Google Q409 Earnings Q&A 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 Google's fourth quarter and fiscal year
2009 earnings follow up conference call. With us are Patrick Pichette, Chief Financial Officer,
Jonathan Rosenberg, Senior Vice President of Product Management and Nikesh Arora is
also going to be joining us for the first half hour, so if you have specific sales,
geographic, vertical questions for him please direct them to him in the first half hour
of our call. After we cover a few housekeeping items, we will begin taking your questions.
This call is being Web cast from our Investor Relations Web site located at
Please refer to our Web site for important information, including our earnings press
release and related slide deck. 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 Web site located at and we encourage you to make use of that resource.
As a reminder, the purpose of this follow-up call is to give participants the opportunity
to ask more detailed financial and product questions in an efficient and Reg FD-compliant
manner. Let me now quickly cover the safe harbor. Some of the statements we make today
may be considered forward-looking and 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 31st, 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, we are ready to take your questions.
Operator? >> 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 one 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, that is star one for questions and we'll pause for
just a moment to assemble the roster. And we'll take our first question from Samit Sinha
from JMP Securities. >> SINHA: Yes, thank you very much. I just
wanted to get down to some more details about CPC growth sequentially. Are there any specific
circumstances, I know in the past quarter about how emerging markets where query growth
has been strong but CPCs are lower? Can you help us quantify that impact? And secondly,
on the CPC question itself, anything specifically in Europe, we've heard instances where trademark
bidding has kind of slowed down or the efficacy of that has slowed down and probably pulled
down CPC with it? Can you comment on that? >> ROSENBERG: Yes, sure. This is Jonathan.
I will let Nikesh comment on any specific issues related to Europe or any dynamics that
he is seeing there on the trademark issues. The specific issues which we have traditionally
talked about a lot on, you are looking at average CPC which obviously is a blended number
and it is impacted by some of the things you suggested such as the relative growth in maturing
markets versus established markets had some anomalous dynamics when you look at this quarter
which I would highlight which are first and foremost the FX movement. We had--the dollar
was weaker in Q4 '09 when you compare to Q4 '08 so that causes the non-U.S. clicks to
have higher CPCs, right, when reported in dollar terms. But I think the other thing
that you may not see is there is an important mix effect going on. We made--excuse me, we
made some quality improvements on the AFC network and basically, that had the effect
of reducing the total clicks in the AFC network, relative to what it would have otherwise been.
And so, we had a higher proportion of clicks therefore, coming from and from
AFS and that's a mix shift that caused the blended average of CPC the way you are seeing
it to otherwise rise. And so, those are the two things that I think are more different
in this quarter than in the past and I think that and otherwise, I don't have any more
insight. >> SHIM: Okay, next question please.
>> And we'll take our next question from Aaron Kessler from Kaufman.
>> KESSLER: Okay, there's a question on the local side and mobile advertising. There is
a lot of assumption on the mobile side that's really going to be dependent on local group
longer term. Just your view on that and how that you're seeing the growth in the local
side develop to drive mobile longer-term here? >> PICHETTE: Hi, it's Patrick speaking. I
think that mobile--one element of mobile is local but I would, far and away, not only
pin it to local. There is no doubt that, you know, we are having some great experiments
on local but on mobile what you have is a whole set of searches and a whole set of activities
that actually just transcends clearly just a local business. And those searches obviously
are going to also fuel it. So, it's a mosaic of opportunities but local is just one of
them. But Jonathan, maybe you have additional comments?
>> ROSENBERG: Yeah and I think local is hugely important. It's going to be much more important
in the not too distant future because as we are seeing more integration of, you know,
as I mentioned in some of my other remarks, people who are shopping offline start online
and today, people still don't have access to the inventory information in the local
stores. So, I mentioned that in mobile, we are seeing that when phone numbers and coupons
are offered, people are much more likely to click on the mobile ad. Well, imagine if the
inventory information is there so they can actually consummate a transaction locally.
As that information becomes available, local is going to be much, much more powerful. And
we already have some examples where advertisers like with AT&T are using some of our local
products to help people, you know, find local stores. So, I think we're just starting to
get there in terms of the capabilities that are going to be necessary for local to take
off. But I think local is going to matter much more on these devices because obviously,
they know where they are with GPS. >> KESSLER: Great, I think [INDISTINCT] quickly.
I think you filtered out some of your advertisers this quarter. Maybe it was just AdSense for
content. Maybe you could just provide some more details around that?
>> PICHETTE: Sorry, could you restate the question?
>> KESSLER: Yeah, I heard there were some reports that you may have filtered out some
of your advertisers this quarter on the AdSense side. So, can you provide any more details
about that? >> ARORA: Yeah, you know, we have been--you
know, obviously, we are constantly looking at our advertisers to see whether there is
any fraud or any spam that is happening and we permanently suspend advertisers who repeatedly
attempt to scam users. So, we went through one of our regular processes of looking at
advertisers and seeing which ones of those we thought were not adding quality or adding
sort of value to our users. And in those cases, we chose to suspend them permanently.
