Google Q409 Earnings Call

Uploaded by GoogleIR on 21.01.2010

Please standby, we're about to begin. Good day and welcome everyone to the Google Inc.
conference call. This call is being recorded. At this time I would like to turn the call
over to Ms. Maria Shim, Senior Manager of Investor Relations. Please go ahead, Ma’am.
>> SHIM: Good afternoon everyone and welcome to today's fourth quarter and fiscal year
2009 earnings conference call. With us are: Eric Schmidt, Chief Executive Officer; Patrick
Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President of Product
Management and Nikesh Arora, President, Global Sales Operations and Business Development.
Eric, Patrick, Jonathan and Nikesh will provide us with their thoughts on the quarter and
full year and then we will take your questions. This call is being Webcast from our Investor
Relations Web site located at Please refer to our Web site for important
information, including our earnings press release, issued a few minutes ago, along with
slides that accompany today's prepared remarks. A replay of this call will also be available
on our Web site in a few hours. Please note that we routinely post important information
on our Investor Relations website located at and we encourage you
to make use of that resource. As a reminder today, we're holding two calls today. On this
call, we will discuss our strategic overview and Q&A with the usual format, followed by
a second call, which is effectively an extended Q&A session with Jonathan and Patrick, giving
the opportunity for participants to ask more detailed financial and product questions in
an efficient and Reg FD-compliant manner. The second call will begin at 3:00 pm Pacific
Time and will also be webcast from our Investor Relations Web site. 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, expected performance of our business and our expected levels of capital expenditures.
These statements involve a number of risks and uncertainties that could cause actual
results to differ materially. Please note that these forward-looking statements reflect
our opinions only as of the date of this presentation and we undertake no obligation to revise or
publicly release the results of any revision to these forward-looking statements in light
of new information or future events. Please refer to our SEC filings, including our annual
report on Form 10-K for the year ended December 31, 2008, as well as our earnings press release
for a more detailed description of the risk factors that may affect our results. Copies
can be obtained from the SEC or by visiting the Investor Relations section of our Web
site. Also, please note that 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 relating to stock-based compensation. We have also adjusted our net
cash provided by operating activities to remove capital expenditures, which we refer to as
free cash flow. Our GAAP results and GAAP to non-GAAP reconciliation can be found in
our earnings press release. With that, I will now turn the call over to Eric.
>> SCHMIDT: Thank you. Good afternoon to all and happy New Year and welcome to our Q4 earnings
call. This was a very strong quarter for Google and an extraordinary end to a roller coaster
year by any--by any means. Seventeen percent year on year revenue growth and we performed
literally, I think well across the board. We learned a lot in 2009. The strength of
our management team, the talent of our employees, the pace of innovation within our product
and engineering teams, if you take a look, you know, the investments we made for example
in Chrome and Chrome OS that we announced over the summer, the resilience of our business
model and advertising dollars are scarce measurement matters even more. We tended to benefit more
than you might have expected and that is great and we're optimistic about the future as a
result. The digital economy continues to grow very rapidly. Specifically, we are moving
literally eyeballs on advertising online. We continue to benefit from that and our decisions
to start ramping up our investments in Q3 which we talked about six months ago was clearly
the right one so we will get the benefit of that in 2010. So we continue to invest heavily
for the long-term, investments for design to maintain and even increase Google’s pace
of innovation. So where are we investing? Well, we are obviously going to invest first
in people. Engineering, best engineering, best technical, best researchers and so forth
and product sales in key markets across the country in all the ways that we have talked
about before. The second, of course, investment is in technological innovation which is our
core value proposition if you will. We're going to follow the 70/2010 which has worked
so well for us. Seventy percent in our established businesses; search with an emphasis on search
quality as we continue on our quest which will never be fully realized to create the
perfect search engine. We added, for example, real-time search in Q4 which has been very
successful and more than 550 search quality enhancements in 2009, far more than one per
day for obvious--and it just continues to accelerate. Search advertising shifting--the
shift on-line as I talked about, lots of growth in our core business as a result of that shift.
Display we've talked about before is now a huge opportunity for Google. Sixty quality
improvements in our display ads in the last year. YouTube, great progress with our [TEPB]
and music deals in Q4 which have been discussed already in the press. Enterprise business,
again, very strong. Terrific momentum there as people move to the web based model with
products that work very well. In the 20% area, newer businesses, these are newer businesses
that fuel our search business. For example, mobile. Everybody knows about the success
of Android, our search traffic increased five times in the past two years. The Droid and
Nexus One show the power of the Android approach. Great devices, multiple partners, great features,
lots of different use cases. Again, a pretty clear success at this point. We also have
our 10% of long-view investments and here, we're interested in things like commerce and
social initiatives which Jonathan will talk some more about. A third component for 2010
will be acquisitions. We've--the pace of deals in Q4 shows that we're, at least, on a path
of one per month and we should expect that to continue. Some big, more small than big
probably and designed either to build upon our existing business, the most obviously
being Teracent and Double Click, but are also to bring in new talent. If you look at like
the Gizmo5 acquisition again. People with a unique expertise that we can use as part
of our platform. So, overall, very pleased with the performance in Q4. We are back in
business full blast and throughout 2009 if you look at it, we're investing heavily, we're
excited about continuing to reinvent search which continues to be our core mission. I
think with that why don’t we turn it over to Patrick and he will take us through the
numbers. Patrick? >> PICHETTE: Thank you Eric. Good afternoon
everyone. So I'll go through the financial results quickly and then turn it over to Jonathan
and Nikesh for more details on our performance. So, we had a very strong finish to 2009. We
are very pleased with the Q4 results and that gives us, as Eric said, the confidence have
turned our focus to the growth opportunities in 2010 already, making already in the back
end of 2009 the necessary and significant investments to pursue those opportunities.
