Google Q1 2010 Earnings Call

>> CONNIE: Please stand by. We're about to begin. Good day, and welcome to the Google,
Inc. conference call. Today's call is being recorded. At this time, I would like to turn
the call over to Miss Maria Shim, Investor Relations. Please go ahead, ma'am.
>> SHIM: Thanks, Connie. Good afternoon, everyone, and welcome to today's first quarter 2010
Earnings Conference Call. With us are Patrick Pichette, Chief Financial Officer; Jeff Huber,
Senior Vice President of Engineering; Susan Wojcicki, Vice President of Product Management;
and Nikesh Arora, President, Global Sales Operations and Business Development. Also
as you know, we are now distributing our earnings release exclusively through our newly revamped
investor relations website located at investor.google.com. So going forward, please refer to our IR website
for our earnings releases as well as supplementary slides that accompany the call. This call
today is also being webcast from investor.google.com. A replay of this call will also be available
on our 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 innovation agenda, expected performance of our business, and our expected
level of capital expenditures. These statements involve risks and uncertainties that could
cause actual results to defer materially and reflect our opinions only as of the date of
this presentation. We undertake no obligation to revise or publicly release the results
of any revisions to these forward- looking statements in light of new information or
future events. Please refer to our SCC filings including our annual report on form 10K for
the year ended December 31, 2009, 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
SCC or by visiting investor. google.com. In addition, certain financial measures we use
on this call, such as operating profit and operating margin, are expressed on a non-GAAP
basis and have been adjusted to exclude charges related to stock base 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. Now, with that, I will now turn the call over
to Patrick. >> PICHETTE: Thank you, Maria. Good afternoon,
everyone. It's Patrick Pichette speaking. Thank you for joining us. Starting the new
year provides us with a great opportunity to tune and streamline our quarterly earnings
communications. So as a result, we have today for you a new format for the call. First,
the two calls we had last year will be merged into a single call going forward and a slightly
longer forward of Q&A. Second, Eric will not be joining us going forward, so I'll be leading
the call. In the new format, Jonathan Rosenberg and I will review the quarter with prepared
remarks and then Nikesh Arora, our head of global sales and operation, will be joining
us for Q&A. Unfortunately today, Jonathan couldn't be with us, but however what we have
is Jeff Hubert, our Senior Vice President of Engineering for Ads and Susan Wojcicki,
our Vice President for Advertising Products sitting in for Jonathan. So here we go. Let
me start by giving you some high level thoughts about our situation at Google before I go
into the details of our Q1 performance. You know, as we enter 2010, it's really clear
that the digital economy, it continues to grow rapidly, and at Google, our users and
advertisers all continue to benefit from this profound and positive trend. Our Q1 results
are simply a reflection of these trends, and this really fuels our optimism as we continue
to invest in innovation for the long run. Consequently, we are continuing to invest
heavily in people, products, and acquisitions. So you see this already in our results for
Q1 and people, we've already stepped up hiring, which is evident, obviously, with the numbers
presented. And we expect to continue hiring aggressively through the year. We have a strong
pipeline of candidates primarily focused on engineering and sales, and we're on-boarding
them to fuel our growth agenda as fast as possible. On product, we continue really to
push the envelope on two fronts. First, we're intensely focused on user experience. Our
continued success really depends on delighting users with differentiated products that really
inspire. Think of Google Goggles, for example. Second, we're continuing to improve our ads
business to show the right ad in the right format to the right person at the right time,
all this regardless of device. Susan and Jeff will really cover each of--in the coming minutes,
both of these sections. Finally, acquisition. We've been very active this far, so far this
year, and we have a strong M&A pipeline in place. It's really designed to build on our
existing focus areas and to bring new talent and new technology to Google, feeding our
entrepreneurial spirit. It really matters to us. So in sum, we continue to be incredibly
excited by the opportunities in front of us and, in consequence, we should expect to see
continued investment in each of these areas. On the business front, Q1 was a really strong
quarter. You know, the healthy momentum from Q4 and a general economic recovery has simply
continued, resulting in a very positive start to the new year for us. Large advertisers
have come back in force, versus last year, reflecting, really, an improved economy and
a few really key important trends. So for example, it's clear now that our offerings
are much broader in scope, and by this I mean, you know, they offer highly measurable but
also integrated campaigns across search, display, and mobile. As a result, our conversation
with advertisers are becoming more and more strategic because of this integration. And
you can see this in our results and our performance. By this, I mean we perform well across every
major product area including Search, Display, Mobile, and Enterprise in Q1, running on all
cylinders. So Search--Google.com was very strong. Great performance across all geographies
and all major verticals including retail, travel, local, technology, and finance. Growth
and display was also really strong. Q4 momentum continued across all regions, product, and
channels. The Google content network was strong, driven by increased demand in consumer packaged
goods and entertainment. The Ad Exchange is also gaining great traction as we move all
buyers and sellers into the latest version of the platform. And finally, we saw very
impressive growth on YouTube with several exciting new content deals signed. Mobile,
a third access, another great, very important area for Google, is also growing very nicely,
benefiting from both the continued growth and the Smartphone volumes and Internet user
and usage on these eye-hand mobile devices. Finally, Enterprise recently launched a host
of successful integrations including a large deployment at, for example, KLM, just one
example among many. All this great performance is reflected in our financial reserves and
our trajectories. So I'll now, if you'll allow me, go through our results quickly. So financially,
gross revenue grew 23% year over year to $6.8 billion. Google websites' revenue grew up
20% year over year to 4.4 billion, which stretches, as I mentioned, across all major geographies
in vertical, right, since revenue was up 24% year over year to 2 billion, reflecting again
a continued strength in the Google content network, an important part of our display
business. Other revenue was also up 68% year over year to 300 million, and that includes
the revenue from the sales of our Nexus One product. Global aggregate paid click growth
remained healthy, up 15% year over year and up 5% quarter over quarter. Aggregate cost
per click growth was up 7% year over year but down 4% quarter over quarter. You should
know that FX had a positive impact on the year over year on CPC growth and also a negative
impact quarter over quarter. A lot of movement in FX year over year and quarter over quarter.
Remember, too, that this is an aggregate number which includes both Google.com but also the
AdSense properties. Turning to our geographic performance, revenue from the U.S. was up
22% year over year to 3.2 billion. In our earnings slides, which you'll find on our
investor relations website, you'll see that we've broken down our revenue by U.S., U.K.,
and the rest of the world to show the impact of FX and the benefits from our hedging programs.