>> ROSENBERG: This was happening this quarter was the approach that we took to suspend the
repeated scam users as opposed to before where all we were doing was disabling certain bad
ads. >> KESSLER: All right and does this have any
material impact on the quarter numbers? It sounds like it could have had a slight impact
from what I was reading. >> ROSENBERG: No, the impact is slight. It's
a relatively small number of advertisers. >> KESSLER: Okay. Great, thank you.
>> SHIM: Okay, can we have our next question, please?
>> And we'll take our next question from Ross Sandler from RBC Capital Markets.
>> SANDLER: Hi, guys. Two questions. First on the cyclical nature of paid click growth
and then a follow-up from James' question earlier, so, on paid clicks, the growth rate
has been decelerating pretty steadily for the last couple of quarters based on some
of the mix and kind of the natural deceleration you guys talk about. Do you see any evidence
in your data that as the economy recovers in 2010, that paid clicks could actually reaccelerate?
And for instance in the fourth quarter, you had a reacceleration in the domestic market.
Did paid clicks reaccelerate there? What are your thoughts on that? And then a follow-up
from James' question, on the international stuff, if we've done the math correctly, international
growth X currency and X hedging decelerated to around 16% from 19% last quarter, can you
talk about what is driving that deceleration because I think it had, you know, accelerated
in 3Q? Thanks. >> PICHETTE: So, on the paid clicks, I think
that the only thing we would tell you because we can't give you anything perspective is
obviously, you know, as every place, there is a recovery and there is robust auctions
and there is also seasonality within those auctions, right? You could have kind of increased
CPCs. And so, that is really the only fundamental driver of the CPC and CPC growth in terms
of… >> SANDLER: You don't see consumers clicking
on ads, not the CPC but actually the volume of paid clicks, you don't see that incidence
increasing when the economy gets better? >> PICHETTE: Yes absolutely. People search
more and they search more and not only do they search more but they click more. There's
no doubt about it. So, there--if you remember, if you go back to a couple of quarters ago,
we had this conversation where we said because people were more shy at shopping, they click
less. And so, it was a consumer driven phenomenon that drove our CPC at the time. It was just
simply that, you know, no matter how the auction operated, the fact that people clicked less.
And as the economy recovers and people click more obviously, it will have an effect on
CPC. As for the international, Nikesh, do you want to cover the international portion?
>> ARORA: I think one of the important thing to note is if you compare and look at last
year's Q4, we had a precipitous decline in the U.S. much more sort of sharper than what
we saw in the international markets. So, the comps for the U.S. look much better than they
look for international regions. In addition to that, many of our new product areas which
we staged globally, will start in the U.S. and make their way across the globe. We have
had sort of more of them do well in the U.S. than they have done internationally. So, purely
from that perspective, the U.S. is going to look slightly stronger from the rest of our
international markets. >> SANDLER: Great, thank you. Thanks Maria.
>> SHIM: Okay, next question please. >> And we'll take our next question from George
Askew from Stifel Nicolaus. >> ASKEW: Yes, thank you very much. Two questions,
first, has Google since the first of the year finished implementing the caffeine search
architecture across all your data centers? >> ARORA: I don't know if we are finished
implementing it. I know it's, but I… >> ROSENBERG: I believe the answer to that...
>> ASKEW: Not yet, not yet. >> ROSENBERG: I'm sorry, I said yes. And the
answer to your question is not yet. The answer is not yet.
>> ASKEW: Okay, not yet. All right. And then obviously, display advertising is a huge push
for the company. Can you help us please understand how much of your display advertising revenue
is from owned and operated properties such as YouTube and how much is powered by tools
of Google but does not appear on your websites like the Double Click?
>> PICHETTE: Well, we don't give the mix but clearly it's all of the elements that are
at work. >> ARORA: So, the best way to think of our
business on the display side is we have our business on the display side which corresponds
to premium [INDISTINCT] which is where brand marketers looking for premium advertising
slots look at YouTube as a property they want to advertise in competition to other premium
inventory that is out there. If you go to the next level, the best way to think about
them are network which is our collection of publishers which are all the way from small
publishers to [INDISTINCT] publishers to certain large publishers who give us access to the
inventory which we are then able to collectively sell as the network, both using conceptual
advertising as well as using intraspace advertising. And that, of course, has a different profile
as it relates to the margins and the revenues as compared to YouTube. And then the third
part is where we use both our tools as well as our exchange properties like Ad Exchange
and Double Click platforms which is where you can have different buyers and sellers
and different people who put their inventory up there and different people selling that
inventory and that is beginning to gain traction now and most of our top ad networks are in
that space. But clearly again, that is a very different pricing profile or margin profile
in the market. So, that's the way to think about our three different businesses now from
a structural perspective. But clearly from an advertising perspective when we go make
that pitch, we offer the entire gamut of services depending on what campaign objectives they
have and what they are trying to achieve. >> ASKEW: Would Google have another owned
and operated display ad site? >> ARORA: Well, you know, we are constantly
experimenting with various properties that we have to see what's the best mechanism and
the best format of advertising to use on those. >> ASKEW: Okay.
>> SHIM: Okay, thank you. We'll take the next question please.