So let’s go through the numbers quickly. Our gross revenue grew 17% year-over-year
to $6.7 billion. Our business was strong across the board in search, display, apps and mobile.
Nikesh will go into more detail on our performance in a few minutes on these matters. Google
website revenue was up 16% year-over-year to $4.4 billion. We saw strong growth on
across the world, boosted by a very strong retail season, economic recovery in many of
our major geographies as well as some favorable FX. We also saw some impressive growth in
YouTube revenues. AdSense revenue was up 21% year-over-year to $2 billion, driven primarily
by solid performance in AdSense for search, strength in AdSense for content and growth
in our display initiatives. Our global aggregate paid click growth remained healthy, up 13%
year-over-year and 9% quarter-over-quarter. The aggregate cost per click growth was also
up 5% year-over-year and 2% quarter-over-quarter. Year-over-year CPC growth was also positively
impacted by some of the FX. Remember too that this is an aggregate number which includes
both Google and AdSense properties and also includes diverse geographic markets some of
which have lower CPCs. Turning to our geographic performance, revenue from the U.S. was up
11% year-over-year to $3.2 billion. International revenue accounted for 53% of our total revenue
or $3.5 billion with about $8 million of benefits from hedging programs this quarter. The U.K.
was up 13% year-over-year to $772 million and this despite, a weaker pound in Q4 2009
compared to last year. Finally using fixed year-over-year exchange rates our international
revenues would have been roughly $196 million lower. So let me turn to expenses. Our traffic
acquisition costs were $1.7 billion or 27% of total advertising revenue. Our other costs
of revenue was $688 million including our stock based compensation of $6 million and
finally all other operating costs totaled about $1.8 billion including approximately
$270 million in stock based compensation. So on a year-over-year basis, our OpEx excluding
SBC was higher by $138 million and up $172 quarter-over-quarter. The increase, both year-over-year
and quarter-over-quarter, are primarily due to increases in marketing expense. As a result,
our non-GAAP operating profit which excludes the stock based compensation increased to
$2.8 billion in Q4 resulting in a non-GAAP operating margin of about 41%--41.3% to be
exact. Our headcount was also slightly up at the end of the quarter, approximately 20,000
full time employees and as Eric discussed, we plan to continue to aggressively hire through
this year particularly in engineering and sales. Let me turn, for a moment, to cash
management. Our other income and expense was $88 million for Q4. For more details on OI&E,
please refer to the slides that accompany this call on our Investor Relations website.
Our effective tax rate for the quarter was 23%. Now turning then to operating cash flow,
it was also very strong at $2.7 billion. CapEx for the quarter was $221 million, again, primarily
related to our data center operations. We continue to make significant CapEx investments
and these continue to be lumpy quarter-to-quarter depending on the timing of when we are able
to make these investments. The net of all this is free cash flow quite strong at $2.5
billion for the quarter. So in summary, we're very pleased with the strong performance of
Q4 across revenue, margins and cash flow. As we enter 2010, we're very excited about
the opportunities, our core business, our display, mobile and apps and so you should
expect us to continue to drive real investments in significant ways in the areas we believe
have real long-term opportunities for Google and that will accelerate our pace of innovation.
With that, thank you for your time. I will now turn it to Jonathan who despite you'll
hear quite a rough voice and a bad cold, I can sure--assure you, has all his regular
expected energy. Let me turn it to Jonathan. >> ROSENBERG: Okay, thank you, Patrick. I'll
do my best. So, naturally, I think that part of our success this past year is the result
of a very focused product strategy. At the beginning of 2009, our strategy was basically
to double down on our core which was search, ad words and display and of course push on
monetizing YouTube. We also wanted to invest in Chrome, Chrome OS and Geo and at the same
time, we made some very hard decisions to focus our resources. We shut down Lively,
Notebook and our ads--and our audio ads efforts. Internally, we referred to this as the "more
wood behind fewer arrows" approach. I think it worked for 2009. As we look back, AdWords
launched a whole new front end and several new ad formats that I think you can see are
delivering results. Android started 2009 with just one device and is now at 20 in 48 countries.
I am proudly carrying the gorgeous new Nexus One in my pocket. Double click is now fully
integrated and display is ramping nicely and we opensourced a whole new operating system
designed for the Internet area with Chrome OS. We also saw a steady stream of small businesses,
large enterprises and lots of schools move to the cloud. And YouTube is, in fact, it
turns out, monetizing well and we are helping lots of our partners who are working with
us there make money. But most importantly, search did particularly well in 2009. I think
that may be the best example of what we feel we can do when we double down and focus. We
launched 550 quality enhancements which Eric mentioned. We produced a much bigger and faster
index. We expanded the capabilities of universal search and we added tools like the search
options that let you work with your results to get to the best answer. We also launched
music search and real-time search which are pretty amazing. I don’t know if any of you
are actually in Northern California but we had this 4.1 earthquake a couple of weeks
ago and like, my office shook while I was in it and two minutes later, Google Search
was showing me people’s Tweets from all over the bay area talking about the quake
that had just occurred and within minutes, I was looking at news reports and the USGS
data on the same quake. This looks easy but we had to build dozens of new search technologies
so we could process the hundreds of millions of real-time changes that occur each day to
make it happen. Eric mentioned that in 2010, we are going to be investing so let me take
a minute to talk about how we are thinking about making those investments. Of course,
we're going to pour a lot into search. The key there is always time to result. How fast
can we get the user to the best answer for her or him. Whether that's a web page, a map,
a video, a twitter update or whatever it is. We are also going to work hard on making the
ads richer, more diverse and more useful. We've talked about the single perfect ad and
we mean that from the perspective of both the advertiser and the user at the same time.