So please refer to those slides for the exact calculations. International revenue accounted
for 53% of our total revenue, or 3.6 billion, up 24% year over year, which includes $10
million in benefits from our hedging programs. And this is a big difference compared to 154
million of benefits in Q1 of last year. Using six exchange rates, our international revenue
would have been roughly 242 million lower year over year. Finally, the UK was up 15%
year over year to 842 million. So very strong performance right across the board on the
revenue. Let me turn to expenses for a moment. Traffic acquisition costs were 1.7 billion
or 26% of total advertising revenue. The other cost of revenue was 741 million, including
stock based compensation of 6 million, which also expenses, uh, related to the sale of
Nexus One. Finally, all operating expenses totaled 1.8 billion, including approximately
285 million of stock based compensation. The increase year over year in OpEx was primarily
due to increases in payroll and advertising and promotion expense. A result of all this,
our non-GAAP operating profit, which does exclude stock based compensation, increased
to $2.8 billion in Q1, resulting in a non-GAAP operating margin of 41%, up approximately
180 basis point year over year. Head count was up 800, approximately, versus Q4 of last
year, ending the quarter with approximately 20,600 full-time employees. Finally, our effective
tax rate--22% for Q1. For a minute, let me turn to cash management. Other income and
expenses was 18 million for Q1, which includes great progress in our portfolio management
performance, but also largely offset by the timing and accounting impact of hedging expenses
associated with the FASB 133. For more detail on the OI&E, again, please refer to the slides
that accompany this call on our IR website. So all this turns out into operating cash
flow, which was very strong at 2.6 billion. CapEx for the quarter, $239 million. Again,
primarily related to our data center operations. As a reminder, CapEx, you know, is lumpy from
quarter to quarter, depending on when we're able to make these investments. Free cash
flow finished the quarter with a strong $2.3 billion. So in summary, we're very pleased
with the performance in Q1 across revenue, margins, and cash flow. As a result, we are
very optimistic and therefore pushing ahead with significant investments as I outlined
to you a few moments ago. Finally, let me remind you as I do every year at this time
that our revenue typically exhibits some seasonality between Q1, Q2, and Q3 because of the coming
summer months. With that, and before we open it up to questions, we'll have Susan and Jeff
cover their comments, and then we'll come back to Q&A. Thank you, and I'll turn it to
Susan. >> WOJCICKI: Thanks, Patrick. I'd like to
take this opportunity today to talk about some of the big areas of investment in our
advertising business--Search, Display, and Mobile, and how they are going so far. We
see a lot of opportunity to innovate in these categories and to make the ads better and
more useful. As we expand to new kinds of inventory beyond Search, our goal is to enable
high performance cross-media campaigns from within AdWords. Let me start with Search.
Starting about a year ago, we asked ourselves, why do search ads just have to be text links?
In organic search, the right result might be a video, a book, or an update from a social
network. We call this Universal Search. But ads are also information. They are commercial
information, and in many cases, it may be more useful to the user and the advertiser
if we show a video or a picture or a product in the ad. For example, if you search on the
query HP all-in-one-printer, some of the ads now include pictures of HP printers, prices,
and where you can buy them. Or if you're looking for a movie, and you search on The Losers,
the ad may give you the option to watch the movie trailer right within the ad. Other ads,
which we call site links, enable advertisers to drive traffic to specific parts of their
site. The query Toys "R" Us is a good example of this, with links to products the retailer's
promoting such as Nerf toy specials or preordering Barbies. The idea is to make the ads more
useful and therefore higher-performing. And so far, they're doing very well. Clicks through
rates on site links, for example, are up as much as 30% to 40%. We also want to give advertisers
more data and insight into their campaigns and customers. The users usually go through
a progression of searches and can interact with a number of ads before actually buying
the product. For example, a user may search and click on ads first for digital camera
and then on Canon before actually clicking on an ad for the PowerShot S90 and buying
the camera. To help use advertisers optimize for this behavior, we launched a new reporting
feature this quarter called the Search Funnel, which tells advertisers about those earlier
searches and the ads the users interacted with earlier in the buying process. By thinking
about the right portfolio of keywords, advertisers can maximize their conversion. Moving on to
our display business, we've seen very strong momentum. We're investing heavily in three
different areas--our platform, which includes the DoubleClick suite of products, our Ad
Exchange, and our Content Network in YouTube. We're bringing the performance, efficiency,
and measurability to the display world like we did with Search, which we believe can overall
grow the display market and benefit everyone. On the platform side this quarter, we launched
the largest Google and DoubleClick integration to date, a new version of DoubleClick for
publishers which has been rewritten on Google technologies. The new version gives publishers
more data and better tools to manage and maximize their return directly and indirectly sold
to ad space. We're also doubling down on our new Ad Exchange, the second pillar in our
display strategy. It's ramping nicely and publishers and advertisers are getting great
results. Some publishers are increasing their yields by as much as 130% when compared to
ads sold directly to ad networks. One of the key features that we're very excited about
on the new exchange is Real-time bidding, which enables advertisers to bid on an impression
by impression basis using their own data. By bringing this level of efficiency to display
advertising buying, everyone wins. And third, on the content network, we've introduced a
number of new features in the past year. It's a long list. Interspaced advertising, frequency
capping, above the fold targeting, new measurement tools, and many new formats among other features.
Combined, they create a compelling platform for display advertisers to reach users globally.
This quarter, we added a new feature that I'd like to talk about called Remarketing.
Remarketing enables advertisers to show ads to users who have visited their website or
their YouTube channel. So if you're shopping around for a vacation destination or go to
one resort site and then leave, when you visit another site in our network, that resort could
show you an ad with a discount coupon. As a user, this means I can get a much more compelling
ad. As an advertiser, it's an opportunity to connect with interested users. Mobile is
also doing very well. This will be an increasingly important form of advertising as users transition
to Smartphones with full browsers. We want to make it easy for advertisers to extend
their existing campaigns to Mobile rather than having to start from scratch. When advertisers
run on desktop and mobile, we enable them to separate their campaign stats by desktop
or mobile to understand their mobile performance. Many of them are surprised by how much mobile
activity they have received. Based on this information, they can decide how to customize
their mobile campaigns going forward. We also rolled out new formats and targeting options
specific for mobile. This quarter, we launched a click to call feature that automatically
puts a phone number in the ad that's running on a Smartphone. So if you're looking for
autosurance and do that query from your android or iPhone, the ads will include a call--a
number to call. Not surprisingly, this has increased click-through, or should I say call-through.
I'm just scratching the surface of all the innovations our Ad team is working on, but
I have to hand it over to Jeff now. Thank you.
>> HUBER: Thanks, Susan. Across all our products, we push to push ourselves to continually innovate.
We believe in open platforms that encourage everyone else to push innovation too. Our
reference and mobile are a great example of this at work. Eric Schmidt mentioned in a
speech at the Mobile World Conference in Barcelona in February that we're taking a mobile first
approach to most everything we do. That means doing things that take advantage of the unique
characteristics of mobile Smartphones. One of those is that your Smartphone knows where
you are, your location. So this quarter, we launched a feature called Near Me Now that
essentially turns your location in to the search query. If you go to google.com from
a Smartphone, you'll see the Near Me Now link right under the search box. Click on it to
see restaurants, cafes, shops, gas stations, ATMs, and other things of interest that are
closest to you. Another common use case is where you're searching for something at home
and then want to find it again when you're out and about. Our new stars in search feature
helps out there. If you do a search, say, for a chili recipe, and when you find a great
result, you click in the star next to it. Later, when you're at the grocery store to
pick up the ingredients, you just repeat the search with your Smartphone, which is easy
to do with the suggest feature. Just type the first character or two. The query will
pop up. Or with voice search, which is increasingly ubiquitous across the platforms, and that
starred result shows right up at the top. The same starred results now work on maps
too. Do a search at home or work, like on an address or for a restaurant, click a star
next to the right result, and that star shows up in your map on the Smartphone, making it
easy to get directions or get more information about it. These are small features in some
ways, but a big innovation in how Smartphones can integrate into your everyday life. Our
open platforms, Android and Chrome, are gaining a lot of momentum. Android is now powering
34 devices, which is up 70% quarter over quarter from 12 different OEMs, and over 60,000 Android
devices are sold and activated every day. Our whole mantra with Android is open. First
the Android OS itself is open for partners to modify and extend on their own. Then, the
Android market for apps is open for all developers, which is driving a lot of growth and great
apps. We're now at over 38,000 apps, up 70% quarter over quarter. The net effect is to
make web-ready Smartphones more widely available. It is helping drive a lot of mobile search
and apps usage. Chrome is also growing really well, mostly driven by its technical innovations
and performance and its security relative to other browsers. A new Chrome feature we
launched just a couple of weeks ago helps address language as a barrier to web use around
the world. Chrome can now automatically translate any page you're viewing into any one of 52
different languages, so if you're an English speaker and want to read the local news in
Paris, you can go to Le Monde.fr and Chrome will offer to translate the page for you.