>> And we'll take our next question from Scott Davis from JP Morgan.
>> DAVIS: Yeah. Hi, thank you. Nikesh, I think I'll just have a follow-up to Ross' and James'
question about the rest of the world growth. So, given that it decelerated and I understand
that the products in the U.S. haven't been rolled out there, that would explain why it
wouldn't reaccelerate but it doesn't explain the deceleration. So, it sounds like you are
saying the primary answer is just the comps which did in fact get a lot more difficult
versus the fourth quarter of last year. I was wondering though, if there is a third
element which is there have been a number of times on the call that it was mentioned
that large advertisers have come back first. And I guess I was wondering if you could give
some color on whether or not the rest of the world make up of advertisers gives more small
advertisers as compared to large and therefore that lagged a little bit for that reason as
well or was it just purely the comps for the first reason that I said?
>> ARORA: Thank you for very much for asking the clarifying question. I think there are
three elements to what you asked. One clearly is a comp element because, you know, as Patrick
would say we have had a v-shaped recovery in certain markets. We've had sort of a slightly
elongated V in some markets and some of the markets have been bobbing around. So, clearly
in the U.S., we have seen a sharper sort of rebound than we have seen elsewhere because
they had not as sharp of a decline. So, clearly one is a comp issue. The second issue has
also to do with the advertiser mix. Actually, the large advertiser phenomenon is over weighted
to the U.S. than it is towards the emerging parts of the world so, in various parts of
Southern Europe, where in various emerging parts of Asia, Latin America and the Middle
East and the other parts of Europe. We are clearly not seeing as much divergence between
large advertisers and small advertisers in those markets. So, the large advertisers haven't
been as aggressively back as they haven't as aggressively left in the first instance.
And the third case is clearly in some of those markets which are nascent, what has happened
is as the economy took sort of a hit or sort of a stutter earlier, they actually reprioritized
their spending and some of them may have pulled back from search and it just takes a little
bit longer to get them back onto online advertising because in those markets they are not as reliant
or as convinced of online advertising. But clearly as I said in places like Brazil, we
will be making huge efforts to get the education up on advertising and we will do that around
the globe. >> DAVIS: Do you have an expectation, just
to follow-up on, you know, because you are clearly pleased with sales and it is easier
for the street including myself to get ahead of ourselves because we can do channel checks
and hear about the U.S. and hear about the U.K. and those things accelerated nicely.
So, it feels like the only thing that the bowl is missing is just some conviction on
when you'll see a reacceleration in the rest of the world. Part of it will come just because
the comps are getting a lot easier. But do you have a suggestion for what kind of lag
you think is involved for the rest of the world?
>> ARORA: Clearly, I am not going to try and speculate in numbers and try and figure it
out when these things are going to happen. But from a long-term perspective, if you think
about the U.S. versus these markets, clearly some of these markets are further behind in
terms of the development where the U.S. is or certain parts of Europe are. For example,
the U.K. is very advanced in the online market. And even if we look at the evolution of some
of these markets over the last 3-4 years, we have seen a trend. And the trend suggests
that over time, people will start getting more convinced about online advertising as
more and more consumers in those markets get online as more and more broadband penetrates
those markets. Any of those dynamics are clearly easy for you guys to understand and try and
project. And based on that, you know, my long-term conviction is that we are going to see the
continued shift towards online advertising both on the search side as well as the display
side as Patrick alluded to in the earlier call, you know, the television market is yet
another huge market where the eyeballs are beginning to shift and advertisers will want
to target those audiences and we feel comfortable that the tools we are developing based on
our experience in the U.S. markets can be deployed around the world. So, in the long-term
I believe there is clearly growth in each of those markets. I can't project which quarters
they are going to show up in. >> DAVIS: Thank you.
>> PICHETTE: I think, just as a general comment on the overall total revenue and then this
difference between all of these markets and geographies. I mean as we said on the call--on
the previous call, I mean, you have to--we are really pleased with the trajectory of
the company and the reason for it is you can see how a quick rebound in the economy in
the U.S. or at least kind of our, not a strong rebound, but a quick rebound actually, you
can see the leverage model of the Google model so, in that sense I think we take a lot of
comfort for the long-term. >> SHIM: Great. Could we take the next question,
please? >> And we'll take our next question from Jim
Friedland from Cowen & Company. >> FRIEDLAND: Thanks. First on G&A, if I look
at Q4 versus Q3, it actually moved up decently. You know, last year, it was flattish but then,
you know, you were really working on the costs. Was there anything one-time in nature or unique
about that increase or was it seasonal or is this just getting back to what's, you know,
sort of a more traditional pattern? >> PICHETTE: No, I think on G&A, the two big
areas that we talked about, one of them was actually ramping up our marketing as we discussed
on the previous call. We also had a few expenses more than would have been ordinary on the
legal side and so, those would be the kind of two big bumps that if you think in the
quarter. And--but nevertheless, I mean, very much under our control, right? If you think
about it, if there is one thing we have proven this year at Google is our ability to actually
really control our expenses and dial where we think we are going to get a great payback
and a great return. And that's exactly what you've seen in Q4 where when Eric talked about,
okay, let's push back the investments, let's go back into making sure that we run the business
we want the way we want to run it. Obviously, you know, when you have areas like marketing
broadly defined, that's the first place that you can actually turn on the dial to get a
real impact back. And that's why we moved that way.