Beyond search and search ads, I think we see a few major trends that are transforming the
Internet and we think we are in a great position to compete in those areas too. The first is
social. And when you say social, I think people think of social networks but really, we believe
the entire web is social. So we are going to look at making all of our products more
social. We think you are more likely to trust a restaurant or a movie review from a friend
of yours than from a stranger. So maybe it should be rated as a higher quality result
but only for you. The Internet is also local and we see more and more of a business’s
on-line presence is as important as its physical one. So we're trying to make it easier for
businesses to manage that presence and to connect with people who might actually be
right around the corner and want to find them. The web has also always been about commerce
and now more and more people who buy stuff on-line are starting their--who buy things
off-line are starting their shopping process and researching all that stuff on-line. We
want to help those people decide what to get and where to get it, whether it is off-line
or on-line. Personalization is also getting more important and we think mobile is a big
part of that. More users both for search and other products are accessing us from mobile
devices. And with all the capabilities these phones that are coming out have like GPS,
cameras, we think there is the potential to actually make this mobile web better than
the PC web. Finally, the shift from enterprise to on-line will accelerate and now we think
organizations are moving to the cloud not because they save money but because it is
actually a better way to run their business. They can do things in the cloud they simply
can’t do in the old desktop world. So those are the trends that are guiding our product
plans in 2010 and we think it is going to be an exciting year and we'll certainly look
forward to sharing our progress with you on future calls, so with that I guess I will
turn it over to Nikesh. >> ARORA: Thank you Jonathan. This is an exciting
quarter for us after a challenging year. 2009 started under a cloud of uncertainty but after
about three quarters of steadily improving performance, I am now pleased to report that
we ended the year with a robust quarter in revenues. Let me take a quick few minutes
to provide details and some examples of how advertisers can and have better leverage their
on-line marketing to reach their audiences. The first macro trend affecting all of our
ad driven businesses was the continued driving adoption of on-line advertising by larger
companies. In these tighter economic times, we saw bigger companies like Staples, Volvo,
UbiSoft, (inaudible), et cetera turn an increasing proportion of their spend to what is a more
measurable ROI of online advertising. They are basically shifting to where their audiences
now spend their time. Looking globally, we saw significant update in retail advertisers
on-line spending. This was, for a change, driven both by on-line retailers as well as
traditional brick and mortar companies. Our sales teams took advantage of this trend and
had strong showing on Black Friday and Cyber Monday which marked the start of the largest
e-commerce holiday season in history. It's interesting to note, remember, search ads
are always a better value in December. CPCs go up but CPAs go down because people end
up buying more during that period. Let me give you a geographic flavor of how our revenues
fared out around the world. Within the U.S., the impact of the economic recovery is beginning
to show particularly in sectors with a strong ROI focus. On the other side of the Atlantic,
U.K. companies in verticals that have been traditionally large spenders in off-line have
also increased their on-line ad budgets. If you shift to emerging markets, they are very
happy with our performance. In most of these markets, we see very clear effects of underlying
economic expansion again as well as the accelerating adoption of both search and on-line display
advertising. For example, our Q4 growth in Brazil was particularly strong, driven by
efforts to educate the advertisers and the under penetrated companies to help them understand
the value of on-line advertising and what that represents in their overall marketing
mix. The second big trend we are seeing is brand marketers continue to better understand
the on-line display format and incorporate that into their campaigns. With our broad
portfolio of products, we are pleased with the performance of pretty much all four parts
of our display strategy; YouTube, The Google Content Network, Double Click and our Ad Exchange.
In YouTube, we have had many successful brand advertising campaigns of note. One that you
might have come across was Fox’s integrated media campaign for Avatar which used pretty
much all four parts of our display strategy. If you haven’t seen it, you can go to the
web to YouTube and query Avatar and it will show you the interactive--integrated multimedia
channel with splash advertising--the movie's trailer in Hi Def. We are also very excited
about an event we held with American Express and Sony for World Aids Day where we streamed
and hosted live Alicia Keyes benefit concert on YouTube. In the campaign, American Express
and Sony were able to reach millions of viewers in 167 countries around the world. Beyond
YouTube, brand advertisers continue to see the value of our million publishers and our
content network and finally the AdExchange which we launched in Q3 continues to show
good progress and is increasingly becoming an important part of display consistent with
we believe most of the top networks are now signed onto the exchange. Third, as Jonathan
mentioned, we continue to see the global trend towards cloud computing speed up as companies
grow more and more comfortable with hosted applications, our sales teams are working
quickly to capitalize on these opportunities. We had key wins at Jaguar and National Geographic
as one of our most comprehensive deals for the City of Los Angeles which moved 30,000
users to Google Apps. So against these major commercial wins, we have signed educational
deals with Virginia Tech and Fresno State while both small and medium sized businesses
continue to adopt Google Apps. Finally, with the trends that Jonathan mentioned, the penetration
of smart phones and other mobile devices, our sales teams are continuing to work with
advertisers who can reach and target their customers through mobile advertising like
never before. One campaign of specific note was owned by Razorfish, an agency partner
of ours, who used a targeted mobile campaign to improve conversion rates for one of their
retail clients by approximately 10%. So we continue to see promise in this area. Now,
I am going to turn it over to Patrick to set up the question period.