Uptake has been great. We're already translating over 60 million pages per day. If we can help
knock down the language barrier through innovative features like this, the web becomes a lot
more accessible and useful for everyone around the world. Our latest open ecosystem effort
is the Apps marketplace for Google Apps. Many of our Enterprise customers want to move more
of their operations to the cloud, including applications that Google doesn't offer, like
CRM, accounting, project management, workflow automation, HR--the list goes on. The Apps
marketplace has had thousands of Enterprise apps purchased in installs already, all integrated
with the Google Apps experience. Finally, we're looking forward to our Google I/O developer
conference coming up in May. I/O sold out in just a few days, as developers know that
in the event's short history, we've used it to announce some pretty amazing things, in
addition to covering a huge amount of content on how they can innovate with and leverage
Google's open platforms. When you open up the web and unleash the passion and innovation
of thousands and thousands of developers, great things happen. Thanks for your time.
Back to Patrick. >> PICHETTE: Thank you, Jeff. And thank you,
Susan. So what we'll do now is, I'll invite Nikesh also to join us and ask Maria to open
up the call for questions, and then Maria will direct the questions for us. Maria?
>> SHIM: Operator, can we start taking questions, please?
>> CONNIE: Thank you. The question and answer session will be conducted electronically today.
If you'd like to ask a question, you may do so by pressing the * key, followed by the
digit 1 on your touchtone telephone. If you're using a speakerphone, please make sure your
mute button is turned off to allow your signal to reach our equipment. And once again, that
is *1 for questions, and we'll pause for just a moment to assemble the roster. And we'll
take our first question from James Mitchell from Goldman Sachs.
>> MITCHELL: Great. Thank you very much. Two questions, and I apologize, 'cause one of
them is really nit-picky, but in your cash flow statement, you've got a repurchase of
stock minus $97 million, and I thought that Google wouldn't buy back stock until the add
more back position was complete. And then, second question is, with regard to domestic
and international revenue, it's great that your domestic revenue is growing almost as
fast now as your international revenue, but it's also a little bit surprising to me. Is
that primarily because you've got more new activities like Nexus One contributing domestically
than internationally or does that reflect more v-shaped recovery domestically than internationally?
Thank you. >> PICHETTE: So I'll take the first question
and then I'll let Nikesh answer the second one. On the first one, it's because when we
bought On Two, what we wanted to do is, uh, it was a share transaction, you will remember,
and because it was a share transaction, we decided to actually re-buy back the shares
thereafter to make it a cash transaction. So it's that simple for that transaction.
For the international, Nikesh? >> ARORA: Yeah, hi, James, thanks for your
question. I think it is a combination of the things you suggest and a bit more. We are
seeing a better recovery in the domestic market, definitely. If you look at the comps from
last year, clearly the numbers look much better. We are seeing tremendous activity from our
large advertisers who are coming back in droves and actually reconfirming their faith in search
advertising, so that's all working. Plus, many of our product innovations start in the
U.S., which allows us to drive those revenues faster in the U.S. Having said that, internationally,
our revenues did not take as material a dip as relative to the U.S., so clearly, the comps
are much stronger on the international side. And it is a basket of many, many, many countries,
so, you know, we're seeing recovery in some of the major markets. Some of the markets
are still not on that curve of recovery, as we're seeing with some of the more mature,
larger markets in Europe. >> PICHETTE: We're very happy with both trajectories.
Thanks for your question, James. >> SHIM: Can we take the next question, please?
>> CONNIE: And we'll take our next question from Mark Mahaney from Citi.
>> PICHETTE: Go ahead, Mark. Is Mark with us?
>> CONNIE: Just one moment. >> MAHANEY: Can you hear me?
>> PICHETTE: Now we can hear you, Mark. >> MAHANEY: Sorry about that. What percentage
of your revenue now would come from mobile display in an enterprise gross basis? Secondly,
is Nexus One, as a group, profitable? And third, could you give us a little color on
these CPC rates? Given the dramatic fall-off in conversion rates, you know, due to the
economy in the fourth quarter of last--of '08, first quarter of '09, it's reasonable
to expect that perhaps CPCs would have risen more. Is there something else we should think
about as kind of tempering the growth in CPCs now? Thank you.
>> ARORA: Great. Remind me of your first question, Mark.
>> MAHANEY: What percentage of your revenue comes from mobile display and enterprise combined?
>> ARORA: Okay, so that one, unfortunately, we can't give you. We don't divulge that kind
of information. On the Nexus, and then Susan can give you the answer on CPC. On the Nexus
one, it is a profitable business for us. We don't give more details on the economics but
we were--we are driving the business to be a profitable business from the get-go. So
on CPC, maybe Susan can give us more comments as to what's going on there.
>> WOJCICKI: Sure, I'll give a couple comments about the CPCs. So I think there are a number
of trends that we see. I think it's important to remember, first of all, that the CPC and
the numbers that we release are an aggregate number and so there are a couple of things
happening. One of them has to do with the growth rates of the different regions and
CPCs being different in the different regions. The second things, which I believe is a long-term
positive for Google but may be reflected in the CPC number here is that we are releasing
a lot of tools to enable advertisers to try to find more, what I'll call long-tail keywords.
So keywords that they might not have been bidding on beforehand and that they might
not be the more competitive ones, and so as a result, the CPCs may vary. And we believe,
long-term, that's good, because we're actually selling more keywords and the auctions are
becoming more competitive, but it may change the mix.
>> MAHANEY: Great. Thanks. >> SHIM: Can we take the next question, please?
>> CONNIE: Thank you. And we'll go next to Vin Schacter from Broadpoint AmTech.
>> SCHACTER: Hi, guys, two questions. One, do you expect to continue to be the default
search provider on Apple products going forward? And then, if I look at the quarter correctly,
it looks like you hired about 800 people. Is anything unique about that number? Is that
roughly the right number you think you're gonna be hiring on a go-forward basis? And
then finally, if there's any other particular comments you can make around Eric not being
on the call or anything else we should read into that. Thanks.
>> PICHETTE: Okay, so why don't we take them in reverse order. Uh, Eric's everywhere. Eric
is at every public--I mean, I've seen him in Abu Dhabi, and then fly across to D.C.
the next day. And he's everywhere. So the fact that we've just decided to streamline
our process just for earnings doesn't mean that Eric is not available and, you know,
he is clearly, you know, leading, you know, as spokesperson of this tragedy with the company.
So he's very transparent and everywhere. So on that point, it was just simply an issue
of kind of streamlining it and making, you know, more focus on financial results for
this goal. You shouldn't read any more or less than that in this decision. On the 800
people, they--look, we have talked about, ever since last summer, that we're trying
to ramp up our machine to hire back specifically in engineering, specifically in the support
of sales, where we see great opportunities, and, you know, it takes a couple of quarters
to ramp up the machine so that we get the levels that we want. So we're very pleased
with the hires we've done. The bar at Google--let me re-emphasize that--has not changed. It
is incredibly high. But we're very please of the onboarding that we've seen this quarter,
and now that this infrastructure is in place, you know, you can expect us to continue to
invest heavily in this form. And we have so many projects that we would love to have more
engineers right now that we'd like to fuel our growth, that it is really paramount to
us to continue to focus on it. On the Apple, maybe Jeff can comment. Mute?