>> FRIEDLAND: Okay and on marketing, you know, we haven't--with the Nexus One we've seen,
you know, some ads around the Google network but we haven't seen any sort of more traditional
advertising given that it is sort of a meaningful product launch and you are trying to change
an industry. You know, why haven't we seen a push in that area or are you just telling
us that you are going to use sort of the traditional way, that Google has gotten out there?
>> PICHETTE: Yeah and I think that and then Nikesh will probably have more details on
this. Because we launched the product and, like, it's really a new model and we are trying
to launch with this online store, we did not--all we wanted to do is and we had so much advertising
anyway and marketing around the product itself. We didn't deem necessary to actually push
it in the same way that other, more traditional channels would have done. Nikesh anymore…
>> ARORA: Well, I think Patrick said it and I think we alluded to this in the earlier
call that as Eric said this is a new way for us of selling mobile phones. And clearly,
the first target group that we can go after are the people who like Google, who are the
Google aficionados, people who are online. So, since we are trying to sort of come up
with a model of selling something online, it's perfectly logical for us to do online
marketing for that and as this evolves and as we test it, we can explore other ways of
going forward. >> FRIEDLAND: Okay. Great, thank you.
>> SHIM: Great. Can we take our next question please?
>> And we'll take our next question from Heath Terry from FBR Capital Markets.
>> TERRY: Great, thank you. Eric touched on this a little bit on the call but can you
give us an idea on where you are seeing the most traction in your display efforts? And
you know, as you look at the Double Click ad networks, what are its competitive advantages
and what does the development path look like there?
>> PICHETTE: Look, in terms of display, I think that Nikesh in the way that he portrayed
it a few minutes ago there is really--let me just give the high level answer and then
Nikesh can add color commentaries. There is, you know, the simplification of the process
with Double Click and the Double Click platforms for both the publishers and the advertisers
has made a--so, simplification of all that has made a huge difference and we can see
it in the numbers of people kind of signing up for it. Then obviously, on the performance
and the markets, two other big thrusts that actually are--have good trajectories. So,
maybe Nikesh, you would want to give a bit more in the display itself?
>> ARORA: I think that's very important to understand. If you'll think about the evolution
of the display in market, right? In the early days of display, we've been selling sites
and as we look at it, there has been a huge explosion on the number of sites. There's
millions and millions of websites that you can actually decide to target ads and try
to display ads. Now, the challenge that it creates is on two ends. One, it creates a
challenge in consistency, which is where products like Double Click which creates some degree
of consistency on how ads are served and how they're put across the board and products
like Ad Exchange begin to help because effectively you are trying to create a consistent way
of serving ads in the market. The second part is also that sort of the inefficiency of the
selling side because it's very hard for an advertiser to then go aggregate multiple sites
and try to buy them individually. So, it really helps to have an exchange that it can aggregate
tremendous amounts of inventory. If you do both of those things, then we can layer on
top of that, both contextual and intraspace advertising. So, the best way to think about
is that we're slowing shifting the display behavior to look and mimic what advertisers
have been traditionally used to buying. They have been used to buying audiences on an aggregated,
large scale and the way we are able to put together the Google Content Network, the Ad
Exchange and the Double Click platforms, we are trying to replicate their ability to buy
large audiences. And as that begins to happen and as they are able to target more and more,
you will clearly expect that, you know, it becomes more relevant for them. And therefore
the prices will react accordingly to that relevance to the advertisers.
>> ROSENBERG: Yeah, this is Jonathan and quickly, I would summarize the competitive advantages.
We're making it easy to buy, sell and serve display ads. And one of the things that I
think is particularly exciting which Eric was asked about on the call earlier was this
shifting budget dynamic. One of the things that I think has been positive we've seen
is that with products like display ad builder, we're actually bringing a lot of new advertisers
to display. They can much more easily create display ads now. They can do it directly from
the ad works interface. It turns out they are new advertisers to display and they are
not fundamentally decreasing their budgets in search so; we're winning on both sides.
>> SHIM: Great. >> TERRY: Great, thank you.
>> SHIM: Thanks. Can we take the next question please?
>> And we'll take our next question from Richard Fetyko from Merriman and Company.
>> FETYKO: Thanks guys. In the past, you talked about changes in ad coverage or density of
coverage. I was wondering if you could characterize the changes in the last couple of quarters
if there has been any. And then secondly, on the mobile strategy, I was just wondering
the success that you had with the adoption of the Android operating system for the mobile
devices. What role do you see that playing in your mobile strategy? I mean does that
lead to certain level of certain opportunity for monetization over time?
>> PICHETTE: So, let me answer the mobile first and then I will let Jonathan answer
the first question on the ad coverage. That the whole mobile strategy is built on building
and accelerating an ecosystem and obviously, we have our own mobile teams who have developed
these cool aspects. So, if you think of Vic, sort of all the people know Vic and all of
the really cool applications that you can see through navigations and all the rest.
