Q3 2010 Earnings Call

>> CONNIE: Good day and welcome everyone to the Google Inc. third quarter 2010 earnings
conference call. Today's call is being recorded. At this time, I would like to turn the call
over to Ms. Jane Penner, Senior Manager, Investor Relations. Please go ahead, ma'am.
>> PENNER: Good afternoon everyone and welcome to today's Third Quarter 2010 Earnings conference
call. With us are Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior
Vice President, Product Management; and Nikesh Arora, President, Global Sales Operations
and Business Development. First, Jonathan and Patrick will provide us with their thoughts
on the quarter, then Nikesh will join Patrick and Jonathan to answer your question. Also,
as you know, we recently began distributing our earnings release exclusively through our
Investor Relations website located at investor.google.com. So, please refer to our IR website for our
earnings releases as well as supplementary slides that accompany the call. This call
is also being webcasted from investor.google.com. A replay of the call will 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 Google's future
and investments in our long-term growth and innovation, the expected performance of our
business, 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 revisions to these forward-looking statements in light of new information or
future events. Please refer to our SEC filings for a more detailed description of the risk
factors that may affect our results. Please note that certain financial measures we use
on this call such as operating income and operating margin are also 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 in reconciliations of non-GAAP to
GAAP measures can be found in our earnings press release. With that, I will now turn
the call over to Patrick. >> PICHETTE: Thank you, Jane. Good afternoon
everyone and thank you for joining us. As Jane mentioned, Jonathan and I will begin
with our prepared remarks and then Nikesh will join us for Q&A. In addition--and as
a bit of a surprise, we may actually have Eric join us for the first 30 minutes of Q&A
before he has to run to a plane. So, let me start by giving you some general thoughts
before I get into the details of our financial performance for Q3. At the highest level,
we're very pleased with our Q3 results and it's clear that the digital economy continues
to grow rapidly. A relentless trend that continues to drives--continued growth in both our core
business, core search, and creating market and also for fuelling momentum in our newer
businesses. Our Q3 results clearly reflect this phenomenon that is our continued strong
growth in our core business and continued very strong growth in our emerging businesses
year-over-year. And indeed we saw strength in every major product area in Q3, that is
search, display, mobile as well apps enterprise. And when I say our newer businesses are seeing
great momentum, I really mean it. And in that, Jonathan will back that statement up with
some hard facts in a few minutes. So, stay tuned for the details. Now, let's turn to
specific of our performance in the quarter from a financial perspective. Let's move quickly
to the results. Gross revenue grew 23% year-over-year to 7.3 billion. Our Google website revenue
was up 22% year-over-year to 4.8 billion, with strength as I mentioned across most major
geographies and verticals. Our AdSense revenue was up 22% year-over-year to 2.2 billion,
again reflecting continued strength in our Google display network. Our other revenue
was up 35% year-over-year to 254 million, down sequentially reflecting the end of our
direct to consumer sale of the Nexus One. Our global aggregate paid click growth remained
healthy up 16% year-over-year and also up 4% quarter-over-quarter. Aggregate cost per
click growth was up 3% year-over-year and 2% quarter-over-quarter. You should note that
the FX had a negative impact on CPC growth year-over-year, but the impact for quarter-over-quarter
was quite neutral. Remember too that this is an aggregate number which includes both
Google.com and our AdSense properties. So, now turning to our geographic performance,
the U.S. and the rest of world are growing at a healthy pace as our results reflect,
but also, while the U.K. continues to lag a little bit in the economic recovery, again
seen in our results. Revenue from the U.S. was up 26% year-over-year to $3.5 billion
and in our earnings slides, which you can find on our Investor Relations website, you'll
see that we have broken down our revenue by U.S., U.K., and the rest of world to show
you the impact of FX and the benefits from our hedging programs. So, please refer to
those slides for the exact calculations. International revenues accounted for 52% of our total revenue
or 3.8 billion, up 20% year-over-year which includes a 89 million benefit from our hedging
programs. And that compares to a 39 million benefit for Q3 of last year. If we used fixed
exchange rates, our international revenues would have been roughly 169 million higher
year-over-year. The U.K. was up 10% year-over-year to 840 million, but actually if using a fixed
exchange rate, that number would have been just shy of 20%. So now, let me turn to expenses.
Our traffic acquisition costs were $1.8 billion or 26% of total advertising revenue for this
quarter. Other cost to revenue was 747 including stock-based compensation of $8 million and
finally all other operating expenses totaled $2.2 billion, including approximately $372
million of stock-based compensation. The increase year-over-year in OpEx was primarily due to
increase in payroll, professional services and advertising and promotional spend. So,
as a result of all this, our non-GAAP operating profit which excludes the stock-based compensation
increased to $2.9 billion in Q3, resulting in our non-GAAP operating margin of 40.2%,
essentially the same as last year. Headcount was up approximately 1,500 versus Q2 and we
ended the quarter with approximately 23,300 full-time employees of which about 300 came
from acquisitions. Our effective tax rate for the quarter was 20%, down from 24% in
Q2 and because--this is mostly because we released certain tax reserves as a result
of the settlement of our 2005-2006 tax audits which are now completed. Let me now turn to
cash management. In the line other income and expenses, it was $167 million for Q3,
which includes good progress on our portfolio management performance, although that was
slightly offset somewhat by the impact of our hedging expenses associated with FASB
133. For more details on OI&E, again, please refer to the slides that accompany this call
on our investor website. Operating cash flow, very strong for the quarter at $2.9 billion.
