Q3 2011 Earnings Call

Uploaded by GoogleIR on 13.10.2011

>> Operator: Good day, everyone and welcome to the Google, Inc third-quarter 2011 earnings
conference call. This call is being recorded. At this time, I'd like to turn the conference
over to Ms. Jane Penner, Head of Investor Relations. Please go ahead, ma'am.
>> Jane Penner: Good afternoon everyone, and welcome to today's third-quarter 2011 earnings
conference call. With us are Larry Page, Chief Executive Officer, Patrick Pichette, Senior
Vice President and Chief Financial Officer, Susan Wojcicki, Senior Vice President, Advertising,
Nikesh Arora, Senior Vice President and Chief Business Officer. First, Larry, Patrick, Nikesh,
and Susan will provide us with their thoughts on the quarter. Also, as you know, we now
distribute our earnings release through our investor relations website located at investor.
Google. com so please refer to our IR website for our earnings release, as well as supplementary
slides that accompany the call. This call is being also Webcast from investor. Google.com
A replay of the call will be available on our website in a few hours.
>> Now, let me quickly cover the Safe Harbor. Some of the statements that we make today
may be considered forward-looking, including statements regarding Google's future investments
and our long-term growth and innovation, the expected performance of our business and our
expected level of capital expenditures. These statements involve a number of risks and uncertainties
that could cause actual results to differ materially. Please note that these forward-looking
statements reflect our opinions only as of the date of this presentation, and we undertake
no obligation to revise or publicly release the results of any revisions to these forward-looking
statements, in light of new information, or future events. Please refer to our SEC filings
for a more detailed description of the risk factors that may affect our results.
>> Please note that certain financial measures we use on this call, such as operating income
and operating margin, are also expressed on a non-GAAP basis, on a non-GAAP basis and
have been adjusted to exclude charges related to stock-based compensation. We've also adjusted
our net cash provided by operating activities to remove capital expenditures, which we refer
to as free cash flow. Our GAAP results and reconciliations of non-GAAP to GAAP metric
measures can be found in our earnings press release. With that, I'll now turn the call
over to Larry. >> Larry Page: Well, thank you, and it's great
to be here, and thanks for taking the time to be with us today. When I look back over
the last quarter, the word that springs to mind is gangbusters. Revenue was up 33% year-on-year
and our quarterly revenue was just short of $10 billion, not bad for a 13-year-old. I'm
also incredibly excited about the progress we've made on the product side. Ever since
taking over as CEO, I have focused much of my energy on increasing Google's velocity
and execution, and we're beginning to see results.
Look at Google Plus. We had 100 features launched in 90 days, the team is really cranking. We
had hangouts on the phone, hangouts on air, Will.i.am did a hangout from his concert
in Central Park, you can now share circles, you can search Google Plus, and you can play
games in Google Plus, and far most exciting of all, open sign-ups, Google Plus for everyone.
Looking at the numbers for Google Plus, I was taken aback. I now want to announce that
we've passed the 40 million user mark on Google Plus. People are flocking into Google Plus
at an incredible rate, and we're just getting started.
The engagement we're seeing is phenomenal too. Over 3.4 billion photos have already
been uploaded in Google Plus, but it's still incredibly early days for Google Plus, because
our goal is actually far bigger than the individual feature launches themselves. Our ultimate
ambition is to transform the overall Google experience, making it beautifully simple,
almost automagical, as we understand what you want and can deliver it instantly.
This means baking identity and sharing into all of our products, so that we build a real
relationship with our users. Sharing on the web will be like sharing in real-life across
all your stuff. You'll have better, more relevant, search results and ads. Think about it this
way. Last quarter, we shipped the Plus and now we're going to ship the Google parts.
The new visual design, beautiful consistent UIs for Search, News, Maps, Translate, and
lots of other features is only the beginning of that process.