But it's above the ecosystem that does three things, right? It really promotes innovation.
It has a lower cost of innovation because by being an open source, you kind of enable
everybody to jump in and do it and then as a consequence, you keep an open source. So,
the benefit to us really is twofold. The benefit is users get better applications faster at
market spread faster everywhere. So, think of the spread of high end devices faster at
a lower cost sooner which drives all these applications and so users get a benefit. And
then as a consequence of that, you know, as we've talked before consumers, you know, that
have Android devices we know from our own research they use it like 30 times more than
what a typical handset would be. And in consequence, they do a lot more search and then there's
a lot more advertising opportunities. So, pushing that ecosystem is so critical because
that's where the world is going and if you think in terms of NPV as the image I always
use, right? What's the value of accelerating that? Well, it's huge and it's huge for the
users but it is also huge for us. And that's why we're pushing it in the three dimensions
of, you know, mobile, Android and now what you've heard is the Nexus with handsets to
kind of set the standards at a higher level. So, that's the mindset in which we operate
and we gain the benefit nicely from it and so does the user. Now, for the ad coverage,
Jonathan? >> ROSENBERG: Sure. So, as you know, we really
don't break down the components of the RPM equation specifically to cover CPC or click
through rates. We have told you in the past on a couple of occasions when there has been
a situation where we noticed a dynamic that caused us to make a change which we'd mentioned
a few quarters ago in the past. Right now, I think we're pretty happy with where our
coverage is. We've mostly been focused on improving the quality of the ads themselves
and we've talked to you a bit in the past about the tradeoffs that we make there in
terms of how we decide to take improvements with respect to quality and coverage. I think
the main change that you can probably see is the new formats that we have been launching
which we talked about which basically offer a better experience within our ads rather
than new ads that were not otherwise showing today. So, I don't think there's not a lot
to say in terms of fundamental changes in coverage.
>> FETYKO: Thank you. >> SHIM: Okay, can we have our next question
please? >> And we'll take our next question from Mary
Meeker from Morgan Stanley. >> MEEKER: Hi, Maria, I'll let you be the
bouncer here but Scott and I have a couple of questions. And the first is for Nikesh
and if you'll let us ask the others, we will, if not we'll keep back up. You guys on the
call were obviously very enthusiastic about the growth and monetization opportunities
in YouTube, Mobile, Double Click and enterprise. That said, desktop is still the vast majority
of you revenue. You guys are the ones who'd be getting the inbound phone calls about people
getting more interested in these categories and to Scott Davis' question, the stock market
is not responding that well to your earnings announcement but at the same time you guys
were really enthusiastic about 2010 per your tone and your commentary. Could you give us
a sense of when these new initiatives start to add 100 basis points here and there or
a couple hundred million of incremental revenue to the business? And if not quantitatively,
just philosophically about when they start to move the needle because that would drive
an acceleration in revenue for the company. >> PICHETTE: All right, it's Patrick. Let
me start by saying the following; One is we display as Eric said, right? It's, you know,
already a pretty significant business for us and in the sense that, you know, when he
talks about it is the next billion dollar business and when you take all of the elements
that Nikesh has talked about so if you think of YouTube and you think of all of the elements
that are within it, right? I mean, at some point in the future, right? This will add
up to something, you know, one that we are excited about and two, you know, that moves
the needle and you could argue, you know, in many areas within it, has already started
moving the needle. And then on the other ones, as you said, Mary, they are nowhere near where
the core business is but the trajectories and growth rates that we see and the adoption
rates and the adoption rate on users, I mean gives us, you know, that's why we feel so
comfortable about when we talk about 2010 and beyond, right and building this business
for the long-term. We see a lot of positive trajectories and we have to kind of celebrate
that because two years ago, right, we couldn't have said that maybe about mobile and we couldn't
have said that about enterprise. But two years later when we stand at the end of 2009 and
we look at the great programs from Jonathan's comment of putting a few arrows in the right
places and then just putting more wood around them, we are very pleased about the trajectories
that these have. >> MEEKER: Is there any stuff around it that
you can provide us? >> ARORA: Yes. So, Mary, let me talk to this
more. This is Nikesh. If you just think about our business in the various ways we just talked
about and I want to sort of underline that search is not by sort of by any means exhausted
the scenario where we continue to make progress and we continue to see interest. I would say
we are seeing more and more large advertisers coming in and that's not just a function of
the economy. It's also a function of them having developed their e-commerce capabilities
and worked really hard on having online strategies. So, as they come forth and build their online
strategies across multiple verticals, we are beginning to see a resurgence and return of
those guys into the online space. Having said that, in addition to pure from a direct marketing
and direct response perspective, the next leg which we are beginning to see a surge
is that people are beginning to see the offline impacts of people searching online. So, even
if you have a business where you're not selling something on the web, it is very clear to
most businesses whether they are in pharmaceuticals, consumer goods, autos, that most people, 78%
of the people will research something online which is a significant value to them or a
significant importance whether it is a drug or whether it's a car, before they will go