>> HUBER: Yes, we can speculate on the specific relationship around search. We have a--have
historically had a strong relationship with Apple across a number of different areas,
and we hope to and look forward to continuing that in the future.
>> SHIM: Operator, can we have the next question, please?
>> CONNIE: Thank you, and just as a reminder, it is *1 for questions today. And we'll take
our next question from M. Ron Conn from JP Morgan.
>> CONN: Yes, hi. Thank you very much for taking my questions. I have two questions.
One, questions about paid clicks growth rate. So, you know, considering that mobile is growing
significantly faster and some of the international countries are growing significantly faster,
with paid clicks growth rate 15%, is it fair to assume that the domestic paid clicks growth
rate has dispersed significantly? And can you give this caller, how should we think
about the domestic paid clicks growth rate? And second question is--is more of a long-term
threat to Google. You know, if we look at the third party data, it seems like that Facebook
and other social networking sites still--are still very low, becoming a bigger part. They're
growing significantly faster as a crossing source to a lot of your big customers like
eBay. How do you think Facebook or other social networking site is a big, long-term threat
to Google's business model? >> PICHETTE: So why don't I let Jeff talk
about the issue of Facebook, and then Susan can cover the CPC growth rates. Susan, do
you want to start? Or Jeff? Okay, Jeff, start, please.
>> HUBER: Okay, um, I mean, with regards to other folks out there, I mean, I guess our
net view is that we don't see things as a zero sum gain whatsoever. You know, looking
at the Internet and vibrancy and rate of growth across the Internet, other people are growing.
We're very happy with our growth. So we don't see that as a significant issue.
>> PICHETTE: Susan? >> WOJCICKI: Yes, I'll comment on the paid
click growth. I mean, overall, I think we've been very happy with the number and the growth
that was seen, and it's a result of a number of things. Certainly the advertisers are coming
back. Some of the largest advertisers are spending more money on Google as well as the
growth across the board in all regions. But with, also, some of the new ads formats that
I spoke about, have brought more clicks as to advertisers because they're coming up with
formats that are more compelling for users in offering information that's very useful
for the users on board, and that's causing a lot of growth in paid clicks.
>> PICHETTE: Yeah, so M. Ron, in closing on that one, the bottom line is, we see it everywhere.
It's not one versus another. And that's true for both of the questions that you've asked.
>> SHIM: Great. Can we take the next question, please?
>> CONNIE: And we'll take our next question from Justin Post from Bank of America.
>> POST: Thank you. Two things. Last year, you were able to give us some inter-quarter
guidance about how the quarter started and ended. Do you feel better about a trajectory
of your growth exiting the quarter than you did entering the quarter? And then, secondly,
on marketing spend, I think it's up 48% year over year, excluding stock-based comp. I always
thought of you as more of a technology-driven company. Why so much marketing spend and what--could
you talk about, maybe, your ROI thinking about it? Or what is it really gonna get for Google?
Thank you. >> PICHETTE: Yeah, so on the latter one, on
the marketing spend, look, there is--it's clear that we have opportunities, and I'll
give you a couple examples. One is, there's a ballot in Europe right now for Chrome, uh,
or there are markets in which, you know, there's a lot of appetite for onboarding customers,
and so we get great ROIs. And--Nikesh, maybe you have additional comments.
>> ARORA: I think it's important to understand, our marketing spend, for the most part, is
ROI-based. If you look at--we spend marketing dollars to go and acquire advertisers. On
our VTV side, we spend marketing dollars to promote various products, where it's very
clear for us to understand for each dollar we spend, what return we get in terms of long-term
value with each customer that is acquired for many of those products which create additional
monetization across our property. So you could expect us to, you know, spend marketing dollars
as and when we see it looks relevant or our long-term strategies have lots more users
for our products and lots more advertisers. >> PICHETTE: Yeah. In closing on that one,
Justin, if you think of GNA in general--right? At Google? --you'll find that our GNA is exactly,
you know, at 20, uh, 20-some percent of, percentage of revenue. I mean, it's not moving that much,
and what you see is a shift between, you know, regular GNA is actually going down, which
is the good news. And you're seeing if we have an incremental dollar, and the great,
as Nikesh said, good ROI-based, I mean, we should take the opportunity on that. As it
relates to your first question, though, we don't give comments. I mean, we had such a
crisis is the last 18 months that back then, it may have made sense to give some color
about quarters. But clearly, Q4 to Q1, we just look at the level of economic activity.
It is continuing to pick up, which is a great benefit to Google.
>> SHIM: Great. Can we take the next question, please?
>> CONNIE: And we'll take our next question from Doug Anmuth from Barclays Capital.
>> ANMUTH: Great. Thanks for taking my question. Um, the first question is on the Nexus One
and, uh, in particular, can you comment on how many phones you sold during the quarter
and if possible, you could change the distribution plan going forward to that they actually are
in the stores rather than just online. And then secondly, can you comment on China as
well, and perhaps give us an update there in terms of what you're seeing, and any thoughts
you might have on what percentage of the business or percentage of the revenue you might be
able to hold onto in that market going forward? Thanks.
>> PICHETTE: So I'll let Jeff answer the Nexus, and then I'll cover China.
>> HUBER: Now, um, we're not disclosing the number--uh, specific number of, uh, Nexus
One devices sold. We are very happy with the device, uh, uptake and the kind of impact
that that's had across the industry of raising the bar in people's expectations of what a
great Smartphone can do. Um, I did earlier mention that across the android landscape
that we are seeing more than 60,000 devices sold in activations daily. Um, on stores,
um, sorry, we can't comment anything about that right now.
>> PICHETTE: Thanks, Jeff. Let me comment on China. Look, you know, we have made, uh,
we've explained to people that, you know, that revenue numbers for China were kind of
immaterial to the financial performance of the company in the previous blogs and communications.
The bottom line, though, on China is, you know, this was a tough situation where we
really believe we've made the right decision. You know, Google stands for really important
values like openness, user choice, protection of privacy, and these are--you know, in a
company that remains to its values, you know, that's what you do. You make a decision that
is driven by those values. Having said that, you know, that what we've announced two weeks
ago--right?--or a few days ago, clearly has us staying in China. I mean, we have just
changed our strategy and adapted our strategy, but our engineering force remains in China,
and we'll continue to develop great products. We continue to keep our sales force in place
because there's still an export market. And then, you know, a lot of opportunities in
China for sales. And what we've done is moved back to Hong Kong for search, where we can
operate uncensored, so from that perspective--right?--you should see a lot of positive moves on basic
Google and--but made the right call. Thanks. Let's go to the next question.
>> SHIM: Next question, please? >> CONNIE: And once again, if you'd like to
ask a question that is *1. And we'll take our next question from Brian Pitts from UBS.
>> PITTS: Thanks. Can you give us an update on where you are in terms of renewing your
distribution deal with News Corp.? And then a quick question on mobile. Is there a plan
B if AdMob doesn't go through? Okay. And also, can you comment on whether you see mobile
services eventually being delivered essentially through the browser, much like the PC, rather
than individual application downloads? Thanks so much.