Last quarter, I talked about focus, and we've made great progress here too. To create products
that really change people's lives, that they use every day 2 or 3 times a day is really
hard, so we have to make tough decisions about what to focus on, or we end up doing things
that don't have the impact that we strive for. Since we last spoke, we've begun the
process of shutting over 20 different products including Sidewiki, Google Pack, Google Notebook
and Fast Flip and we'll continue to simplify and streamline our products going forward.
This prioritization is crucial if we are to really invest in the extraordinary opportunities
in front of Google today. Let me give you a few examples. Chrome. Usage
is going through the roof. We've now hit over 200 million users, and still growing fast.
Turns out that people really care about getting to the web quickly and securely and having
a whole ecosystem of apps at their fingertips. I'm super pleased with Google Maps, it's a
favorite with our users, especially on mobile devices. In August, we launched in 40 new
countries, taking our total to 130 countries. The growth of Android is mind-boggling too.
Over 190 million devices have now been activated globally. I'm super excited about the soon-to-be
released new version of Android called Ice Cream Sandwich. That's right, Ice Cream Sandwich.
You won't believe what we've managed to get done in this release. We're also seeing a
huge positive revenue impact from Mobile, which has grown 2.5 X in the last 12 months
to a run rate of over $2.5 billion. Generally, I have found that high-usage products
will make a lot of money over time for well-managed technology companies, and that's why it's
so important to run these businesses for the long-term. That said, we must never lose sight
of the fact that today's revenues and growth serves the engine that funds all of our future
innovation. People are a crucial part of Google's long
term success, since great companies are no greater than the efforts and ingenuity of
their employees, so our goal is to hire the best people at every level and keep them at
Google. Our hiring has to be manageable if we are to balance our short and long-term
needs. You may have noticed quite substantial hiring this quarter driven in part by a lot
of University graduates, despite the seasonal effect, the total number of people we hired
was about the same as last quarter. Our attrition remains low, which is great, though obviously
contributes to our overall current headcount. As I have said previously, I continue to believe
that our headcount growth is the edge of what's manageable.
Let me finish by saying that we are still at the very early stages of what technology
can deliver. These tools we use online will look very different in 5 years time. We're
building those tools now as Google Plus, which is why I'm so excited to be here. So thank
you, and again, we had a great quarter, and now I'll turn it over to Patrick.
>> Patrick Pichette: Thank you, Larry. Good afternoon, everyone, and thanks for joining
us. Let me first turn to the specifics of our performance in the quarter from a financial
perspective. Our gross revenue grew 33% year-over-year to $9.7 billion and 8% quarter-over-quarter.
Note that while some currency fluctuation boosted our revenue again this quarter, a
little bit, even in constant FX terms, our growth rates remain very strong.
Our Google website revenue was up 39% year-over-year to $6.7 billion, and 8% quarter-over-quarter
with strength across most major geographies and verticals in fact. Our Google network
revenue was up 18% year-over-year to $2.6 billion, and 4% quarter-over-quarter. On the
one hand, year-over-year network revenue growth slowed slightly, due to a few factors including
the Search quality changes that we made earlier this year that we already commented on. On
the other hand, the momentum of our Display business which comprises only part of the
network line, continues, and I guess we'll have more to say on this in a few minutes.
Our other revenue was up also 52% year-over-year to $385 million and that was up 24% quarter-over-quarter.
Our global aggregate paid click growth was very strong, up 28% year-over-year, and up
13% quarter-over-quarter. The corollary, the aggregate cost per click growth was up 5%
year-over-year and down 5% quarter-over-quarter. Remember, too, that doesn't aggregate number,
which includes both Google.com and our AdSense properties. As usual, there's some variability
quarter-over-quarter in these metrics, but overall, we continue to be very pleased with
our revenue, and the performance of our ad system. Again, Susan will give you a few more
comments in a few minutes. So turning to our geographic performance,
the US and rest of world are growing at a very healthy pace, and our results clearly
reflect that. Even the UK continues to show some positive momentum. In our earnings slides,
which you'll find on our investor relations website, you'll see that we've broken down
our revenue by US, UK, rest of world to show the impact of FX and the benefits from our
hedging program, so please refer to those slides for the exact calculations.