CapEx for the quarter was $757 million, again mostly primarily related to our data center
operations. And as a reminder, we continue to make significant investment in CapEx and
these have shown to be quite lumpy from quarter-to-quarter depending on when we're able to make these
investments. So, in the end, free cash flow was also very good at $2.1 billion. Before
I close, I want to say a few words about how we're continuing to grow the business for
the long term. And when I say the long term, we really mean, you know, not the next quarter
and the following quarter, but we're thinking about the next five to 10 years. Looking ahead,
we continue to see tremendous opportunity in our agenda in both our core and in our
emerging businesses. So simply put, we're on disclosed agenda at full throttle. We're
doing it largely in two ways, to think about it; continue to invest heavily in people and
also in product. Yeah. In people, it's a pretty simple story, the explosive growth in the
digital economy that we're experiencing, it's really created a war for talent in our industry;
the digital economy. And one that is quite out of sync with what's happening in the rest
of the economy. So, we believe this trend is only accelerated in the next 18 months
and will continue to accelerate. So, in context with that, we've stepped up our hiring machine
and we are currently exploring how we can continue to attract and retain the very best
people in this exceptionally competitive environment. So, we strongly believe that the difference
between the winners and the losers in our industry, will be--be to a large extent determined
by who we can attract and who we can retain the best talent. So to that end, we're incredibly
proud to have attracted approximately 1,500 people to join Google in Q3, the majority
in engineering and sales once again. On the products side, our goal continues to be--to
develop truly innovative products that leverage Computer Science to solve these incredible
problems that we tackle. And offer, obviously, significant ROI across a number of very large
growth opportunities. As I mentioned, Jonathan in a few minutes will be speaking of this
great momentum our products are experiencing and as always we're investing with discipline
following the Google tradition of being generous but frugal. So, in summary, very pleased with
our performance of Q3 across revenue, margins, cash flow. And we plan to continue to attract
higher, retain the very best talent in the world, wherever they are, to fuel our innovation
agenda. Now, is the moment for me to turn the call over to Jonathan, which I--usually
means that my number part is over. But today, I've actually asked Jonathan to share with
you--and let me emphasize, on a one-time basis--a few products' specific metrics that I think
everybody will be very interested to hear. And as the CFO, you know, as--I'm usually
the official buzz killer, so I need to make it very clear that we will not be updating
these numbers going forward. We are merely sharing them with you as a proof point of
the great momentum we're experiencing in our emerging businesses. And with that, let me
turn it to Jonathan. >> ROSENBERG: Okay. Well, thanks, Patrick.
So, I think you guys can see from the financial numbers, we've got tremendous momentum in
the core business. But in these emerging businesses, you guys basically have to invoke your Jedi
guesstimation skills to try to figure out what's going on. So, today with Patrick's
permission, I hope to shed a bit more light on these businesses with some numbers that
we've not shared before. But let me start with the core. Search is more important than
ever. The Internet, as you guys know, continues to explode. There's lots of more websites,
there's more videos, there's more images, there's more books and news, all these stuff
is coming online. And at the same time, more people are coming online too. And what do
these people do when they get online? The first thing they usually do is search. So,
search is still at the heart of the Web and with all of this new content coming online,
doing search well is even harder than ever. I actually believe search remains one of the
most challenging Computer Science problems of our generation and probably the next one
as well. This is why we're so incredibly proud of Google Instant. Many of you guys speculated
that we launched Instant to make more money. Well, let me tell you, that's simply not the
case. We launched Instant because it's so much better for the user. In fact, from a
revenue standpoint, its impact has been very minimal and from a resource standpoint, it's
actually pretty expensive. So, why did we do it? Well, we believe from a user standpoint,
Instant is outstanding and the data that we're seeing actually bears this out. We took something
that no one thought was a problem and we created something that once you use it, you can't
recall how you lived without it before. It saves about two to five seconds per search
and users absolutely love it. The percentage of people who select Instant results before
they finish their query is steadily rising. So, in other words, that means the more they
use it, the more they like it. So, let me be clear that Instant wasn't based on a narrow
financial calculation. We launched it because we could and because it's great for our users,
as we have always said. Of course, I know it's an earnings call, so let me be clear
on another point. We do, in fact, care about money. And Search is still the most monetizable
moment on the web and as Search gets better, our ads have to keep pace. The good news is
they are. It turns out we also have a lot of great momentum with AdWords and this is
particularly true with the new ad formats. On past calls, I've talked about making ads
more useful with the new formats like site links and ads with seller ratings and product
listing ads, which we think--which we could see now are starting to have a real impact.
These ads appear on more than 10% of the queries where we show ads and people like them. We
see this because click-through rates are up for some formats as much as 10%, and up more
than 30% on some others. We're also seeing great momentum in our newer businesses and
this is where Patrick is letting me give you some big numbers, so I hope you find them
useful. The numbers all begin with the letter B. And remember, as I often remind my team
at Google, a billion is a thousand million. So first big number, 2.5 billion; as in Display
is on an annualized run rate of over 2.5 billion. So that's non-text display, meaning it doesn't
count text ads running on our network. What it does count is YouTube ads, non-text ads
on the Google Display Network and, of course, on the DoubleClick platform. So you guys often
ask me, "Jonathan," you know, "Where's the next multibillion dollar business after Search?"
There's your answer. It's Display and it's already here clocking in at over a $2.5 billion
run rate. So, clearly, we're firing on all cylinders in Display. The advertisers are
running great branding campaigns. The Ad Exchange is taking off. We're partnering very well
with agencies and, of course, more publishers are making more money. And if you want to
know more on the display front, Nikesh, who is here, is passionate about this business.
He's made enormous strides with the sales force and clients, which I'm sure he'll be
happy to talk to you guys about in the Q&A. So second big number, 2 billion; as in YouTube
is monetizing over 2 billion views per week. That's up over 50% year-over-year. And when
you think about that growth, it's important because the RPMs are really strong on YouTube.
We've just launched some new ad formats called TrueView where the viewers get to choose which
commercials to watch or they can even skip watching the ad altogether. It turns out when
advertisers only pay for the commercials people watch; we discover the ads are a lot more
valuable to advertisers when they're only paying for viewers who've actually chosen
to watch them. Finally, third big number, 1 billion. Mobile is on an annualized run
rate of over $1 billion. This means that people who are accessing our products and services
through their mobile phones are adding a billion dollars annually to our existing revenue streams.