make that purchase or before they will make a brand affiliation. And so, clearly, you
know, that sort of research is being funded by us and by various agencies out there and
that is continuing to drive that search cycle whilst it is driving down that in some of
the more mature markets, clearly those effects are still to make their way into the emerging
markets and maturing markets around the world. So, I just want to underline that in this
tremendous sort of runway and surge still from where we stand. As Patrick said about
display, again, clearly, you're seeing the shift from people buying sites to where people
are buying audiences and people--they are making it more and more intraspace which that
is how traditional advertisers are used to buying. So, they are buying frequency, they
are buying advertisers, they are often not buying sites because sites over emphasizes
brand affiliation as opposed to interest targeting. I think that trend is going to continue. If
you think about this, sort of the YouTube space and the online video space, I think
we have seen that sort of becoming a relevant part of the media mix as far as online advertising
is concerned. But if you just think structurally in the industry, we are beginning to see the
emergence of professional content on the web slowly both from broadcasters or from sort
of content creators as well as people who provide online video. And as that trend continues,
as that sorts of creates more and more inventory in the online web, we're going to see more
and more people get excited about advertising video to their audiences which I think is
going to be another big leg for the whole industry not just for us. And if you should
continue that story Jonathan talked about mobile, and Patrick talked about mobile, again
as we see the emergence of the smart phones and devices like the Nexus One continued sort
of success of various devices from various manufacturers around the world. We're again
going to see the search traffics begin to move in that direction. So, clearly, you know,
all those things are on the right direction. And of course, you know, as Eric alluded to
earlier on the enterprise side, we are seeing this big shift on cloud computing. We are
beginning to see large customers and even parts of the government, the City of L.A.,
start to take or make inroads into those customer segments and clearly, other people will watch
those customers and gain strength from those and start to convert. So, in and across the
board, I think I'm very positive about the potential end prospects of each of those business
lines. Again, you know, as Patrick said and Jonathan said, we can't actually comment on
when these things will materialize in a quarterly basis but again, we've remain convinced that
this is a good long term trend. Does I give you enough flavor, Mary?
>> MEEKER: Thank you. Thank you very much Nikesh and Patrick.
>> ARORA: Thank you. We'll go the next question. >> SHIM: Yeah.
>> ARORA: Sorry, Mary, we'll go for the next question.
>> I apologize; we're going to take William Morrison from Think Equity.
>> MORRISON: Hi, just a couple of quick modeling questions Patrick. How should we be thinking
about tax rate in 2010 and, you know, and then on CapEx, you know, before the recession,
you guys were kind of consistently spending, you know, somewhere in the low teens as a
percent of revenue on CapEx and that came way down last year. I am curious, you know,
should we be expecting CapEx to ramp back up to 10+ percent of revenue or any commentary
around CapEx? >> PICHETTE: Okay, so, William thanks for
your question. The usual suspects continue to be OI&E, CapEx and tax rate and this quarter
is no different than the prior quarter. So, just to give a bit of color quickly on each,
the tax rate has been quite stable, you know, through the year and so the big issue that
we focused on the tax rate because, you know, it gets affected by mix and a few other things.
But the real fundamental issue is legislation for us rather than in this quarter or next
quarter so, I think that there's nothing in our tax rate that is affecting it more if
you think in the long-term than any of these big legislations. And that's why we are focused
on them because I think it is really important for the U.S. economy and for U.S. companies
that are participating internationally to get this right because there are so many jobs
in the U.S. associated with them. So, that's on the tax side. On CapEx, I mean, you know,
sometimes, you know, people say, Patrick, you say this too often but, you know, it's
true. I'm really pleased with our CapEx numbers. I think that we are ramping back up. We're
ramping back up at a much lower level than what it has been historically but we are ramping
back up and every opportunity that we have to make sure that we meet capacity or we meet
CapEx, we will fund everything fully. We've been really fortunate in 2009 that we've had
a couple of good breaks in terms of capacity utilization, a bunch of chip sets that worked
on our favor in terms of performance as we discussed before and all this. I mean we just
dropped right to the bottom line. That's fantastic to us and to our shareholders and we'll continue
to monitor that very closely. So, that level, what you should take away is, you know, we
are going to continue that level of discipline. If you allow me to close on OI&E again, big
variability quarter-over-quarter so, everybody who has their crystal ball on both the variability
of FX as well as just variability in general between FX exchange rates and, you know, it
drives so much of our FAS 133 that you see the big swing this quarter hit once again
but in the other direction. And it was also, you will remember I said in the previous call
that we had taken so much accelerated write offs of our previous hedges portfolio that
we had so much of it written off that, at some point you get some benefit in the short-term.
So, that's what happened. And then also people should know that we have started moving off
as we've discussed in the previous quarters. We've been so focused during the crisis of
late 2008 or early 2009 of cash preservation to make sure we do not put at risk the cash
we had accumulated. And then over the last couple of quarters, we've begun the transition
to a more balanced portfolio. So, you also see there the proper, you know, ramp up in
yields there as well. So, these are the big ticket items that usually fluctuate or you
have questions on the P&L. So, I am glad you asked the question, William, thanks.