Our revenue from the US was up 26% year-over-year to $4.4 billion. Our non-US revenue accounted
for 55% of total revenue or $5.3 billion, up 41% year-over-year, which includes a modest
$1 million of benefits from our hedging program and this is compared to $89 million benefit
in Q3 of last year. The UK was up 25% to $1 billion, and year-over-year growth in fixed
FX still is pretty healthy and would have been 20%, or is 20%.
Let me now turn to expenses. Our traffic acquisition growth and costs were $2.2 billion or 23.7%
of total advertising revenue and our other cost of revenue was $1.1 billion, which excludes
stock based compensation of $72 million. Finally, operating expenses, also excluding SBC, totaled
$2.8 billion and SBC itself totaled $499 million in Q3. So our increased year-over-year
in SBC is primarily due to the annual equity refresh, which we do at this time of year,
and the increase in year-over-year for our OpEx was primarily due, as usual, in payroll,
increased professional services and advertising and promotion spend. So as a result of all
this, our non-GAAP operating profit was $3.6 billion in Q3, which excludes SBC, and are
resulting in non-GAAP operating margin of 37.3%.
Headcount was approximately up by 2,585 versus Q2, ending the quarter with 31,353 full-time
employees, and as Larry already noted, there are 2 factors at work here. Q3 usually has
significant headcount additions, and this quarter is no exception, due to a bumper crop
of University hires. In fact, we had the second highest number of University hires in Google's
history this quarter. Additionally, acquisitions this quarter added a large number of people
as well. Our effective tax rate was 19% in Q3, flat with Q2, and the lower tax rate is
driven by a mix of earnings between domestic and international subsidiaries.
Now, let me turn to cash management. Other income and expense was $302 million for Q3.
OI&E was driven by strong portfolio management performance and additionally, we saw lower
than expected FX cash flow hedging expenses, due to the strengthening of the US dollar
in September. For more details on OI& E, again please refer to the slides that accompany
this call on our IR website. Operating cash flow was very strong at
$4 billion. Our CapEx for the quarter, down from last quarter, to $680 million and the majority
of the CapEx once again in Q3 was related to facilities and production equipment and
as a reminder, we continue to make these significant investments in CapEx and these have shown
to be lumpy from quarter to quarter, depending on where we're able to make these investments.
We're very pleased with our free cash flow and consequence of all this which was $3.
3 billion. So before handing it over to Nikesh, I know
that many of you have had questions about general economic outlook and have been kind
of asking us those questions. Look, what we're seeing is not terribly surprising or different
from what you're all seeing, watching on TV, reading in the press. And while obviously
we don't control the economy or the exchange rates that fluctuate so much, we do very much
control our own operating agenda, and that's why we will, as always, stay focused on what
we control our agenda for the long-term, with a strategy and investments that are not calibrated
for quarter-to-quarter views but really designed to create, as Larry said, fantastic products
that transform our users' lives and create significant value for our shareholders. With
that let me hand it off to Nikesh, who will cover details in our sales performance this
quarter. Nikesh? >> Nikesh Arora: Thank you, Patrick. I'll
give you an update on our business activities. To reiterate what Patrick said, we saw strong
performance across our portfolio, supported by the strength of our products. Our sales,
customer support, marketing and partnership activities drove $9.7 billion in revenue
this quarter. First let me talk about results for our advertising
products, then our performance by region, and finally, some highlights from our amazing
marketing team. On Search, our core desktop search business maintained its momentum. Google.com
growth was faster than one year ago. Our syndicated search revenue also accelerated
this quarter, with new large global deals contributing to our growth. We're monetizing
clicks better by working closely with our clients to grow the value of Search advertising. What's
interesting is, we're increasingly able to link search marketing efforts to both online
and offline sales with various other media. This quarter, we worked with our clients such
as leading apparel retailer H&M to promote sales through classic search campaigns, additionally
clients like J&J and Sharpie use search advertising support large online branding campaigns with
other media like YouTube and our Google Display Network.