>> PICHETTE: Thank you, Nikesh. So, everybody will remember in our last call, we had set
up a dory page, a question page on-line to sort out through the questions and answers
and through your feedback and we actually haven’t tested that, we prefer to actually
go back to our more traditional mode so, thanks for actually having tried it with us, in the
spirit of innovation and I'll turn it to Connie to set up the call in questions.
>> Thank you. The question and answer session will be conducting electronically today, if
you'd like to ask a question, you may do so by pressing the star key, followed by the
digit one on your touch tone 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 one 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: Thank you so much for the question, it looked like your US revenue accelerated
from 4% year-on-year growth in the third quarter to 11% year-over-year in the fourth quarter
which was great while your international growth accelerated from 19% in the third quarter
to 21% in the fourth quarter. Twenty one percent is still a big number but not as sharp an
acceleration. I wonder if the discrepancy was due to any of the following; first, the
U.S. having easier comps than international from a year ago? Secondly the monetization
improvements you made in the US that you haven’t yet rolled out internationally? Or thirdly
the fact that display advertising is benefiting your U.S. business more than your international
business at this point? Thank you. >> PICHETTE: So I'll let Nikesh give you a
sense of the focus that he's put in the U.S. for Q4.
>> ARORA: The U.S., as I mentioned earlier, we have been able to see the continued shift
of large advertisers which started in Q3 and continued into Q4 and has been reasonably
strong. On the international side, I am very pleased with the growth we have seen across
the world but you have to understand, there is a mix issue. There are different parts
of the world which have grown at different paces and while we continue to see growth
in most markets, there are some markets where we are seeing growth like Brazil as I mentioned,
which are causing that growth rate to look different than the U.S.
>> PICHETTE: Great. Let's go to the next question. >> And we'll take our next question from Mark
Mahaney from Citigroup >> MAHANEY: Thanks. Two questions please.
The sequential growth is actually very similar to what you had in 2007. Is it pretty clear
to you that overall search spending trends are kind of back to normal seasonal patterns
or are there still verticals that still seem weak to you, not retail obviously but other
areas? Secondly, the materiality of mobile, could you talk about any data points of sequential
growth in search, what percentage of searches are off mobile devices in any particular markets?
Thank you. >> SCHMIDT: So, just in a very general issue
we don't--we won’t comment about the mobile and how it affects our total revenue. And
then in general there is clearly--I mean you see through the second half of 2009 a recovery
in economic activity worldwide and that clearly has shown up in our results. But I will let
Nikesh give you more [specifics.] >> ARORA: From a vertical perspective as I
mentioned we have seen very strong send in the retail vertical across the board pretty
much all around the world. We have also continued to see strength in the technology vertical.
As you might expect finance is not as strong as it was in 2007 and we are seeing stabilization
and some amount of recovery. In addition to that we continue to make progress with all
the other verticals like CPC, health, local etc.
>> MAHANEY: Thank you. >> PICHETTE: Let's go to the next question.
>> And we'll take out next question from Benjamin Schachter from Broadpoint Am Tech.
>> SCHACHTER: If you could rank the key monetization changes you made in 4Q and how do you think
they are going to impact the model going forward? And then on mobile I just wonder if you could
have a broader discussion about how you think about the P&L there. Is this something you
want to drive revenues? Is this something you just want to push the internet experience
forward on mobile? And then finally any comments on China and the situation there? Thanks.
>> ROSENBERG: Hey Ben it's Jonathan. So I guess I can just start with the quality question
since that's what you asked, specifically. Q4 tends to be a modest quarter for us quality
wise. We had about a dozen launches but the dynamic that we have there is we try to freeze
the launches after Thanksgiving so we have stability for our advertisers around the holiday
period. So from an overall impact on RPM perspective, the quality launches are actually more modest.
Some of the apps changes that we made, site links, comparison ads and product extensions
certainly started to take effect as did the fact that all of our advertisers are now on
Ad Words 3 which we think is allowing them to be much more effective in terms of their
bidding efforts. I would generally describe the quarter as relatively modest from a quality
perspective. Nikesh and others can give you their perspective on Mobile. The main thing
I think we are starting to see there is that advertisers are getting better at figuring
out what kind of ads work on the mobile devices. The simple addition, for example, of things
like including a phone number or an offer is substantially increasing the click-through
rates and the ROI for the subset of advertisers who are correctly optimizing their mobile
campaigns. So we are certainly seeing very strong growth there.