Clearly, this is the future of Search in the Internet; more people and more countries coming
online from these smartphones. Our Mobile search queries have grown five times over
the past couple of years and, of course, a lot more of those queries are now coming from
Android phones. So here are the facts that Patrick has let me say just this once. Non-text
Display, 2.5 billion run rate; YouTube, 2 billion monetized views per week; and Mobile,
over a billion dollars added to our business. And Patrick, maybe I'll adlib on one more
fact here without asking you. You should know all these businesses are growing. So I hope
this gives all of you a sense of why we're so excited about the incredible emerging businesses
at Google. And with that, I'll take it back to Patrick.
>> PICHETTE: Thank you, Jonathan. Before we take your questions, I just want to add one
fact regarding the new disclosures that Jonathan just gave you. Obviously, this information
reflects our revenues from two different angles of our business. And with it, we recognize
in some cases some small overlaps. So, for example, the AdMob revenues are obviously
included both in the mobile number because it's a Mobile product and in Display because
it's also a Display product. So these are very small, but I wish to just clarify it
out for everybody. So with that in mind, what I'd like to do is turn it over to Connie to
open--and we have Eric with us. So, the May is now an actual. Eric is with us. He's got
20 to 30 minutes; then he's running for a plane. So delighted to have you with us, Eric.
And what I'll do is I'll turn it to Connie for the Q&A questions period. Thank you.
>> 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 star key followed by the
digit 1 on your touchtone telephone. If you're using a speaker phone, please make sure your
mute button is turned off to allow your signal to reach our equipment. Once again, it's star
1 for questions and we'll pause for just a moment to assemble the queue. And we'll take
our first question from James Mitchell from Goldman Sachs.
>> MITCHELL: Great, thank you. I'll ask two separate questions, if I may. The first one,
if I look at your paid lead growth, it's been remarkably consistent and not decelerating.
I think it was 4% sequentially in the third quarter of 2008, 4% sequentially in the third
quarter of 2009, and then 4% sequentially in the third quarter of 2010. Is that because
your query growth is also fairly consistent or are you supplementing query growth with
monetization initiatives that increase paid lead takeup? And then, secondly and separately,
thank you extremely much for disclosing the billions in terms of Mobile and Display advertising.
But within the 2.5 billion plus of Display advertising, how do you account for advertisers
spending through the DoubleClick Ad Exchange? Is that on a gross or net basis? Thank you.
>> I think that is paid... >> ROSENBERG: I'll try to--I mean, I'll try
to take the first question. Certainly the highest correlation between ad clicks and
anything else is query growth. So that's going to certainly, by far, dwarf any other factor.
I think the other--the other factors that we're seeing is that the new formats that
we have which I had mentioned certainly drive click growth as well. And I mentioned that
those formats appear on 10% of the queries. If you try some of those, like Halloween costumes,
you'll see that they make the ads much more compelling as do things like merchant ratings
if you type in laser printers. So by improving the ad formats, we are increasing the relative
number of clicks because the click-through rates go up.
>> PICHETTE: Great. On the other one, the Ad Exchange is included in--so if you think
of the elements, the Ad Exchange, the DoubleClick platforms, all these are included in Display
and it's done on a gross basis. Thank you for your...
>> MITCHELL: Thank you. >> PICHETTE: Thank you for your question.
Let's go to the next question, Connie. >> CONNIE: And we'll take our next question
from Spencer Wang from Credit Suisse. >> WANG: Thanks and good afternoon. I guess
since you guys are sharing some numbers this time, I was just wondering if we could just
delve into the YouTube numbers a little bit. Of the 2 billion views, Jonathan, I was wondering,
you know, what--roughly what percentage of total views is that currently? And then, you
guys have talked in the past about getting closer and closer to profitability. I was
wondering if you could just give us a sense of where you are with respect to profitability
as well. Thank you. >> PICHETTE: So, on profitability, let me
jump on that one first which is, you know, we have not made any comments on it. You will
remember we talked about it a long time about ago because there was so much distortion in
the market. We just thought it was okay to kind of set the clocks properly. But since
then, we have not and will not comment on it. On the billions of...
>> ROSENBERG: Sure. >> PICHETTE: Jonathan.
>> ROSENBERG: This is Jonathan. So there's basically two points that we've given that
you can use to connect those dots. We've said that traffic over--that we have over 24 hours
of video uploaded every minute and over 2 billion views per day. When you couple that
with the 2 million monetized views per week, I think you can get to the answer that you're
looking for. >> WANG: Great. Thank you very much.
>> PICHETTE: Thank you. Let's go to the next question, Connie.
>> CONNIE: And we'll take our next question from Imran Khan from J.P. Morgan.
>> KHAN: Yes. Hi. Thank you very much for taking my question. So I have a question for
Eric as he is on the call and then a follow-up housekeeping question. So Eric, you know,
I think the two big trends on the Internet, you know, obviously, the web is becoming more
social and realtime. So as the web becomes more social and realtime, how does Google
compete in that world in terms of real time search market and how does that impact your
business? And secondly, on the mobile trend, you know, obviously, you know, you have this
Apple Ecosystem with I--oh, Apple I applications and people are going directly to applications
and how does that impact Google's business model over the long term? And the housekeeping
question, near-term question is the tax rate was 20% on the quarter. Is there anything
specific in one--this quarter? How should we think about the tax rate? Thank you.
>> SCHMIDT: Imran, let me--let me deal with your questions. There's two separate questions
for me. With respect to social and realtime, we use complex signals to do ranking, and
over time, we will add additional social, if you will, ranking clues. Fundamentally,
we want to make Search more personal and as we get more information with who your friends
are, we can make the search that much better. We are quite convinced that that produces
better Search results for people who choose to give us that information. For people who
want to continue to do what is generally known as anonymous search, that's also possible.