Moving on to Display, growth this quarter was robust. With products like YouTube and
Google Display Network, we're giving advertisers more options to engage with their customers
online. What's interesting is we've seen a marked increase in our average spending since
2009. 2009, our top 20 Display deals averaged approximately $2 million each and now, when
our top deals are over 7 times larger, averaging approximately $15 million each.
Some of our biggest Display campaigns this quarter from came DreamWorks and Disney, we've
launched Space Lab, a partnership between YouTube and Lenovo, this is a video competition
for 14 to 18-year-olds in which winners will have the opportunity to send a science experiment
to the International Space Station. So we keep doing interesting things to try and keep
driving more usage and more revenues for YouTube and our Google Display Network. We have equally
strong traction with our ad agency partners, with whom we're very excited about the partnerships
we've developed. Just over the past 6 months, we've signed Display deals with agencies which
total almost $600 million to help deliver online advertising options to our shared customers,
which are part of our Display initiative. Next turning to Mobile advertising. Larry
mentioned $2.5 billion, as a run rate. Our revenue growth continues to accelerate, even
in mobile, driven primarily by mobile search. This growth obviously is driven both by the
underlying expansion of Android devices and tablets as well as stellar performance by
our sales teams, while working closely with our customers to help them craft compelling
mobile advertising solutions. Many advertisers have greatly increased the size and frequency
of their mobile campaigns, mobile is becoming a must-have. This includes clients like Intercontinental
Hotels Group, which spans pretty much across our entire portfolio of properties, including
Mobile Search, Mobile GDN and AdMob. Moving our sites to enterprise, we see continued
revenue acceleration in our enterprise business, more companies are fundamentally going Google.
Our apps products continue strong growth with the recent app wins with people like Goodyear
and SoftBank of Japan. We're particularly excited obviously, also, that we've just deployed
apps to 450,000 teachers in Morocco. Finally, Chromebooks have been available for purchase
since mid-June and we're beginning to see lots of interest and good uptake, both from
the businesses and educational institutions. Let's shift gears and look at our country
performance. If you look across countries, we continue to see strong business growth
despite uncertainty in the global economy. In particular, North America was broadly stable
this quarter, US revenues have stayed on their growth trajectory, and Canada has actually
accelerated. In much of Western Europe, we have seen some softness in ad sales; however
in markets like Spain, we are seeing that our sales execution efforts are continuing
to keep our revenue stable and in some cases accelerate the revenue growth. Of course,
across Asia and our key emerging markets we grew much faster. Japan's post-earthquake
recovery has continued, and has been driven primarily by large advertisers. We also see
revenue growth in Australia, India, Brazil. They are all strong and they continue on the
strong growth trajectory. Finally let me spend a few minutes on marketing
and partnerships. Our marketing and partnership programs continue to help scale and grow usage
of our products. To start, we're very proud of our Get Your Business Online program. This
is a campaign which basically, we work with our partners, we help small businesses and
bring their companies online. This is great for the business, it's great for the economy,
and this is great for future add spending, so during Q3 we helped 7,000 US businesses
get online in places like Texas, Vermont, Kansas and Missouri.
We also drove multiple customer launches this year. Our teams have helped expand the footprint
for Google Offers, our Deals business to about 11 cities in the US, after our pilot last
quarter in Portland. Additionally, we continue to grow Chrome user base, which I talked about,
the penetration continues to go with our campaign called The Better Web Campaign. We've laid
the foundation for Chrome Books, which I talked about. If you haven't had a chance, if you
fly Virgin America, you might have the opportunity to surf on a Chromebook in flight. Finally,
we've supporting the growth of Google Plus which we're very excited about, building a
richer user experience by connecting users and prominent public figures, celebrities,
including Will.i.am from right on stage, Britney Spears, Richard Branson just to name
a few. In closing, we had a phenomenal Q3 and we
hope to continue the good work for our customers, partners and users in Q4. I'll now turn it
over to my partner and colleague, Susan, who will discuss the product performance this
quarter. >> Susan Wojcicki: Thanks, Nikesh. Let's start
by talking about Search. We had another great quarter for Search quality, with over 100
launches. We improved our preview feature, so that when you hoverer your mouse over search
results, a large thumbnail of the site appears on the right. We also expanded the site links
feature to include more links, with full snippets for each link.