>> PICHETTE: Let me just comment on AdMob, and then Susan will probably give more comment--
commentary on the monetization. Look, the case for AdMob is, there's overwhelming evidence
that the mobile advertising industry, both in terms of platforms and providers, is nascent.
It's incredibly competitive. It didn't exist 24 months ago. There's dozens of ad networks
out there and, you know, even last week, you may have heard that there was an announcement
from Apple that they were starting their own. I mean, it is incredibly competitive, and
that's why we believe that actually, you know, we're very positive about, you know, making
this transaction happen. The case is on our side. Now, on the specifics of monetization,
maybe Susan can give a bit more color commentary. >> WOJCICKI: Well, I was just gonna comment,
since you asked about a plan B, um, I will say that Google does have a monetization product
for monetizing mobile applications, AdSense for mobile applications, and that is a product
that we are investing in, um, and we have seen good growth with that one. But I just
want to reiterate the point that Patrick said, which is that we see it as a very, um, a very
new and nascent market. It's less than two years old and, um, there's a lot of competition
in this market, um, so we are continuing to work with the FTC on AdMob. Your other comment
was about ad applications versus web, and Google is investing and believes that html--html5
has the opportunity to enable a lot richer applications on the web, and that's something
that we're investing in, and we'll see over time how applications and html5 both develop.
>> PICHETTE: Wait, let me go back to the very first question you asked, which is, I think
the News Corp. question was around, uh-- >> PITTS: Yeah, just--
>> PICHETTE: The MySpace--MySpace deal. Look, we're--we're working. Look, Google wants every
partner, in the sense that it's good for the ecosystem, it's good for our partners. It
gives them opportunities for monetization. We're in the negotiations right now of a deal
that is kind of to be renewed, and these deals were, you know, like in the case of that specific
one, was done a number of years ago with completely different industry dynamics, so we're working
with them to find a real win-win, and you just stay tuned for when we have an announcement.
>> PITTS: Thanks so much. >> SHIM: Okay, next question, please?
>> CONNIE: And we'll take our next question from Spencer Wang from Credit Suisse.
>> WANG: Thanks. Um, just two quick questions. First, on the pay-click growth, um, which
is up 15% every year. That actually, um, reaccelerated for the first time in a couple, um, years,
so I was wondering, Susan, if you could just give us a sense of, you know, what driving
that? Is it, you know, a combination of site links? Um, how much of it is mobile, etcetera?
And then secondly, just for Patrick, um, GNA, it looks like that stock comp goes actually
down every year. Is that kind of the rough--right, absolute level we should be thinking about
for the rest of the year? Thanks. >> PICHETTE: Want to cover it for us, Susan?
>> WOJCICKI: Yeah, on paid-click, I think it's a combination of, um, you know, a lot
of different factors, and it's really important to remember that this is also an aggregate
number across all of our businesses, and so, as we saw advertisers come back and start
spending again, you know, driven by a lot of our largest advertisers really increasing
their spend as well as Google, um, and the ads team bringing a lot of new types of products
to market in terms of the site links product, which has not just one place to click but
multiple places to click. We started seeing advertisers have, you know, higher click-throughs,
and so all of those higher click-throughs that I talked about do manifest themselves
in terms of the aggregate paid click number. Mobile, you know, is a component of many different
types of inventory that Google is expanding to, to increase the overall paid click number.
>> PICHETTE: Great. On the GNA, Spencer, the short answer is, we're gonna continue to be
disciplined, just like you see in the--the ramp--the runways and the ramp-ups that you
see, so we're very disciplined. This place continues to be, uh, frugal in many ways.
On the other side, right, we are hiring. We are hiring, and--and it's obviously lumpy,
so the point is, like, we are--every time I could find another great engineer to add
to the Chrome OS platform, I'm gonna hire them. We're gonna hire them. Google needs
them. On the flip side, there's a lot of discipline around. It's not like you do whatever you
want around here. There's discipline. >> WANG: Great. Thank you very much.
>> PICHETTE: Thank you. >> SHIM: Thanks. Next question, please?
>> CONNIE: And we'll take our next question from Ross Sandler from RBC.
>> SANDLER: Hey, guys. Thanks for taking the time. Two quick questions for Nikesh. As you
look at year over year growth in the UK, versus R.O.W., kind of an unorganic basis, they're
about the same. Can you talk about what areas in R.O.W. are out-performing and which ones
are under-performing? And then, you had mentioned a couple--a month or two ago that there was
some paid-click cleanup in the fourth quarter. Was there any of that in 1Q? And can you talk
about the growth rate of O&O clicks versus, uh--or Google website clicks versus partner-site
clicks? Thank you. >> ARORA: Um, thanks for your question. In
terms of the UK versus the rest of the world, I think the rest of the world, for us, performed
even better than the UK did in the last quarter. Having said that, as I mentioned, there are
parts of the rest of the world which are continuing to perform really well for us--places like
Brazil, uh, which we talked about last quarter; places like Russia, etcetera, continue to
perform well. There are some parts of the European economy, as you're aware, which are
still undergoing some correction, like Greece, where it clearly can't expect us to be performing
too well. So, yeah, there are pockets of strong performance in the rest of the world. They
are pretty much in line with our expectation in terms of trends we're seeing which are
dependent on broadband penetration, dependent on the e-commerce activity, dependent on the
small businesses' adoption to the Internet. And as those scores continue to go up, we
continue to see correspondingly good performance in those markets, and we're planning our growth
strategies in those markets along those lines. >> PICHETTE: I think for--the keyword refinancing
for Greece should be pretty popular, though. [laughter]
>> ARORA: Unfortunately, I don't think there's 30 million euros on the Internet for them
to get, Patrick, but we'd love that advertising business. Uh, see now, he's made me forget
your other question. >> SANDLER: The, uh, clean-up of the paid
clicks and-- >> ARORA: Yes, we did do a slightly outside-of-normal
clean-up in the last quarter, but I think our activi--you know, we're constantly making
sure that we're taking care of spam and we're taking care of advertising situations where
we don't believe, uh, that's appropriate business. We do that on a regular basis. So we've done
nothing extraordinary in this quarter. Last quarter, we did sort of look at our policies
in certain areas and clean it up, which is why we mentioned it in the last call.
>> SHIM: Okay. Could we have the next question, please?
>> CONNIE: And we'll take our next question from Mary Meeker from Morgan Stanley.
>> MEEKER: Yeah, thanks. So just one clarification and then a question. So on the cost-per-click
decline, 4% sequentially, by our math, um, if you exclude 4x, the decline was probably
closer to 2 1/2%. And just, we want to try to rank order the drivers of the sequential
decline, and our thinking is that 4x was the number one driver of the decline. The second
was a geographic mix, which is an ongoing issue with the second driver. Third was related
to tools, that Susan spoke about, to find more long-tailed keywords which, over time,
should drive CPCs higher or certainly assist CPCs. The fourth was the slower economic recovery
in Europe versus the U.S., and your comment about Greece that related to that. And the
fifth was another Susan comment, that product innovations roll out in the U.S. first which,
over time, as they roll out in the non-U.S. markets, should help CPCs outside the U.S.
One you didn't really mention was mobile, which is probably a factor as well. Is that
the right laundry list of drivers of a sequential CPC decline? And the right list in the right
order in your view, Patrick? >> PICHETTE: The--Mary, I think that you have,
in essence, the right laundry list. And I can tell you that DFX, anybody that--because
that's kind of public information on FX--um, you can, it is a big contributor to that 4%.