So, one of the ways to think about that is that we want users to be more logged in, you
know, to Google. The more logged in they are, more likely we are to provide them not only
the social information but the other information. You also asked about realtime. We already
have significant feeds from realtime information providers. We do a--we have a realtime index
which, of course, is very successful for us, and you could see that whenever anything interesting
happens. It's already right there at Google. But for example, we use Twitter as a realtime
source of information. So, if you search for almost anything, you'll see the Twitter feeds
now as part of universal Search. Could you repeat your--the second part of your question
for me? >> KHAN: The second one was, Eric, on the
mobile front right, you know, we are seeing explosion on application on mobile platforms.
So does that impact your search volume and if people go directly to the vendors to the
app? You know, it seems like, you know, Amazon talked about a billion dollar sales through
coming from mobile devices. So how does that impact Google's business long-term?
>> SCHMIDT: It doesn't--it doesn't seem to. This is one of those sort of worrywart questions
that we get all the time that the success of one thing could that impinge on something
else? And in fact, the rising tide lifts all boats. And I would say that, again, what I
hear is this sort of presumption that it's a zero-sum game and that one wins and another
one loses. But what's really happening is that all of the companies that are driving
the web and web applications are all doing really well. People are moving from offline
to online, and in the course of doing that, they're using these systems more. They're
searching more, using apps more, et cetera. Now, from our perspective, you have this phenomenal
success of Android which is, you know, well past anything that I had ever hoped for and
looks like it's on its way to being a huge, huge success with the number of partners,
number of devices, an open model for access, lots and lots of innovation, more dynamic,
more competition than in any other part of the platform. They're up to 90,000 applications
on Android and growing very, very fast and those applications, of course, have search
services inside of them, so we don't see them as a negative; we see both as very strongly
positive. >> PICHETTE: Thanks, Eric. Let me go back
then to, Imran, to the tax question. We did get a one-time benefit this quarter on the
tax side and it is related. You know, as the statutes expire for 2005 and 2006, all of
our taxes are now closed and in doing so, then you--we had an opportunity to reverse
a set of provisions we had taken that we ultimately didn't have to take. So you can see the tax
rate this quarter as a bit of an anomaly again. >> KHAN: Thank you, Patrick.
>> PICHETTE: Thank you for your questions. Connie, let's go to the next question, please.
>> CONNIE: And we'll take our next question from Justin Post from Merrill Lynch.
>> POST: Great. Eric, while we have you, I want to get back into mobile--just when you
think about Android as an operating system, how does that proprietary to Google when you
think about your search services? Does that give you an advantage over other phones for
some of your services and does the phone operate better when you're using Google services?
And then second, I think you were quoted in an article saying, you know, "Maybe someday
Google can make $10 per phone." Would you see that as mostly advertising and is that
number right--something you did say? Thank you.
>> SCHMIDT: Yeah, the latter, well, I made out of thin air, so, you know, we don't really
have a notion of exactly what it is, but it's probably pretty big. So, one way to think
about Android is that it's probably the largest single platform play available in the market
today. Because it's a platform for computation, for location, for everything that you could
do with the new and most popular set of computing devices that are emerging. That market is
larger than the PC market. The tablet market is a small component of it, but an important
part of it. So, if you think of mobile as platform--as phone plus tablet plus all of
the other things, we hope to become the leading platform in that space and we're doing it
with an open source approach. So, in the open source approach that means we give the software
away, which is always paradoxical. People say, "Well, how do you make money from that?"
Well, let's start with the fact that the evidence we have is that people who use Android search
twice as much as everything else. So, clearly, there's more revenue associated with those
searches. And another thing, of course, is if they're using Android systems, the revenue
that we share in the search is a share with the operator but not with anybody else. So,
again it's more lucrative. So, not only is there more searches and there's more apps,
but it's also more lucrative. So, on that basis alone, Android is hugely profitable
and we maintain the anti-fragmentation and other things by a series of contracts around
the store and so forth and so on. So, Android is likely be financially successful to Google
without even any of the applications that are possible. So, Patrick calls up and says,
"Okay. Well, what else can you do for us?" And the answer of course is that we can layer
on value-added services which how you get to the $10. And the value-added services could
be of any kind. Our primary purpose right now is building this open platform. Google
had--chose to make a bid--a bet on open systems and open platform and the open Web. That served
us well so far and it looks like it's going to work really well in Android.
>> POST: Thank you. >> PICHETTE: Thank you, Justin. Connie, let's
go to our next question please. >> CONNIE: And we'll take our next question
from Mark Mahaney from Citi. >> MAHANEY: Great, thanks. Two questions on
the cost side. It looks like this is the first quarter in about a year and a half, which--in
which cost per employee on an annualized basis have declined sequentially. Is there something
that you've been able to put in place that gives you confidence that that'll continue
going forward? And just on the mobile revenue opportunity, are the results strong enough
from your perspective in terms of dollars and growth such that you'll stay with an indirect
monetization approach towards Android, or are you going to keep the door open and potentially
charge per operating system as a share of applications in the future? Thank you.
>> PICHETTE: On cost per employee, look, it's just another reflection of--I wouldn't--I
wouldn't read anything kind of forward-looking into our results except that it's just another
good example of how we are, you know--I've talked earlier about, you know, generous but
frugal. We're investing, but people should not confuse the fact that we're investing
and we're investing aggressively where we really see fantastic opportunities, from being
wasteful. We're just not a wasteful company. And so, in that sense that's a good signal
and we'll continue to do so. On the mobile, maybe Jonathan or Nikesh can give us an indication
of it. >> ARORA: I think just following up on what
Eric said earlier, you know, we are very, very keen to build this ecosystem. And I think
Jonathan's disclosure on the fact that we're on a billion dollar run rate in mobile is
testament to the fact that we have a revenue model which we're very excited about. And
that revenue model sort of proves to us that, you know, roughly the revenues are split between
our storage efforts, our display efforts and our application efforts. And we are able to
play across all those three spaces in our mobile monetization efforts. And the more
people who use smartphones, the more people who are able to access telephony devices,
the more we see the trend that people are going searching in them, they're going to
give us opportunities to put display advertising on them. So, we see no reason to change our
monetization model. We think the current approach to Android drives more users and more usage,
and drives the ecosystem. >> SCHMIDT: And Nikesh, I think you've argued
that display will become a very large component with the mobile revenue, because of the success
of it, we're seeing in our mobile business, I'm [INDISTINCT].