A good example of this is when you search on Metropolitan Museum of Art. You can see
links to exhibits, the store, and general information. What I love about features like
these is they magically make Google easier to use.
The same goes for our new speedy flight search option. When you enter a query like SFO to
JFK, and then click on the flight link on the left-hand side panel, you can see all
of the different flight options. You can sort it in a variety of ways, airline, pricing,
non-stop, times, and bring up a map that shows the flight route and other potential destination
and prices. Flight search combines ITA expertise with Google technology. We are still very
early with the product. Think of this first version as the take off, not the final destination.
Turning to our ads business, as Patrick mentioned before, our revenue growth was very strong.
We are pleased with the paid click growth, which increased this quarter, while keeping
ad quality high. After a number of quarters of strong CPC growth, we continue to see year-on-year
CPC growth. As we have said in the past, these average CPC metrics incorporate a number of
factors, including mix effects such as mobile and emerging markets as well as true changes
to keyword prices. It's also important to look at clicks and CPC metrics together, since
more clicks can often lead to decreases in average CPC and vice versa.
We also made a number of improvements to our core advertising product. Starting with the
local and the small business market, we launched AdWords Express in the US, and started product
trials in the UK, Germany and France. There are a lot of businesses who want to advertise
online, and they haven't done so because they're too busy running their business. AdWords Express
makes it possible for these businesses to start running an ad campaign in just a few
minutes. The advertiser gives us some basic information, and we do all of the rest, the
keywords and the bids are automated. We're excited about this product because we believe
it's the first time we've successfully simplified all aspects of AdWords, while keeping its
effectiveness for local and small businesses, and the results so far are quite positive
with our advertisers. With regard to the local market, we also expanded Google Offers to
11 cities, the latest launch was in Miami last week.
On the other end of the spectrum are large businesses and agencies. We made a number
of significant improvements to Google Analytics this quarter, since we know when site owners
have more insights into site traffic, and better information about how to optimize their
campaigns, they tend to increase their spend. This quarter, we launched multi-channel funnels
in Google Analytics. This gives marketers aggregate information an insights into the
full path to conversion, including clicks from paid and organic searches, and Display
ads, not simply the last click, so advertisers can tell which marketing and ad programs are
working. We also added realtime reporting to Google
Analytics, so that marketers and publishers can see what is happening on their site right
now. This is especially useful to measure the immediate impact of social media, so if
you put up a new blog post, or you send out a Google Plus update, you can instantly see
what happens to your site traffic. We also launched a premium version of Analytics with
more data, advanced tools, dedicated support and service level guarantees.
Nikesh mentioned how well things are going with Display advertising. From a product perspective,
we would like to highlight interest category marketing. We completed rolling it out to
all advertisers at the end of Q2, and since then thousands of advertisers have signed
up and the annual run rate has doubled. With interest categories, we look at the types
of pages a user visits, and associates their browser with relevant interest categories
such as ecotourism, mobile phones or hybrid cars. Then advertisers can show that user
relevant ads across all types of sites. Users can opt out at any time, but the results of
interest category ads is that they are more useful to users and more effective for advertisers,
which in turn leads to higher returns for publishers.
We are making it a lot easier for advertisers to set up and manage video ad campaigns on
YouTube and the Google Display Network as well. We began beta testing AdWords for video,
which integrates video buying campaigns directly into the AdWords interface. The momentum around
Google Plus is starting to apply to our ad products as well. Users can now plus-one Display
ads on the Google Display Network and have plus one buttons on search ads and results
since the end of Q1. Although it's still pretty early, our data shows us that ads and results
that are socially annotated are more relevant for users.