Uh, for the other--the other last element of the equation is, you know, always the mix
between, you know, Google properties versus the partner properties, which also has, and
especially in the case of international, the U.K. So you have all the elements of what
you talked about, plus you have to look at the mix between the dot-com properties versus
the partner properties. And now, you know, we don't--we don't give you the breakdown
of all the elements, as you know, but you have the right basket, if you include the
last one I just gave you. >> MEEKER: Okay, and then, a question. And
I'm gonna give you a fun name, is you've been telling us about lumpiness and catbacks for
a really long time. Catbacks has been, actually, very constrained, and the phrase is gonna
be lumpy but disciplined. You've been talking about investments in people for the last couple
of quarters. >> PICHETTE: Mm-hmm.
>> MEEKER: You increased your headcount about 4% sequentially, but your operating spending
per employee was flat, sequentially. >> PICHETTE: Yes.
>> MEEKER: And the question we have is, as you grow, as you should, do you think you
can continue to keep up extra employee flat sequentially? So we'll call it lumpy but disciplined.
>> PICHETTE: I mean, the--that's the intent. The intent is, you know, you unboard Googlers,
right? They take real estate, they take computers, they take, you know, computing power. But
it's not--I mean, for the models that we have right now in the spaces where we are, I mean,
it's really about software development and sales. So, you know, that's the intent, absolutely.
And then, on the CapEx side, you know, I could argue, it grew 8% quarter--a quarter, right?
But you're absolutely right. We're very disciplined about it, and we're very proud of, in fact,
getting so much yield out of our infrastructure, uh, and--but there's always--remember, I mean,
I tell this because when it all happened, just like we had talked about a few quarters
ago that we're ramping up on hiring, in the same way, when there's a great opportunistic
purchase on assets, we will be there. >> MEEKER: Thank you.
>> SHIM: Okay, let's take our next question. SHIM: And once again, that is *1 for questions.
And we'll go next to Jaedel Patel from Deutsche. >> PATEL: Great, thank you. Couple questions.
I guess coming off the bottom obviously from an ad market standpoint, can you I guess talk
about, are you seeing from your marketers at least in the U.S. in customers a different
allocation of ad dollars between search and display ads and other initiatives such as
product listings and the like as you come up from Q4 to Q1 and beyond? Second question
is I guess, you know, we continue to believe in, you know, you guys investing in the business.
And just curious with the incremental 800 ads, I guess, is there one or two sets of
projects that you're allocating incremental investment against, whether it be moble or
YouTube or what-have-you just to give us a flavor of where you're headed from a product
innovation and kind of traffic load standpoint? And then I have a quick follow-up.
>> PICHETTE: Jeff can talk about where--all the areas where we're deploying the engineering
and then, I mean, obviously Nikesh will answer the first question. So Jeff, you want to give
a sense of where we're plowing resources? >> HUBER: Sure, it's a combination of the
core business is strong in growing. So we're continuing to invest in that. Susan went through,
in her section, a lot of the innovations and new products that we've introduced in the
core search and display ads business. Some of the other major areas of engineer investment
are some of the things that I cited--the open platforms, Android and Chrome, are growing
very quickly and having a big impact. We're also investing incrementally in the apps and
enterprise business where we're seeing very strong growth and a lot of customer uptake
there. >> PICHETTE: Nikesh?
>> ARORA: Let me answer the head count question [indistinct] first, then I can go back and
talk about the marketeers and the advertisers. As Jeff mentioned, on the business side we
are continuing to add resources selectively in search as you see the markets continuing
to grow as well as deploying it in markets where we see higher growth as I mentioned
earlier. In addition to that, we are putting a significant amount of resources in our display
space as the product team continues enhance our display offering and give us more features.
And that will continue to sort of be a focus for us throughout the year going forward.
In terms of what we're seeing from marketeers, I think the pullbacks we had seen about six
to nine months ago is all gone. What has also happened [indistinct] is I continue to see
tremendous amounts of capability building on the advertisers' side. One of the challenges
we always have--you can go to an advertiser, pitch them on a tremendous search campaign.
However, they feel like we can lead the horse to water, but they still have trouble making
it drink because their websites aren't fully capable of conducting the e-commerce transactions
at the level they would like. Having said that, I've seen tremendous amounts of capability
improvement in the last six to nine months across a majority of our mature markets both
the U.S., U.K., Germany, France, et cetera, which allows us to go in with bigger, more,
sort of, larger campaigns to these guys. And they're beginning to understand that, you
know, search is, sort of, diminishing inventory. If you don't buy today, it's not gonna be
there tomorrow. So they have to be more willing to be flexible with their budget and be open,
depending on what's going on. And they are very--they are getting more and more, sort
of, adverse to the ways of search. So clearly we're seeing them get more flexible with their
dollars in the search side. They're beginning to understand the value of product license
and mentions by free marketing and how to use the display networks effectively in sort
of a CPC model and a CPM model, depending on which one they choose. So clearly, you
know, in the more mature markets we're seeing awareness with the digital market space. We're
seeing them sort of keep the search budgets open, and we're seeing tremendous amounts
of engagement from their side. >> PICHETTE: Just in closing on that point,
I think that the display market is seeing such an evolution because the simplicity of
the tools that did not exist a year ago are now here, and people now have the choice of
participating and participating actively. And in these campaigns now, love to have the
flexability to move from one another to find the right audience. So a tremendous progress
we've seen, and we're very encouraged by what we see.
>> PATEL: I guess a question to Nikesh's commentary. I guess if companies are having a hard time,
you know, getting the transaction in the door once they get the traffic and small businesses
have that same issue. I guess would you ever look at a model such as a percentage of sale
model to go, you know, eliminate that issue and, you know, have the transaction occur
on site? >> ARORA: Well, I think-- I want to make sure
you interpret what I said carefully. I think, to be fair, most of the small businesses are
very, very good with their allocation. As you'd seen just a few quarters ago, we've
seen a dip in large advertisers and not in small advertisers because they've always been
[indistinct] driven. They totally understand how to bring in a search lead and how to convert
that search lead into dollars. I think the challenge of the large advertisers has been
that as a proportional to total advertising revenue, they have not been able to allocate
a lot of dollars towards search. Hence, now as they've built up their capability, they're
able to do that more effectively. >> WOJCICKI: Yeah, so this is Susan. One additional
thing I would like to add is we definitely see an opportunity to move to taking a percentage
of the conversion. In fact, we call this CPA, cost per aquisition. And one of the products
that was developed in this area that we are optimistic about is the product ad product.
And the way that works is the retailer just gives us all of the information about their
products, the price, the listing, description, et cetera, and then Google actually does the
targeting to decide where to show those ads. And then we take a percentage when the product
is actually purchased, when the user actually converts. And we do see that as an opportunity
to really simplify the process for advertisers over time, and it's something we're investing
in. >> CONNIE: Right, can we take the next question,
please? >> SHIM: And we'll take our next question
from Jason Helvstein from Oppenheimer. >> HELVSTEIN: Yeah, thanks. Let me ask just
a bit about expenses. So did Nexus One have a materal impact on sales and marketing expenses
in the quarter? And then number two when we look at seasonal pattern of expenses last
year, they increased the percent of revenue in the second quarter. Should we expect a
similar pattern this year or is each year different based on your initiatives? Thanks.