>> SHIM: Thanks, can we take our next question please?
>> And we'll take our next question from James Mitchell from Goldman Sachs.
>> MITCHELL: Thank you for taking another question. I believe you mentioned on the fourth
quarter 2008 results call that the quarter was "one of our strongest quality improvement"
whereas on the call just now you mentioned that the quality launches are more modest
in terms of impact on monetization. Is it fair to infer that fourth quarter 2008 revenue
benefited more from ad quality initiatives versus fourth quarter 2009 revenue?
>> PICHETTE: That's a pretty hard question to fully parse without my actually going back
and digging into the data. It is consistently the case that we freeze quality improvements
after Thanksgiving. So, I would have to actually look at what the exact improvements were and
when they occurred intra-quarter comparing Q4 this quarter to Q4 last quarter and without
actually having that in front of me. It's pretty hard to say.
>> MITCHELL: Okay, thank you very much. >> SHIM: Can we take our next question please?
>> And we'll take our next question from Mark Mahaney from Citigroup.
>> MAHANEY: Thanks. There was a recent deal with Twitter in terms of live feed. Jonathan,
you mentioned your own anecdotal uses of it. Can you make any broad comments about what
kind of impact that you think that that had on overall usage? Have you found any levels
of greater engagement because of the inclusion of real time, you know, Twitter results in
your overall search results? Anything in terms of click through rates, length of time or
number of searches or anything like that? Thank you.
>> ROSENBERG: I'm not sure I have any great data to offer you there. The sets of things
that we're now incorporating in the real-time search are Tweets, blogs, news. We certainly
see those dynamics when you have something that is very interesting like an earthquake.
So, the feature we think is certainly performing well and it is giving people better quality
results much more expeditiously than they previously had. But what the overall impact
is across search and each of the other metrics, I think it's still too early to say.
>> PICHETTE: I think it is worth saying that in the last--again, if you go back in the
last 6-9 months, the thing that continues to amaze me on the search side is how people
almost take it for granted that search works. And when you look at the last 6-9 months,
like real time search introduction, which was really done in the second half of this
year, the complete overhaul of the caffeine so, that, you know, from a speed perspective
and tying it all back again to the mobile. I mean it is amazing the kind of searches
you can do right now, just typing a few words that even six months ago, you wouldn't have
dreamed of doing. So, from that perspective I think that it was really important to us
to get real time search up and running because there are a lot of types of information that
people want on a kind of an actual basis because it just happened and having these feeds provide
so much value. So, in that sense, I think that there's no doubt that they are having
an impact. Now, for the--that the issues we haven't asked an economics team that actually
can run these models, you know, give me a sample and then run the experiment and so
it is a good question to ask but there is no doubt that it clearly improved the experience.
>> MAHANEY: Can I also ask a quick question on China? Is there a solution here whereby
you can stay committed to China in the future and not censor search results? Is there some
sort of work around down that? >> PICHETTE: Now, look, you know, the team
is working on this and I think it's really important that we stick to Eric's comments
of earlier this afternoon. So, I just refer you back to his comments.
>> SHIM: Okay, thanks. Could we take the next question please?
>> And we'll take our next question from Benjamin Schachter from Broadpoint Am Tech.
>> SCHACHTER: Patrick, a couple of sort of housekeeping modeling questions and then Jonathan,
one for you. On the housekeeping front, can you give us some specifics on how you're accounting
for Nexus One products being sold? Are you taking inventory? How do they go through the
P&L? And then also on gross margin, it obviously is trending up significantly from lower CapEx.
Is there anything that is going to offset that any time soon? And then, Jonathan, if
you could, CPA product ads, you know, I know it's still the early stages here but how widespread
are they? Where are we in the rollout of that product and your general thoughts on the product?
Thanks. >> PICHETTE: All right, so, let me start with
the specific of Nexus One. The Nexus One, I mean we have partnerships as you know with
TMobile with that specific handset right now. Actually, we book them to other revenue so,
the revenue comes as other revenue and we recognize the full $529 per device up front.
So--And that is tied into the licensing in other revenue. And then--and that's regardless
if it's an unlocked phone or a TMobile phone. And then in terms of the gross margin, I'm
sorry, the cost obviously goes to other costs. And on the gross margin, I think that the
thing that you've noticed properly that, you know, over the last two quarters, you know,
not only did CapEx run well. But because CapEx ran well, also our data center expenses as
we continue to kind of push for efficiencies, we got some benefit out of that as well. And,
you know, again, can't push forward to give you any details on the future but you should
take comfort that we're actually really managing these efficiencies quite well right now. One
last point, Ben, that you talked about on the Nexus, on the inventory side it is really
immaterial to us. I mean, it is inconsequential. So, you know, we don't have a big exposure,
either on the inventory and clearly not on margin. So, I'll turn it over to Jonathan.