>> PICHETTE: Exactly. Thank you very much Mark for your questions. Let's go, Connie,
for the next question please. >> CONNIE: And we'll take our next question
from Douglas Anmuth from Barclays Capital. >> ANMUTH: Great. Thanks for taking the question.
Two things, first on display, can you give us any context in terms of breaking out Youtube,
AdSense for content in the ad exchange. And then secondly, what's your view on other potentially
competitive Android app stores that are out there? Thank you.
>> PICHETTE: So, I'll answer the first and then I'll give Jonathan to talk about the
Android marketplaces. So, on display--we just don't break it down. So, we will not give
the details. What we wanted to give today with the numbers we're sharing is a sense
of scale and trajectory. And that's really what we wanted to share. So, we unfortunately
won't give any more details on that. On the Android competitive stores, Eric, maybe you
can give us more perspective on it. >> SCHMIDT: Yeah, the goal of the stores is
to make money for the people who are writing the software and the applications. And it's
not a revenue goal for Google. So, there, certainly, will be multiple stores. There
will, certainly, be the key one from us. And we think it's a net of--a net win for everybody.
So, but it's not a primary focus on Google from a revenue perspective. It's really for
the developers. >> ANMUTH: Thank you.
>> PICHETTE: Thanks, Eric. Connie, our next question please.
>> CONNIE: And we'll go next to Brian Pitz from UBS.
>> PITZ: Great, thanks. Would you provide us with a relative idea of how the difference
between average CPCs and clicker rates are, basically, on mobile versus the PC, now that
you have a large enough number of devices in the market? And secondly, if there is a
gap, which I imagine there is, you know, can you close that gap longer term between the
two? Thanks. >> ROSENBERG: This is Jonathan. Nikesh can
maybe give you more of a customer base perspective. I think that some of you know we recently
started smart pricing on the mobile devices and it is the case that the CPCs on the mobile
devices are a good bit lower. It's primarily because there isn't the measurement--that
there isn't that--there isn't as much of a consummation of a transaction on the mobile
devices. People don't have their credit cards in them; it's harder to type into them. So,
the mobile rates remain relatively lower. As payment platforms get built into the mobile
devices, and as people are more likely to actually complete a transaction, I think you'll
see those things go up substantially. I think it's also the case that on devices like the
iPad, the kind of activity looks a little bit more like it does on a PC, primarily because
people have a larger window, a bigger browser and they're also more able to input information.
Nikesh? >> ARORA: I think the only thing I have to
add to that is, [INDISTINCT] there are some formats which we started to introduce, which
are driving a better monetization on the mobile sites. Formats like click-to-call and hyper-local,
because people are searching in their mobile devices where they want to then make a phone
call, or they are searching on their devices when they're looking for something in a very
local context. And there, we're beginning to see sort of better CPMs and better monetization.
Generally, we think that's where the trend is, that's where we're going to see more and
more monetization. And clearly, we are seeing monetization in the application side of mobile
side--of mobile, because with the AdMob sort of team that we have and all the advertisers
who want to be part of the application, the applications are becoming a big share of people's
mobile usage. >> PITZ: Great. Thanks.
>> PICHETTE: Thanks, Brian. Connie, our next question, please?
>> CONNIE: And we'll take our next question from Ross Sandler from RBC Capital.
>> SANDLER: Thanks, guys. Two quick questions. First is, you guys have discussed the cannibalization
topic before between smartphone and PC, but have you--when you look at the search data,
can you see whether tablet searches or iPad searches are incremental or is there any cannibalization
towards PC? And is the tablet option within AdWords going to be similar to the desktop/laptop
option or is it going to be kind of a separate category? And then the cash, can you just
give us a little bit more color on the rest of world growth just in terms of regions that
were driving that 26%? Was it broad-based or was there anything that stood out? Thank
you. >> PICHETTE: So, we'll let Jonathan answer
the first part. >> ROSENBERG: Yes. We--so we don't see cannibalization.
We tend to see mobile as very complementary to the desktop. I think you do see some differences
in the search patterns. People use mobile at lunch, they use it on eve--in the evening,
they use it on weekends, they use it more on holidays, but we see both mobile and web
search traffic growing and they appear to us to be complementary and not cannibalizing
each other. >> PICHETTE: Nikesh, you want to cover the
international growth? >> ARORA: Yes. You know, the U.S. growth was
very good for us. I'm very pleased the way our U.S. team has driven the revenues sort
of across the board--across our revenue categories. On the international side, you know, I'd say
generally, the trend has been positive across the board. I know that U.K. has been a bit
weaker, but there's a bit of currency in there as well. But France, Germany, those markets
have actually been very, very robust. I'd say Southern Europe has done way better than
some of the Northern European countries, but that's expected because they are enjoying
sort of a bit of a growth curve. And clearly, some of the Asian markets are growing robustly
for us. So, good growth across the board. >> PICHETTE: Thank you, Ross, for your question.
Connie, let's go to our next question, please. >> CONNIE: And we'll take our next question
from Jeetil Patel from Deutsche Bank Securities. >> PATEL: Great, thanks. A couple of questions.
I guess you're on a pace of doing about a 30 billion or a gross revenue run rate. I
guess maybe a different way to look at your business. But, well, you know, since it's
an ROI-driven model, I guess, can you quantify or give us a sense of what kind of gross dollar
value of transactions that entails for all the merchants and customers that are participating
in the system? And second, I guess if you look at your competition in mobile or in other
company in the space in mobile, they make about $300 in operating profit per handset
sold. I guess, do you think this is more the upper bound as it relates to lifetime profit
per handset? Do you think it can be higher? I know obviously you're going after a different
strategy, but where do you think is the upper bound in terms of the profit potential on
a, you know, let's say a two-year handset in terms of monetization?