>> PICHETTE: Justin, to make it simple, on the Nexus One we did not have a material advertising
for it. And then on the second one, I wouldn't provide any guidance for the coming quarters.
So I would leave it at that. >> HELVSTEIN: Okay, thanks.
>> CONNIE: Great. Can we have our next question, please?
>> SHIM: And we'll take our next question from Youssef Squali from Jeffries.
>> SQUALI: Thank you very much. Two quick ones. One for Patrick, one for Susan. Starting
with you, Patrick. I just want to go back to the China issue and understand a little
bit better what you said. So is serving China from Hong Kong is a sample strategy for you
guys? Doesn't that put you at a strong disadvantage versus a native player over time? And then
to Susan, among the many products that you cited, product search, site links, image ads,
et cetera, help us understand which one or which one or two are having the most impact
on conversation rates and CPCs. Thanks. >> PICHETTE: So on the case of China, I mean,
obviously we still have sales in China, and the fact that we serve them in Hong Kong and
from Hong Kong doesn't stop us from having all the opportunities that we want from the
Chinese markets. And, you know, remember there's a huge industrial infrastructure all around
Hong Kong and south in China. So it's really addressing a market from a different perspective,
and our sales force is ready to serve them from there.
>> SQUALI: MOSTLY FOR EXPORTERS? >> PICHETTE: It's both actually, because we
have--like, we really have both opportunities. What we've really done, if you think about
it, is, you know, we've stopped censoring. But the access to Google is still available
for all Chinese people through dot hk. I'll leave it to Susan to answer the second question.
>> WOJCICKI: Sure. So from an impact standpoint, some of the biggest changes that we make that
impact the product in all the metrics, not just CPC but, you know, percentage of click
growth, et cetera, a lot of them have to do with changes in the ads quality that we make
in the quarter. And the reason is, is because if we can make a percentage increase off of
that very large business, that can have a significant impact. And so we had a, what
we'll say, a modest quarter from ads quality. We had more than a dozen different launches
that were significant across the board, and they certainly, over time, do play an important
role in how they affect the metrics. The other thing I'd like to point out that I think also
is really an important thing to look at with our overall business is something was introduced
in AdWords called Opportunity Center. And Opportunity Center is a way for advertisers
to know this is how many more clicks I should be getting or could be getting. And so what
we wanna do is we wanna give a lot more guidance to advertisers in terms of: Here are more
keywords. They're very easy to add to your keyword list. We just launched this quarter,
for example, bid suggestions to give them an undstanding of whether the trade-offs between
volume in CPCs and where's the optimal place that they should be bidding, as well as budget
suggestions. And because this is--because Opportunity Center is applied to the core
business and to all of our advertisers, it can move the metrics over time in terms of
getting more advertisers to buy keywords or increase their budgets or change their bids.
>> SQUALI: Okay, thanks. >> PICHETTE: Thank you for your question,
Youssef. >> CONNIE: Can we take the next question,
please? >> SHIM: And we'll take our next question
from Mark May from Needham & Company. >> MAY: Thanks, I had two. I wondered if you
could give some color around the paid click and cost per click growth as it relates to
ONO and the network. Did paid clicks grow faster on the ONO network or an the AdSense
network? And same for CPS. And then the second question is: There are a lot of innovative
companies in the display space. Earlier you mentioned remarketing. But generally speaking,
there are, you know, others out there doing remarketing. So my question is: What are the
top couple of things that Google is doing that's different in the area of display, particularyl
from a targeting standpoint that is, you know, meaningfully differentiated?
>> PICHETTE: All right, so on the first one I'll punt because we don't divulge the split
between ONO and other properties. But I'm sure Susan will talk about the display innovations.
>> WOJCICKI: Sure. So you brought up some questions about remarketing. And what we're
doing there that's unique and, yes, I think I would definitely agree with you that display
is a really vibrant space and there's a lot of innovation that's happening right now in
the display market. And I think ultimately that innovation will enable the market as
a whole to grow. But one of the things that we have that's very unique from the remarketing
perspective is user--or advertisers can refind users across the content network. And the
content network, because we have so many publishers on our site and because we are a global network
as well, it gives advertisers the opportunity to expand and find a lot more of those users
across the network than they probably can with a lot of other options. The other thing
that we're doing from a targeting perspective is we're trying to make it really easy for
advertisers to work with existing interfaces. So right now you can do remarketing within
AdWords. So if you are an AdWords advertiser, you can do the remarketing there. If you are
DFA advertiser, then you can also do it from that perspective as well. The other thing
that is important is from--'cause you also asked about different types of targeting.
We offer a number of different targetings that we think are unique. And one of them
that we're best known for is the contextual targeting. So the ability to actually figure
out on a page what this page is about dynamically and then serve an ad that's matched to that
one specifically. Then we also have placement targeting where we give advertisers ability
to choose where they want their ads to appear by actually selecting-- these are the sites
and this is where I want them to appear. So the combination of all of these things together
give advertisers a large number of options. And we're thinking about how these things
actually work together. So, you know, how do all of these different targeting mechanisms,
how do you combine them in a way to provide the best options for the advertisers and users?
>> MAY: And Susan, when you said content network, you do include YouTube in there?
>> WOJCICKI: Yes, we do include it within there.
>> MAY: Great. >> CONNIE: Great. Can we have the next question,
please? >> SHIM: And we'll take our next question
from Jordan Rohan from Thomas Weisel. >> ROHAN: Hi. Actually I have a drill-down
question on site links and image ads. The question I have is: Really just how do I think
about the pervasiveness of these new ad formats? Over what percentage of queries or what percentage
of advertisers do you think it's relevant? Seems like it would be a relatively narrow
set of very commercial queries for very response-driven advertisers. How are penetrated are we? How
new is this? Thank you. >> WOJCICKI: This is Susan again. So you're
right that site links is new, and we are really just beginning to penetrate all of the advertisers
that I think would benefit from the site links feature. We do see site links appearing mostly
on navigational queries where the user is looking for the brand name or, you know, the
product category. But it is a very powerful tool, and we believe there's still a lot of
advertisers that are not using it today that would benefit from it. The other thing I'll
say about site links is it is rolled out globally. And so when you look at the combination of
all the different companies and advertisers globally that could benefit from this, we're
just getting started because we've just started rolling this out in Q4.
>> PICHETTE: Thanks for your question, Jordan. >> ROHAN: Thank you very much.
>> CONNIE: Can we have the next question, please?
>> SHIM: And we'll take our next question from Marianne Wolk from Susquehanna.
>> WOLK: Thanks. I had two quick questions. The first is: With regard to your mobile advertisiing,
it sounds like it's an opt-out program now for most AdWords users. Is that true? And
would you also include in-app ads as an opt-out mobile choice as well? And then also, is it
fair to say, based on the comments you made about the content network, that the mix shifted
from the content partners--to the content partners from the search partners by several
points this quarter? And did the content network also grow much faster in the U.K. this period
than in the U.S.? And I know you rolled out video and display ads on the content network.
Can you talk about the uptake there and any positive impact that's had on pricing? Thanks.
>> PICHETTE: Sorry, Marianne. Could you just repeat your questions so we'll all just write
them down? >> WOLK: Sure. On the mobile advertising side,
it sounds like you're saying it's an opt-out platform.
>> PICHETTE: Yeah, the opt-out issue. The second one was about the U.K. versus other
geographies for pickup rates for different formats.
>> WOLK: No, for the content network, for the content network.
>> PICHETTE: Okay. >> WOLK: And whether you're getting any pricing
benefit there from the introduction of display and video ads recently.