>> PICHETTE: Just on--just to close on mobile, there really is a two, if you really think
about it a two-pronged strategy on it which is one is driving innovation in an ecosystem
on one side. So when you think of all of the applications like goggles and all of what
you have seen on voice recognition and navigation, that is all innovation that basically drives
people to the web with these new mobile applications. Obviously the more people spend their time
on it then they trigger into search and then monetization occurs. So for that perspective
I think that's the core engine of the mobile model. On China I suggest that Eric answer
that one, please. >> SCHMIDT: Ben, I think the China stuff has
been covered really quite well in the press. Just a review for everybody on the call, we
announced a little more than a week ago three reasonably separate facts. One, that there
had been a cyber attack on Google probably emanating from China. Origin details unknown.
It's still under investigation. We believe we have made the necessary technical changes
to prevent such a future attack. The second was a--we discovered in the course
of that, a--perhaps related or perhaps unrelated monitoring of human rights activists which
we disclosed in the spirit that people be aware this may be occurring. And then the
third was a decision for those reasons and other reasons, a decision for Google to no
longer be willing to apply the censorship rules in China. This has a bunch of consequences.
One of course is that we are in conversations with the Chinese government. The second is
our business in China is today unchanged. We continue to follow their laws. We continue
to offer censored results. But at a reasonably short time from now we will be making some
changes there. We have made a strong statement we wish to remain in China. We like the Chinese
people. We like our Chinese employees. We like the business opportunities there and
we would like to do that on somewhat different terms than we have. But we remain quite committed
to being there. I hope that helps. >> PICHETTE: Thanks Eric. Let's go to the
next question please. >> And we'll take our next question from Justin
Post from Merrill Lynch >> POST: Thank you. My question is more on
competitive issues in search. It looks like US did accelerate where I would expect to
have the biggest impact but are you seeing any share changes internationally related
to any of your competitive initiatives? And then secondly on the partner environment are
you seeing more competitive pressure on signing up partners given some of the initiatives
of your competitors out there? >> SCHMIDT: On the competition question, I
think it is better for us to focus on what we do and not what our competitors are doing.
I think our results sort of speak for themselves and I will let you judge how they are doing
in a market that is a highly competitive market. The one area where there is probably a pretty
big competitive event is whatever happens in China, which at this point is obviously
unknown and that would clearly make a difference. Nikesh?
>> ARORA: We continue to work closely with our partners both on the search and display
side. And in a--most of our partnerships are based on very clear ROI and very clear benefits
to partners and to us. And we, we haven’t seen any change from our partner experiences
from Q3 to Q4. >> PICHETTE: In fact on the content side the
announcement of Vivo, the announcement of Channel 4 and Channel 5 in the U.K. for YouTube
has in fact been an increase and we are very pleased about these type of partnerships.
All right let's go to the next question please, thanks Justin for your question.
>> And we'll take out next question from Doug Anmuth from Barclay's Capital.
>> ANMUTH: Thank you for taking my question. Two things first, I was wondering if you could
comment on the relative outperformance of the network business versus O&O and if there
is any particular dynamics in there that make network growth higher? And then secondly can
you also comment on the higher marketing costs that you saw during the quarter and in particular
how much of that is attributable to Android launches and the Droid in particular? Thanks.
>> PICHETTE: In terms of O&O versus network, nothing really significant to disclose in
this quarter. On marketing I think it is fair to say there are two things there; there is
a high level and then I will let Nikesh give a couple of comments. At the higher level
remember when we said at the end of Q3 that we wanted to ramp up our investment in a bunchareas
to accelerate our growth. Marketing is one that you can actually affect in the short-term
quite well. And because we have such a kind of scientific approach to it to track it,
we decided to invest a bit more in Q4, so Nikesh can probably give you a couple of examples
on that. >> ARORA: For example many of our marketing
efforts in Q4 had been targeted towards trying to educate and bring more and more small advertisers
into the web where we can clearly measure the ROI, clearly understand what the impact
of those is. So that has been one big focus. The other big focus on the consumer side has
just been to support some more of our more consumer launches that have happened in Q4.
>> PICHETTE: Thanks Doug, we'll go to our next question
please. >> And we'll take our next question from Imran
Khan from JP Morgan. >> KHAN: Yes, Hi. Thank you for taking my
questions. Two questions. You talked about search traffic increased five times on mobile.
I am trying to understand that economics. What kind of revenue per search on mobile
are you seeing compared to the PC and secondly a couple of questions, more related questions
on the cost side. You talked about the spend more on the marketing in Q4. Is it more of
a one-time nature? Do you expect that to do down in Q1? And also how much were bonus accruals
for Q4 due to (exiting) your full year plan? And should we think the bonus accrual will
go down in Q1? Thank you. >> PICHETTE: Okay, let me start with bonus
and then we will go back to the other question of marketing. And, so on bonus, here is what
everybody has to remember because last year you will remember there was a lot of questions
about that. When we start a year we reset the plan and as we progress through the year
if we vary the plan whether positive or negative, then we have to make additional accruals but
in the beginning of the year we just don’t know that. So in 2009, so in 2010, next quarter
you can expect we will reset our plan and therefore, you know, we'll go back to the
base number. For this year, 2009 specifically, we had actually by Q3 figured out we had a
different trajectory than the base plan and what we did as a consequence is actually did
a combination of cash up Q3 and Q4 to make sure we were properly provisioned for the
bonus at year-end. That is why you haven’t seen like at the end of Q4 of last year a
big blip for that reason. We’ve increased it but just in proportion to the second half
of the year. So that is the key on bonus. On marketing I think the issue from a financial
perspective, clearly we don’t give any perspective view on marketing. I think the most important
thing is that we are really pleased with the experiments we are running right now in the
marketing domain. Again, I will circle back to Nikesh to see if he wants to give more
precision on it. >> ARORA: I am just going to echo what Patrick
had said. We are going to look at the campaigns we have in place and we are going to look
at the products we have in place and based on the ROI of those campaigns we are going
to ratchet our spend up or down in the following quarters.