>> PICHETTE: Let me--on the gross value, what--rather than to try to give you more details on this
call, Google has actually published some economic data about the amount of value that is actually
transacted across the system. And so, I may just refer you back to the IR team that can
actually dig that out, because we actually shared that with the public over the last
kind of eight months or six months, and it's actually very detailed into how much economic
is actually flowing through our systems. And... >> SCHMIDT: Yeah. On the handset question--this
is Eric--that you asked--I understand the question that you're asking. Our model, remember,
is that the handset manufacturers and the operators are going to make a lot of that
money. And our model is that, our operating system is free and that we're going to make
money from advertising and value-added services on top of the Android platform. So, it's clearly
a different model. And so, there--it's not very difficult to compare the two, they're
really apples and oranges. It would be, I think, premature to--for us to estimate what
that would be, but if you assume that search monetization on handsets will become equivalent
to PCs and then eventually exceed it, which is my personal view, then it should be highly
lucrative. Because those--the customers are using Google services, they're going to use
them more because they're more personal, they're more targeted. And so ultimately, it should
be a very, very strong revenue stream compared to a PC.
>> PICHETTE: Thank you, Eric. And thank you for your question. Connie, let's go to our
next question, please. >> CONNIE: And we'll take our next question
from Jason Maynard from Wells Fargo. >> MAYNARD: Hi guys, good afternoon. Actually,
I have a question about social search. I am just curious about how do you capture the
signal from social networks without a relationship like you have with Twitter, where you can
actually get fairly easy access to the data feeds?
>> SCHMIDT: One of the things we're careful about is not to describe how our signals are
actually assembled, but the answer is that there are some ways in which we can do that.
And we also have in development other ways in which people can give us that sort of information
that can make it even more personal. >> MAYNARD: Okay. And then maybe just a follow-up
for Nikesh. When you think about mobile advertising, maybe just to sort of help me frame, where
do you think advertisers are at in their lifecycle of actually committing dollars to spend in
this medium and form factor? >> ARORA: I think the important part to understand
on the mobile space is that the reason the billion dollar number is an interesting number
is that just means that now the larger advertisers can get more interested, because we can help
them spend reasonable amounts of money. It's very hard to go make a pitch to a large advertiser
when the maximum inventory that you can offer them is in the 5 to 10 or $50,000 range, especially
with advertisers who've got $100 million or $200 million advertising budgets. So to get
them interested-–if they get interested--they'd like to be able to deploy reasonable amounts
of money against this market. So the part I'm excited about is that the inventory continues
to grow. There is diversity in formats. People are interested in search-based advertising.
People are interested in display-based advertising. They want to be in the middle of applications
and get customer engagement. So we are seeing sort of reasonable broad-based interest. Clearly,
the early adopters are people who can actually consummate a transaction. So insurance services
want to click-to-call, they want to be able to pitch, they want the customer to be able
to pick up the phone and call them. There are people who are in the local space who
want the customer to come to their restaurant. They want the customer to come show up where
they are offering a local service. So that interest is going up now. The retailers who
actually are interested when you're looking for a local J. C. Penney or a RadioShack that
it can--if we can tell you where it is and then they can actually click and find out
where it is. So the interest continues to grow as you look at the local categories,
as you look at the click-to-call categories. And as Jonathan said, as payment capabilities
start getting bills through the phone, you'll start seeing even more of an interest on the
e-commerce players. >> ROSENBERG: Yes. By the way, this is Jonathan.
Try typing in some things that will generate the hyper-local feature that we have on mobile
search ads. If you try, for example, typing in car rental, there's a very good chance
you'll see an enterprise rent-a-car ad that tells you how far away it is to their nearest
location. You know, half a mile along with the phone number and a link to a map, and
I think that will give you a sense of how powerful it is.
>> MAYNARD: Okay, thank you. >> PICHETTE: Thank you, Jason. Connie, let's
go to our next question. >> CONNIE: And we'll take our next question
from Jason Helfstein from Oppenheimer. >> HELFSTEIN: Thank you. One of the questions
that investors continue to have is ultimately, what's the right long-term growth rate to
think about for international. You know, prior to the recession, the company was obviously
putting up a very large international growth rate. We've seen it slow down and now a rebound.
If there's additional color you can give us as far as you think about the long-term opportunities,
let's say, in the more developing countries and how that's impacting your results internationally.
Thanks. >> PICHETTE: Because it's guidance--forward-looking
guidance, I--we just can't comment. I think that you have to take it from the current
performance that you see over the last couple of quarters that there is clearly a separation
in the world of economic growth in general and the digital economy growth. And from that,
I mean, you have to infer that, you know, that's why we're so optimistic about the future
of international and we're investing so much in it. Let's go to the next question, Connie,
please. >> CONNIE: And we'll take our next question
from Youssef Squali from Jefferies. >> SQUALI: Thank you very much. Two quick
questions. First, Patrick, your traffic acquisition cost rate seems to be the lowest you've had,
I think, since IPO. What accounted for that and is that sustainable, going forward? And
two, growth in the last few quarters was driven largely by volume, not price. So to what extent
is that driven by more SCO, less SCN, maybe a mix of domestic versus international, and
how realistic is it for us to kind of expect, kind of hockey stick, or maybe not a hockey
stick but a reacceleration in pricing trends? Thanks.
>> PICHETTE: So I'll take the first question. And then on pricing, Jonathan can probably
give you some perspective. On the TAC, it's very simple. I mean, this quarter, we've had
two really--two really factors. One is our MySpace deal is now over and with it, there
was a contract with minimum guarantees that now is expired. So that's one--and then the
second one is simply the mix of our partners within the network actually will affect our
TAC, and that's really the effect that you see for this quarter. There's nothing more
or less. And in terms of forward-looking for volume versus price, hey, Jonathan, any insights
or...? >> ROSENBERG: I'm not really sure how to answer
the question without saying anything forward-looking. Is there--is there anything specific, Youssef,
in terms of trends that you've seen that you're asking for clarification on?