>> PICHETTE: Okay. Susan, you want to take these?
>> WOJCICKI: Yeah, I'll take both of them. So on the mobile component, I'll say that
we do give advertisers the option to--the default is for advertisers to be on search
content and mobile. And the reason we do that is because want to make it as easy as possible
for advertisers to get as much reach and reach as many potential users as possible, and we
try to do the right thing for those advertisers. So the default is for them to be opted into
both. However, we do offer the ability for advertisers to run a mobile-only campaign.
And under that mobile-only campaign, we give them the option to target, for example, a
specific mobile OS. And we give a lot of options within the mobile category, but I'd really
think about that more for advertisers who are--have the capabilities and are advanced
enough to know that this is-- these are the capabilities that they want to do and customize
their campaign in order to make it worthwhile for them. On the formats question, I will
also say we definitely have been introducing new formats into the display network, and
we've been really excited about that. In fact, we have a product called display ad builder.
And display ad builder is a way--it's a template system that enables us to have lots of different
ad formats and to add them very, very easily to our network. And from an advertiser standpoint
they're very, very easy too to actually start and get running. It's really just a click,
click, click, and your ad can be running, your display ad can be running. So because
the content network and the way that we choose which ad is actually run is auction, what--it
displays mostly--if a display is winning, then it's winning because it's actually a
higher CPM ad. And so by bringing display ads to the mix with text, there's more competition
and there's more variety. And so when it makes sense for a display ad to run, then it wins
the auction, and because it won the auction then it's bidding more than the existing text
ad. And so over time that can bring positive competition to the auction.
>> PICHETTE: Thank you for your question, Joanna.
>> CONNIE: Okay, can we have the next question, please?
>> SHIM: And we'll take our next question from Aaron Kessler from Kaufman.
>> KESSLER: Yes, a couple questions. First, can you give us a little more details on the
travel and retail verticals. I know you said the verticals are strong. Is there any more
color there? Then just updates on your hedging program would be helpful and just kind of
your thoughts going forward with the hedges. >> PICHETTE: Great. Maybe I can start with
the hedges and then turn it to Nikesh. Look, our hedging program is really effective. We--I
just want to remind everybody, for us it's an insurance policy. It's an insurance policy
for high volitiliy and specifically if the U.S. dollar strengthens dramatically. And
so if you look at where the euro was a year ago versus where it was 90 days ago versus
where it is now, I mean, and then you go back to last year--as we discussed, we had booked,
at this time last year, big hedging revenues, was mostly because we had such a massive appreciation
of the U.S. dollar. So for us very effective in, you know, finding the right sweet spot
to make sure that we have the right coverage. What we're caught with is the accounting rules,
which some quarters, like last quarter, right, had very little FAS 133 ruling pushing through
the P&L, and this quarter has a disproportionate amount. They don't represent our regular cost
of hedging, so it creates a bit of a--kind of a fluctuation for you to model, but in
the end we're very happy with what we're getting out of it. In terms of the verticals, I'll
turn it to Nikesh. >> ARORA: As you mentioned, travel and retail
have been strong. I also alluded to the capability building, which for e-commerce, primarily
I was talking about the retail vertical where we're seeing some good strength. Travel is
going strong and is steady. Retail and travel end up being some of our larger verticals
in the entire landscape. Having said that, you know, I'm seeing good strength as well
from CPG and entertainment because that's where a lot of the display advertisers like
to focus. Those verticals, even though those are smaller numbers, those verticals aren't
traditionally strong search verticals, but they definitely play in the display space
and a lot of the display efforts have been targeted at those verticals.
>> KESSLER: Great. Thank you. >> CONNIE: Great. Can we take our next question,
please? >> SHIM: And we'll take our next question
from Colin Gillis from BGC. >> GILLIS: Hey Patrick, was there any tension
between Sergey and Eric over China? And could that be tied at all to why Eric is not on
the call today? >> PICHETTE: [laughing] No. I'm sorry, I shouldn't.
Thank you for the question. Thank you--I have a feeling that, you know, I've heard every
rumor. So thank you for asking the question so candidly. The answer is no. There's nothing
going on at all. I mean, it was really, you know, as we were doing the planning at the
end of last year, you know, to all the questions every--if you doubt that we actually scrub
every department at Google, I was scrubbed too. And the question that was asked is: What
can you do differently to be better next year? And one of the things on the list that we
brought up in finance was, hey, maybe we should look at the quarterly call and whole process
and the webcast that we launched. And one of them was, hey, you know, we thought of
this as an innovation. Has nothing to do with it. Thank you for asking the question.
>> GILLIS: How 'bout as a quick follow-up. The newer ad format, did that provide any
lift at all to the CPC? >> PICHETTE: The newer ad format.
>> GILLIS: Click to play video and things along those lines.
>> PICHETTE: You know, I think it's important to understand, we--some of the newer ad formats
they're all not sold on a CPC basis. Our new ad formats are sold, like, traditionally in
the display space. We sell them as watch pages or homepages. So they're not paid on a click
by click basis. >> GILLIS: Okay, thank you.
>> PICHETTE: Thanks for calling. >> CONNIE: Can we take our last question,
please? >> SHIM: And we'll take our final question
from Scott Devitt from Morgan Stanley. >> DEVITT: Hi, thanks. Two questions, please.
The first one, just to follow up on Mary's laundry list question, the comment about site
revenue and network revenue mix. The site revenue, network revenue were both flat sequentially.
So I was wondering if you're suggesting that CPCs in the network are actually declining?
If that was a contributor to the sequential decline in CPC? And then secondly, you recently
indictated 50 million Chrome users, and I think Android, the smart phone shipments,
have been roughly 6 million per quarter run rage. So your thoughts on shipping a tablet
to take advantage of this momentum? Thanks. >> PICHETTE: Let me-let me answer in two ways.
We're really delighted by the Chrome take uprate. I mean, it is a fast browser. It is
a secure browser. It has all the elements that we have kind of told about it, so this
is a terrific opportunity. In terms of tablets, the one announcement that we made last year,
you'll remember with the launch of Chrome OS, is we are working with manufacturers to
have a netbook out sometime in the fall. And we're continuing to work diligently on this.
We're very excited about it. And we think that, you know, there's gonna be a ton of
innovation coming out of that. So there's no doubt that we're pushing for it for all
the reasons that you're mentioning. Can you remind me your first question?
>> DEVITT: Sure. The addition to the list earlier in terms of drivers of changes in
CPC was the mix shift between site and network. And as we go back and look at the sequential
growth rate of Google site revenue, Google network revenue, they're both basically flat.
So I was wondering if there was any implication from that CPC and one of those two actually
changed more than the other? >> PICHETTE: You know what, I don't have the
answer to that. But what I will do is just we'll follow up with you.
>> DEVITT: Okay, great. Thank you. >> PICHETTE: Great. Maria?
>> SHIM: I think we're done taking questions, so I'm gonna turn it over to Patrick for some
closing thoughts. >> PICHETTE: Great. I just wanna thank everybody
for joining us today. I want to thank ever Googler as well who listens to the call. I
mean, you know, we have Googlers all over the world working so diligently at kind of
creating these incredibly products and all of the opportunities we have. Thanks for your
time, and we look forward to talking to you at the end of Q2. I'll let the lady close
the call. I forgot her name. I'm sorry. >> SHIM: Connie?
>> CONNIE: And this concludes today's conference. We thank you for your participation.