>> PICHETTE: Great. And on mobile, maybe Jonathan? >> ROSENBERG: [mic on mute. Voice heard in
background.] >> PICHETTE: Can we hear you?
>> ROSENBERG: I was--I was muted. Sorry Imran. I am not going to give specifics on mobile
RPMS versus desktop RPMs but I think the main thing we can say is that the new formats,
the targeting tools and the reporting that we're giving the mobile advertisers is making
the huge difference. And I mentioned Click to Call putting phone numbers in the mobile
ads making a difference. Try something like auto insurance on your phone and you will
see that the Progressive ad on the phone actually shows the phone number while on the PC it
doesn’t. Nikesh gave the Razorfish example in his opening remarks and we are also letting
the advertisers target high end devices, specific devices or specific carriers and we have also
launched the reporting with analytics to the mobile phones. So we are starting to see much
improved monetization in general across mobile. >> KHAN: Got it, thank you.
>> PICHETTE: Thank you. Thank you for your questions.
>> And we'll take our next question Brian Pitz from UBS.
>> PITZ: Great. Thanks. Over the past couple of quarters you have rolled out several new
ad formats such as site links and video ads on the site. Could you discuss
the adoption of these formats among advertisers and any commentary on if these formats have
potentially lowered page clicks and increased CPCs on the site? Thanks.
>> ARORA: The ad formats we launched in Q4 have been very successful. The advertisers
have taken them up very effectively. We have actually used our direct sales force across
the US as well as across major parts of Europe and worked with some of our larger advertisers
to include site links to their mobile format. I'll pass the CPC question back to Patrick.
>> PICHETTE: I mean we won’t comment on the very specifics on each one of them but
it is very clear when you have product listing ads that have come in either new cost for
action pricing models as that includes images and pricing within them or even the comparison
ad that we now kind of started introducing, I mean, all of these obviously provide more
information to the user and therefore more value. So from that perspective it has been
a real positive. >> ROSENBERG: For people that are confused,
the easiest way for them to see what we are talking about is just try typing something
like Sears into Google and you will see the example of what Nikesh was referring to as
ad site links. It's intuitively easy to how they lead to higher user engagement. You will
see the electronics and tools section, the deal of the day and you can see how much of
a better experience that is both for the advertiser and for the user.
>> PITZ: Great. Thanks. >> PICHETTE: Thank you Brian. Let's go to
the next question please. >> And we'll take our next question from Spencer
Wang from Credit Suisse. >> WANG: Thanks, good afternoon. So my question
is regarding YouTube monetization. I know you have talked about being happy with the
monetization at YouTube. I was wondering if you could just give us perhaps some updated
metrics on how much of YouTube is being monetized. I think in previous calls you said that it’s
tripled year-over-year. So any update on that would be great. Thanks you.
>> SCHMIDT: Well us, we're not gonna to give any specific metrics on YouTube. What I can
say is the big shift we are continuing to see on YouTube is that it's gone from being
a nice to have to an essential part of the media mix of any display campaign that our
advertisers are planning. That is a big shift from our perspective and we continue to see
people and if you can look at YouTube, it is very easy to see, you will see that our
home page ads are there on their watch page ads are on there and we have been able to
expand that across the world in many markets where we have YouTube in place.
>> PICHETTE: Yeah, great performance from-- just to close on, just--when people think
of key insights on YouTube, right? The homepage was nearly sold out in Q4 and that was a great
testimony of the power of YouTube and we're now running ads in 20 countries worldwide,
so again to give you a sense of perspective of how successful YouTube has been. So, hope
that’s useful Spencer. >> WANG: Thanks Patrick.
>> PICHETTE: Let's go to another question please.
>> And we'll take our next question from Scott Devitt from Morgan Stanley.
>> DEVITT: Hi. Thank you. There was data in the quarter that suggested that large branded
retailers grew on-line sales at roughly 15% in the quarter and that smaller retailers
experienced slower growth. And given your broad visibility into ad spending and particularly
the long tail in smaller advertisers, wondering if you can just comment on ad spending trends
by advertiser size? Thanks. >> ARORA: As I alluded to this earlier, our
larger advertisers continue to increase their on-line spending and operating search and
on-line display in their marketing mix. So the retail has been particularly strong during
the holiday season. Most of the large retailers have created very robust websites and they
are able to target a very, very large host of keywords and to some degree automated this
stuff. We continue to work with some of our smaller advertisers and bring them into the
fray. It's purely a mix issue and a seasonal issue where we have seen the larger advertisers
outperform the smaller ones. >> DEVITT: Thank you.
>> PICHETTE: Thanks for your question Scott. Let's go to the next question please.
>> And we'll take our next question from Sandeep Aggarwal from Collins Stewart.
>> AGGARWAL: Thanks for taking my question. Can you please rank your non-core search businesses
in term of the growth potential? I.E. display, YouTube, mobile and ads? And then also any
color you can add on your partnership/competitive dynamics, you know with Google and Apple?