>> SQUALI: Yeah. I mean, we've been hearing from more--from agencies and advertisers there.
They are spending more on SCO. They're getting smarter about how to spend their ad dollars.
And so to the extent that that continues, then that really is putting a dampening effect
on the CPC growth going forward. The mix between domestic-international should shift to more
international and that, over time, we should see higher CPCs. I'm just trying to kind of
see as we look at the business, you know, over the next several years how realistic
is it to assume that one, i.e., that increased international CPCs will offset the SCO trend?
>> ROSENBERG: Well, I guess I don't actually agree that I've necessarily seen such a trend
in terms of more SCO versus SCN. I mean, as far as I can tell, SCO has always been pretty
big. Pricing has been pretty healthy from my perspective coming out of a recession;
bids are healthy. We've got a very strong conversion rates and presumably that's because
the advertisers are seeing buyers again. And, you know, the advertisers look at the total
value they get from Google and they're optimizing across, you know, everything under their purview.
So I'm not necessarily sure I agree with the trends the way you've stated them.
>> SCHMIDT: Interesting that's going on is that we're continuing to make algorithmic
improvements to our ad targeting, which flow through the system sort of as the inventions
are brought out. We brought out, you know, hundreds of them in the quarter, the small
ones. But the sum of them is actually helping drive, basically, the revenue performance
on a per query basis. >> SQUALI: Okay. Thanks.
>> PITCHETTE: Thanks, Youssef. Let's go to the next question.
>> CONNIE: And we'll take our next question from Ben Schachter from Macquarie.
>> SCHACTER: Hey, guys. A few years ago, there was a lot of discussion around probable exclusive
data or databases. And while yesterday's deal with Microsoft and Facebook was not exclusive,
I wonder if you think that's going to be a topic that may become more of an issue going
forward particularly with Microsoft? And then also, just quickly, a lot of discussion lately
around daily deals and private sales and those kind of things, can Google participate in
that in any way? Thanks. >> PICHETTE: Well, in general, I mean, the
Web continues to grow at such a blazing pace that if you think of all the signals available,
I mean, there are--anyone that would be private is completely swamped in the sea of the Internet.
And in that sense, it's not really a relevant question if you think of the--what Jonathan
would call it "petabytes" or "terabytes" or "exabytes." So, from that perspective, I think
that, you know, we continue to organize the vastness of this and that's where most of
the value comes from. So, I think that we're not concerned on that sense.
>> SCHMIDT: There's always a concern that large, private collections of data are not
accessible to Web search engines. We have teams that have spent an awful lot of time
trying to make people--make sure people know that they--if they optimize their stuff it's
easy to crawl their site maps and other services which are standardized among the Web search
industry. So, it's obviously up to the content owner to decide how much of that information
to expose. But we've taken the position both to sort of in a--both in a religious and a
business perspective that the world is better off if you want--if you take the information
that you're assembling and making it searchable. It provides a larger audience. It drives more
traffic to your site, et cetera, et cetera, and we fundamentally believe that. Jonathan,
do you want to take a second? >> ROSENBERG: Sure. There's no question, Ben,
there is very exciting space related to daily deals which we're seeing and there's obviously
a lot of small companies that are doing a fabulous job there. We do participate in it
to some degree. There are some companies that use Sitelinks for hot deals. So, there is
a mechanism that we already have where advertisers are actually putting in today's deals and
highlighting them. But there's no question, that's a very exciting and hot space, and
there are a lot of innovative players building some pretty effective business models there
right now. >> SCHACTER: Thank you.
>> PITCHETTE: Connie, why don't we go to the next question?
>> CONNIE: And we'll take our next question from Jordan Rohan from Stifel Nicolaus.
>> ROHAN: Couple of follow-up questions on Mobile while we're on the subject. I'm a big
fan of Google Instant. Wondering when it will be fully rolled out on BlackBerry, iPhone
and other devices there? Also curious if you happen to disclose the number of Android devices
activated in the quarter, I think, last quarter was around 200,000 a day. And finally, instead
of smart pricing and sort of obscuring the discount placed on mobile search clicks or
calls, why not let advertisers just bid directly on a mobile search inventory? You might be
surprised about the yield. >> PITCHETTE: So, let me--on Instant, Jonathan,
when is Instant available for all these mobile devices?
>> ROSENBERG: It's relatively soon. Sometime this fall; fall lasts a little longer in California,
though. >> PITCHETTE: Okay. And they--we don't--last
public number is 200,000 handsets activated a day. And that's the last number that we've
been using, so we stick to that one for now. And can you just repeat, Jordan, your last
question for me? >> ROHAN: Yes, smart pricing is, as I understand
and maybe I'm getting it wrong. But Google has an algorithm which discounts the value
assigned to advertisers that--which advertisers have to pay for certain clicks if it's believed
that those clicks perhaps are less frequently tied to conversions.
>> ROSENBERG: Yeah. You could--they can set up a separate campaign now. So the smart pricing
is a convenient mechanism for them if they want to leverage the existing campaign across
Mobile. But many advertisers have increasingly set up separate campaigns for Mobile.
>> ROHAN: They can right now, full visibility there, so that's how you, at some level, inform
your decisions about smart pricing for the rest of the universe, like, that accesses
the inventory? >> ROSENBERG: I'm not sure that's--no. The
smart pricing is done algorithmically on the basis of what we see. We're not doing it.
We don't necessarily look at differentiation between specific bids on--across different
campaigns. >> ROHAN: Got it. Thank you very much.
>> PITCHETTE: Thank you, Jordan. Connie, let's go to our next question please.
>> CONNIE: And we'll take our next question from Sandeep Aggarwal from Caris and Company.