>> ROSENBERG: Yeah. Hi, Ben. The product ads I think are still occurring on a relatively
small portion of the queries. I was trying to come up with an example here and it took
me a couple of tries. Jogging strollers, if you type into Google will show you one. But
I think it's a small portion of the queries. There's certainly a lot of interest from the
advertisers. We started by focusing on the larger retailers and it was just a relatively
small number of them. But it's a great ad experience for users because you see the pictures,
you see the prices. It gives users a lot more information to help them decide which product
to buy. So, I'm very excited about the form but I think right now it's still in pretty
nascent stages in terms of the number of participants and the degree to which it shows itself in
the results. >> SHIM: Great, can we have our next question
please? >> And we'll take our next question from Justin
Post from Merrill Lynch. >> POST: Hi, I just want to talk about the
CapEx efficiencies. Really when able to pull back your CapEx budget and just going forward,
do you think you can still see a lot of efficiencies or do you think you just kind of need to ramp
up as you see growth kind of reaccelerating? What is your view on that?
>> PICHETTE: It's a tough answer to give for the following reasons and I don't want to
be evasive here but here's the real issue is because Google, as you know does its own
data centers and most of its equipment is built and designed by ourselves. All you need
is, you know, by pushing hard on the limits of this equipment and working really hard
to make sure we get good performance. You get a couple of good breaks and as you see
in the last 12 months, we got a really nice break from a CapEx perspective. And, you know,
in the future, we're obviously pushing the team for utilization and design to make sure
we get as many of those as possible. You know, what's the beta on that? It is pretty high
but every time you get one, right, you get a lot of value and you have at least, some
evidence we are pretty good at it. So, there lies the tension but I have Justin with, you
know, because I am not just assembling stuff that is off the shelf from regular products
and I can give you the exact forecast and life goes on, it is much more difficult to
actually answer your question. Having said that, well, there's no doubt as you can see
in the last 12 months. The level of commitment that we have in making sure that we're going
to be capital efficient and on the flip side of that, if we ever needed to actually ramp
up our CapEx for whatever reason, we're ready to pounce as well. So, that's the balance
we are trying to strike. >> POST: Thank you.
>> SHIM: Great, can we take our next question please?
>> And we'll take our next question from Brian Pitz from UBS.
>> PITZ: Great, thanks. Just quickly regarding China, I know what you guys have said so far.
But help us think about something for a second. If you in fact made the decision to leave
this market, do you think you would still operate your AdSense and/or apps businesses
which are, you know, pretty much unrelated to censorship in the region? Thanks.
>> PICHETTE: Yeah, I think. Again, I am going to ask everybody to be patient over the coming
weeks as we are working through the resolution of this issue. I think that Eric was quite
eloquent in what he tried to kind of communicate. The blog post was very clear as to the objectives
we have and Eric was quite eloquent in trying to. So, I would circle back to his answers.
And just, you know, in a way, work with us as we have over the coming weeks and as you
can imagine that we are working really hard at this and as soon as we have more information
we'll let you know. >> PITZ: Thanks.
>> SHIM: Okay, can we take one more question please?
>> And we'll take our next question from Spencer Wang from Credit Suisse.
>> WANG: Thanks for squeezing me in. I was wondering, if we look at the international
markets, I was wondering as you guys have wrapped up to 2009 and 2010, which geographies
do you think you have the most opportunity to gain incremental share in search? Thanks.
>> PICHETTE: In search, I think the answer is yes. I mean you'd expect to have in every
area with the kind of product rollout that we have and the focus that we have. I wouldn't
say that we, you know, we are favoring one market versus another to actually push. I
mean there are just clearly, you know, the world is really divided into kind of three
sets of markets as Nikesh always pointed out right? We have the very mature markets of
the U.S. and the U.K. then you have, you know, the next tier of kind of somewhat mature markets
but, you know, with a lot of headroom which is the kind of big European countries, Japan
and all of the kind of industrialized nations of that nature. And then you have all of these
other emerging economies that actually are very promising--very different in CPC but
very promising. And, you know, we have a balanced set of approaches for each of them because
they are just so different in terms of where they are and that's why, you know, even the
marketing is different for each of them because of the different circumstances. So, our objective
is to continue to actually increase our share of search by having the right both kind of
total global products but also pushing on localization with languages and everything
else that you hear from us. >> WANG: Great, thanks.
>> SHIM: Okay. >> PICHETTE: Thank you. Maria--when I close--I
want to--Mary, it's funny or somebody else, I think it was Mary that I've talked about,
you know, we feel optimistic about 2010. I think that we have had and we were very optimistic
for the reason that we see great trajectories from our 2009. I think Eric said it very well.
2009 was a real year of testing. We tend to forget how fast 12 months has passed. But
I mean, the roller coaster that we went through over Q1, Q2, Q3 and Q4 of this year; we're
delighted to see the recovery in terms of our kind of think the growth rates, the performance
of the business and the innovation that we drove through 2009, so, from that perspective,
that's why the company feels confident about, you know, not only 2010 but its long-term
prospects in all these areas. So, with that, I'd like to thank everybody for your great
questions and I look forward to seeing you at the end of Q1. Have a happy New Year everyone.
Cheers. I'll leave Connie to close the call. >> Thank you and this concludes today's conference.
We thank you for your participation.