>> SCHMIDT: This is Eric. It depends on whether you are looking at absolute growth or percentage
growth. Obviously the smaller ones are going to grow faster than the larger ones. We have
said for a pretty long time the next huge business for us is display and we put in place
a series of acquisitions and a series of products. We have integrated them and we are seeing
the benefit. I think one of the stories that's not really come out yet is how successful
Google is at display. I think you will see that especially in 2010. So if I were to talk
about absolute numbers that are not search I would say that is probably your number one.
But, obviously the smaller ones will grow faster on a relative basis. There the most
obvious one in terms of growth rate would be mobile and a lot of that depends on the
competitive dynamics of the industry, how successful the new AFMA product from us is,
the AdMob acquisition if that comes through. We have a lot of evidence that people are
moving to these data friendly mobile devices very, very, very quickly. Our search traffic
growth rate is quite a bit faster than on PCs. We expect that to continue. So for lots
of reasons 2010 will be a year of significant mobile revenue growth for the whole industry.
I am sure Google will be able to play a major part of that. With respect to Apple it is
probably better to say that Apple, I as a former board member have a special spot for
Apple in my heart but I will tell you Apple is a very well run company. They've got a
lot of very good stuff coming. We have a couple of very good partnerships with them and it's
clear we also compete with them in a couple of areas. And my guess is that is a pretty
stable situation for awhile. >> AGGARWAL: Thank you Eric.
>> PICHETTE: Thank you for your questions. Let's go to the next question please.
>> And we'll take our next question from Jeetil Patel from Deutsche Bank Securities.
>> PATEL: Great thanks, two questions. One, i'm just taking a step back, you've got a
$23 billion business built around advertising and that seems like it's--got some sensitivity
to the macroeconomic environment these days. I guess broadly as you look forward and the
broader ecosystem of consumers and business partners you work with I guess they're newer,
more unique ways of kind of adding value to the broader ecosystem in terms of new revenue,
models or business models that are you know, kind of worthwhile exploring as you look ahead
and to try to break away from the sensitivity of the ad business that seems to be tied to
macro. Second, on mobile your strategy seems to be a little bit perplexing in that you've
got a partnership strategy with a slew of handset OEMs and then Nexus One. I guess,
Is that a comparison of network and O&O? Is that how we should think about the evolution
of that strategy or are you just trying to push the smart phone category and be the--
obviously the interface and the brand that consumers use to access information through
those devices? >> PICHETTE: Okay, we'll let Eric answer both
of those. >> SCHMIDT: On your question about the macro
we said last year and reiterate we are not immune to global economic trends. I think
the evidence would say we fared better than most companies in a global economic downturn
and the hopeful global recovery that is clearly underway at this point. We have seen that
for six months or maybe longer. So, I'm not so worried about our reliance on ads which
is sort of the premise of your question. From our perspective our goal as a business is
to solve the advertisers’ and the other businesses’ problems which is ultimately
about selling products, marketing and so forth. We are in various conversations about trying
to do alternative ways to distribute additional content. We're trying to come up with new
ways of using GPS data to sort of advertise against position in place, we have a lot of
initiatives in this category. The ones where we will probably have the biggest impact or
not impact as much as those are exciting, will probably be in the display area because
in aggregate size our display business will give people an opportunity to reach people
with visual stories, with images with narratives which they couldn’t do with search text.
So it is probably the case that the combination of local advertising, all of the things we
are doing in display plus some of these new and more speculative things are likely to
drive a lot of new ways of solving the business’ problems. We also and we haven’t talked
very much about this but we have quite a healthy enterprise business that is going to grow
we think quite rapidly over the next few years as people move from the older legacy sort
of PC centric traditional operating system model to the new web-based application model.
And the trend there is clear. Everyone is moving there and we are going to be one of
the leaders there. >> PICHETTE: Eric, do you want to comment
on the issue of mobile and the question that was about the perplexity of the--our business
model? >> SCHMIDT: The question--the second part
of your question is of course on Nexus One and that model. And there has been a lot of
confusion about that. It is probably easiest to understand it the following way: What the
Nexus One is really about is a new way of buying a phone. The Nexus One is simply the
first of a series of examples where you can essentially purchase a phone on-line from
one or multiple manufacturers, self provision and have it just work. We think that is a
natural evolution of a particular model. It does not exclude the other models and I think
it is comparable with them and the sense that the retail model will continue to be quite
successful. So far our partners have understood that message and they have been okay with
it and the Nexus One itself of course is a magnificent product.
>> PICHETTE: Thank you Eric. Let's go to the next question please.
>> And we'll take our next question from Jason Helfstein from Oppenheimer & Co.
>> HELFSTEIN: Hi, thanks, I have two. First question, are you seeing--do you think Bing
is having an impact on cost per click? And then number two, do you expect the tax rate
to rise in 2010 with the improvement in US revenues?
>> PICHETTE: Let me answer the second one first and we can come back to the first one.
On the issue of taxation obviously we don’t give any kind of guidance forward. We were,
we continue to monitor very closely all the issues related to those tax bills and the
legislation. Obviously we are like most American companies that have, you know, a large international
presence, we continue to you know, believe that you know, it would be a disadvantage
to have kind of some of the proposals that have been tabled. We are going to continue
to participate in the process very actively and make our voice heard. And--but, we can’t
speculate as to the outcomes of these things. In terms of Bing, Jonathan do you want to
give a comment on it? >> ROSENBERG: Sure, we generally don’t comment
on competitors. We think our CPCs are not generally impacted by what other search engines
do. Our CPCs are set by competition among advertisers and we have a very competitive
auction market. >> PICHETTE: That is the essence of the point,
right? People choose. Why don't we go to the next question please.
