 17 24.10.2008 16:32

Eric E. Schmidt
On the hiring question, the first part of your question, you’ll remember that we hired a little ahead of ourselves
maybe six months ago, so we’ve returned to our normal hiring process -- more international over time, a balance --
maybe 50-50, or close to it, technical and non-technical.
We are a very difficult place to get a job at and so we continue to look to the very, very top talent in each and
every position, and we do that worldwide and it’s working very well. And I don’t think any of that is going to change.
I think that model for hiring and building the organization has worked for us for many years and I think it will
continue.
George Reyes
Our TAC rate is not 88%. We are looking at TAC as if it were a percentage of advertising revenue, which is
roughly 30%. So as we’ve said, primarily this is all related to our AdSense partner sites and that’s -- which is
where we are required to make the guaranteed payments and social networking is also something that is coming
online pretty strongly.
Eric E. Schmidt
So with that, I want to thank everybody. Thank you, Krista, thank the Operator and thank all of you for spending so
much time once again on your afternoon/evening covering Google and we look forward to talking to you in our
next quarterly earnings call. Thank you very much.
Operator
This concludes today’s conference. We thank you for your participation. You may now disconnect.

Стр. 17 из 17 24.10.2008 16:32

Google Inc Q1, Q2, Q3, Q4 2008 Earning Calls

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Google Inc. Q3 2008 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/100356-google-inc-q3-2008-earnin...

Google Inc. Q3 2008 Earnings Call Transcript

October 16, 2008 | about stocks: GOOG

Google Inc. (GOOG)

Q3 2008 Earnings Call

October 16, 2008 4:30 pm ET

Eric Schmidt - CEO

Patrick Pichette - CFO

Sergey Brin - Founder & President, Technology

Jonathan Rosenberg - SVP, Product Management

Omid Kordestani - SVP, Global Sales & Operations

Hal Varian - Chief Economist

Imran Khan - JPMorgan

Mark Mahaney - Citi

Brian Pitz - Banc of America Securities

Christa Quarles - Thomas Weisel Partners

Ben Schachter - UBS

Doug Anmuth - Barclays Capital

Justin Post - Merrill Lynch

Ross Sandler - RBC Capital Markets

Jeffrey Lindsay - Sanford Bernstein

Youssef Squali - Jefferies

Jeetil Patel - Deutsche Bank

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With that it is my pleasure to turn the call over to Eric.

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Yes, we are ready do queue up for questions, operator.

Imran Khan - JPMorgan

Jonathan, do you have a view on this?

Imran Khan - JPMorgan

Our next question?

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We will go next to Mark Mahaney from Citi.

Mark Mahaney - Citi

Sergey, the second part of the question.

Let's go to our next question.

Стр. 8 из 16 24.10.2008 16:31

Brian Pitz - Banc of America Securities

Brian Pitz - Banc of America Securities

Brian Pitz - Banc of America Securities

Our next question?

We will go next to Christa Quarles from Thomas Weisel Partners.

Christa Quarles - Thomas Weisel Partners

Стр. 9 из 16 24.10.2008 16:31

So, next question.

We will go next to Ben Schachter from UBS.

Ben Schachter - UBS

Congratulations on a nice quarter.

Yes. Thanks Ben.

Ben Schachter - UBS

Стр. 10 из 16 24.10.2008 16:31

Patrick, do you want to handle the last question?

Ben Schachter - UBS

Ben Schachter - UBS

Okay, thanks. Next question?

We will go next to Doug Anmuth from Barclays Capital.

Doug Anmuth - Barclays Capital

Стр. 11 из 16 24.10.2008 16:31

Okay. Thank you. Thanks Sergey. Next question?

We will go next to Justin Post from Merrill Lynch.