>> AGGARWAL: Thanks for taking my questions. Actually, I have two questions. One is, Eric,
given that non-core search business is becoming more material part of your business, in the
past, you allocated resources that's, you know, 70-20-10; is there are a shift in terms
of how you're allocating resources now? And secondly, this may imply more of asking than
guidance, but I guess my question is by when do you envision mobile advertising overtaking
display advertising? >> SCHMIDT: The latter is a very--the latter
is a very speculative question and that's something that, one, we don't know and, two,
if we--even if we knew, we probably wouldn't talk about it. On the question of allocation
of resources, I think at the end of the day, Larry and Sergey and I have talked about it's
sort of our job to use our best judgment based on the sum of technological opportunity, business
opportunity and so forth to divide, if you will, between classic core businesses, you're
really asking in some of these emerging ones. So we're informed by the hockey stick nature
of these things. So there's a couple of ones, to give you an example of Android, which is
small in resources and growing very quickly. So they pretty much have been able to get
whatever resources they've need--they need and they're going up against very large giants
with a factor of 10 more resources. And so we sort of measured it that way. When we then
go back and saw for 70-20-10, it turns out we're roughly consistent with 70-20-10. But
it's not really as much of a formula as it is much looking at where the real excitement
is. The other thing that we're doing is we're organizing ourselves, and Nikesh is actually
leading this effort, into more of an internal business unit structure, because frankly,
it's just become so large and so complicated that it's been difficult for us to keep track
of all the details. And so, that will give us a better tie-in between where the current
and future revenue is and where the resources are going. And I think Nikesh is on the order
of, you know, 10-15 kind of structure by the time we're done, with the obvious big ones
being, you know, Search and Ads and Display and Enterprise and that kind of stuff, YouTube.
>> PICHETTE: Yes. So--and just in closing on that, what really matters the most to us
as we actually do the resource allocation is, as Eric said, when you see a hockey stick,
pour on gas on that fire. And when we do actually--and we keep the flexibility to make sure that
we really feed the winner so that they keep the momentum as you've seen, for example in
Android in the last 24 months, which has been tremendous. All right. Thank you for your
question. Connie, we probably have time for two or three more, for two more questions.
So let's go for the second last. >> CONNIE: Thank you. And we'll go next to
Mark May from Needham & Company. >> MAY: Thanks. A big picture question about
data because that seems to be an increasing, you know, factor of differentiation in growth
for online ad companies. How does Google think generally about leveraging user data, both
to better target ads and, you know, how to stay competitive with those like Facebook
and Microsoft and Yahoo! that are leveraging data possibly more so than what Google is
today? And I think this is particularly relevant for using Search data for your Display business,
but we'd love to get your thoughts on that. >> SCHMIDT: We have a pretty strong opinion
that we're not going to do very much of it. The reason is that we take our end-user data
privacy incredibly seriously, and the trust that people have with respect to giving us
that information, both their search histories as well as other piece of information, they
get very upset very, very quickly if we, in their view, misuse it. So what we typically
tell people is we're not going to do the kind of things that you could do with this, you
know, in particular, use it to generate sort of strange ads against your history and things
like that without your explicit permission. And we probably, in many cases, won't do it
forever. >> PICHETTE: Thank you, Mark. Let's go to
our last question, Connie. >> CONNIE: And we'll take our final question
from Marianne Wolk from Susquehanna. >> WOLK: Thanks very much. It looks like you
did a great job converting a lot of the advertising on the content network over to Display. Can
you talk about to what extent that's now video-based and is that helping monetization rate significantly?
And do you expect that to be sort of 100% Display shortly? Thank you.
>> PICHETTE: Nikesh, maybe you want to talk about the display and how it's evolving.
>> ARORA: I've been waiting for the entire earnings call, Patrick, to talk about Display.
I am glad that Patrick and Jonathan have allowed us to disclose the run rate of $2.5 billion.
I think this puts us in one of the top three display networks in the world. And I also
believe that the technology suite we offer is second to none. So in terms of the video
versus the other display format, it is primarily a lot of this is still display in terms of
banner ads and other formats, and this video is beginning to come into it. But we believe
in the future there is going to be a lot more rich media involved into display network,
because as we go forward, you're going to see more and more monetization of video, whether
it's on YouTube or other partner sites, that's going to happen. So, you know, we believe
the display network we offer has maximum frequency and maximum reach. We can reach people more
times a day than anyone else. So, we're really excited about Display. So, I was not sure
what you meant by what becomes 100% of display. >> WOLK: Oh, I'm sorry, but of the sort of
roughly one million partners that are part of the partner network, to what extent is
that now converted to Display and could that ultimately be entirely part--entirely Display
network? And then also, just since I've got you, can you clarify the run rate information
you gave? Is that a trailing 12-month figure or you're annualizing the current quarter?
Thank you. >> ARORA: Yeah. So, I'll let Patrick answer
the--how we came up with $2.5 billion dollars. But in terms of the million partners we have,
the entire partner network is part of our display network that we offer, and we actually
have the ability to offer them display advertising or text-based advertising. And basically,
it's based on ROI and CPMs that we make that determination or the publisher makes the determination
or the advertisers make the determination. So an entire network that we have is open
for display advertising already. >> PICHETTE: And on the previous question--on
the follow-up question, it was about--it's just the trailing quarter. So with that, thank
you for your question, Marianne. Let me give you a couple of closing thoughts. One is just
want to reiterate that what we did today was give you a few indications of, you know, why
we believe we're successful in these emerging businesses. These data points are not about
giving you more information on the coming quarters, but more to give you the confidence
that where we're investing and just really filling it, you know, great growth rates and
building meaningful businesses. I want to thank Eric for taking the time. I know he's
running for the plane, but it's terrific to have you on the call and take a few minutes
with our analysts and shareholders. And then I also want to take a moment to thank all
the Googlers for their hard work. I mean, all this strong performance is really on the
back of fantastic work from our team worldwide, our great engineers, our great sales force,
and our great support staff everywhere. So I just want to take from the OC, just the
time to thank them again on--in the public domain, because they do such a terrific job.
With that, Connie, I'll let you close the call.
>> CONNIE: Thank you. And this concludes today's conference. We thank you for your participation.