>> And we'll take our next question from Gene Munster from Piper Jaffray.
>> MUNSTER: Can you talk a little bit about the impact of Nexus One in the model specifically
the margins going forward? Thank you. >> PICHETTE: In its most simplistic form,
you know, we don’t track percentage margins as part of our business model. What we're
looking for is opportunities to innovate, to shift product that we think really are,
kind of disruptive, game changing and to the benefit of users and the Nexus One is a great
example of that in setting the bar as to what a great mobile handset should look like and
it will have its own margin. That is how we are focused on building the business. Let's
go to the next question please. >> And we'll take our next question from Mark
May from Needham & Company. >> MAY: Hi, thanks. Two please. We've been
hearing from a number of AdSense partners that Google’s TAC rate is trending towards
Google’s favor. Is the fourth quarter TAC decline a reflection of a declining trend
in TAC or is it just seasonal? The second question is I think investors have a good
sense of the assets and such that Google brings to bear in the on-line display space but doesn’t
have a good sense of the size of Google’s display business and the trend in market share
there. The question is just how big in fact is Google in display today?
>> PICHETTE: Let me start with the TAC issues. I mean, we have a lot of great partnerships
with so many of our AdSense partners and other partners, the fact that it has been trending
down has to do simply with kind of mix issues and it is not really tied to seasonality.
And so, you know, there is nothing of a big surprise there in our mind and we continue
to have great partnerships with all of our partners on AdSense and others. In the case
of display, I think that the few facts we shared already on the last web cast on display
are worth mentioning is the industry itself is a $17 billion industry so it is a big pie
and if you just take the TV advertising industry which is $170 billion industry that is all
ad buyers that are shifting over time to the internet or digital content. That is also
going to make its, some of it is going to make its way progressively to display, so
there is no doubt it is a huge pie to go after. From our side we clearly don’t comment on
the specifics of our market share or our revenue dollars but I think you should take from the
tonality of Eric’s comments that this is really a big focus for us because it has a
lot of runway. I will leave it at that if you don’t mind. Let's go to the next question
please. >> And we'll take our next call from Youssef
Squali from Jefferies & Co. >> SQUALI: Thank you very much. Two questions
please. First, on mobile we've seen from some third party data the iPhone may account for
as much as 50% of overall mobile traffic. First, is that kind of similar to what you
are hearing or what you've seen? And I guess related to that, Eric you said earlier or
mentioned that you're--you see the Apple relationship as stable. Are we inferring from that you
think the upcoming renegotiations of that deal and potential of it moving to a competitor
likely to move in your favor? And on the display side can you give us a sense of the percentage
of search advertisers that are buying display from you today and what is the major push
back from those that don’t? Thanks. >> SCHMIDT: So, so this is Eric. We're not
going to speculate on the market share of Apple mobile products. That is for Apple to
discuss with you. And as far as I can tell our business structures with Apple are quite
stable. I am not going to speculate on any deals of any kind, rumored, true, not true,
you name it we are not going to talk about it. On the display question?
>> ARORA: On the display side there is a reasonable number of our search advertisers who also
buy display. It actually depends on their campaign objectives. If their campaign objectives
are direct response oriented, they favor search as well as certain parts of the display network
which would give them a higher conversion rate and a higher click through rate as it
relates to their advertising. If they are more brand focused they tend to overweight
display in their campaigns. And in that category clearly they have many choices including YouTube
as far as where they spend their premium brand dollars.
>> PICHETTE:Thank you. We'll take one or two more questions. So let's take two more questions
please. >> Thank you, we'll take our next question
from Steve Weinstein from Pacific Crest. >> WEINSTEIN: Actually, most of my questions
been asked, so I'll leave time for someone else.
>> PICHETTE: Thank you Steve. So one more question maybe?
>> And we'll go next to Marianne Wolk from Susquehanna Financial Group.
>> WOLK: Thanks very much. Given how attractive you're making the new display products to
advertisers and the big push with your sales force, have you seen any of your advertisers
shift budget from search into the newer display offering? And as a follow-up how do we think
about what is going on in the content network? Where are you in transforming that from basically
contextual advertising to display? >> SCHMIDT:
This is Eric. On the question of shifting, my experience with advertisers is they don’t
shift, they add. The reason is that the decisions they make are sort of standalone. In other
words they will simply maximize the amount of search advertising they do to maximize
their revenue. A display decision is a decision they make which is both a revenue and also
strategic decision around their branding and so forth. And that's growing as we can offer,
if you will, the science that Google applies to the display business. And that's our differentiator,
we do it better than anybody else and that is why we continue to win all those deals.
>> PICHETTE: Thank you. We're going to close, we're just running out of time. We're going
to close on this for now. I want to thank everyone for taking the time to listen to
our call today. As you can tell we are very excited about moving the business forward
in 2010. I want to take a moment to thank also all of the Googlers who have been listening
to this call, for their hard work. 2009 was a roller coaster year, very strong performance
and really the achievement of everybody on the team. So for, on behalf of the management
team thank you to all. And thank you for listening. And Jonathan and I will talk to you in half
an hour. Cheers. >> And this concludes today’s conference.
We thank you for your participation.