Finally, we shipped Google Wallet to Sprint Nexus S 4G phones and started working with
Visa, American Express and Discover as partners so their cards could be added to future versions
of the apps. This morning I bought my latte using my phone as a wallet. I'm looking forward
to leaving my traditional wallet at home in the future. That's it for now. Thanks, and
back to Patrick. >> Patrick Pichette: Thank you, Susan. So,
we'll circle back with Jamie to open up the call and take your questions. Thank you, Susan,
Nikesh, and Larry so everybody grabs their handset and we're ready to go, Jamie. We'll
look for your instructions. >> Operator: Thank you. (Operator Instructions).
We'll take our
first question from Brian Pitz with UBS. >> Brian Pitz: I've noted the proliferation
of newer richer ad formats like product listing ads. Can you help us to understand the impact
on your financial model? Are they more or less profitable to you, and then secondly,
on your comments on western European ad sale softness, is the softness across all formats
or are Mobile and Display holding up generally better? Thanks.
>> Patrick Pichette: Thank you for your question, Brian. I think I'll ask Nikesh to answer that.
>> Nikesh Arora: Yes, I think we are constantly improving Search as well as improving our
ad format so if you look at our revenues, we are always there trying to drive new ad
formats to our customers, because we believe they provide better information, both to the
user as well as their bid for the advertiser. Effectively, I'm not going to comment on the
profitability of the ad formats, except for the fact they are great for users and advertisers,
and if good ads are delivered and users click on them more, obviously, it will have impact
on the financials. I think you can figure that one out.
In terms of my comment on the western European ad sales, it was more of a relative comment
vis-a-vis prior quarters as opposed to an absolute comment about softness. Generally,
we're seeing the economic impact in some of those markets might flow through to some of
these things, but it's just mildly soft and we're generally comfortable, generally, grades
are going up, people are happier with Mobile, people are happier in Display, we're seeing
Search query growth so it's a bit of a mix across-the-board but it's a slight softness,
not weakness. >> Brian Pitz: Great, thanks.
>> Patrick Pichette: Thank you for your question. Let's go to the next question please?
>> Operator: We'll go next to Mark Mahaney with Citi.
>> Mark Mahaney: Thanks. On that pay click growth, that's real sharp acceleration, yet
the organic revenue growth didn't sharply accelerate, so could you just provide some
color on that? Is that just this market shift towards Mobile searches? What's driving that
and secondly, what's behind that other revenue, that really spiked as well? Thank you very
much. >> Patrick Pichette: Thanks, Mark. I'll let
Susan take that. Susan? >> Susan Wojcicki: Yes, hi, Mark. So there
were certainly a number of factors at play in terms of the CPC and the paid click growth,
but the most important thing that I want to emphasize is that it's really important to
look at these 2 factors together, since they often move in reverse from one another. The
other thing is there certainly was a mix factor, where we do see changes in our mix, and that
sometimes does have impacts on how our CPCs are, how the aggregate winds up being affected.
>> Patrick Pichette: Just on other revenue, let me comment on the other revenue. It really
is the year-over-year impact of ITA, so Mark, that's really the key issue there.
>> Mark Mahaney: Thank you very much. >> Patrick Pichette: Thank you. Let's go to
the next question please? >> Operator: We'll go next to Spencer Wang,
with Credit Suisse. >> Spencer Wang: Thanks for taking the question.
Just 2 quick ones if I could. First, Larry, on the $2.5 billion Mobile run rate revenue,
could you give us a rough sense of how much of that is Mobile search versus Display, perhaps,
and then the second question relates to the people strategy. Given Larry, what you said
about being at the edge of what's manageable, should we expect headcount growth to moderate
in Q4 and into 2012, and are you contemplating any sort of adjustments to base salaries,
as you saw earlier this year? Thanks. >> Larry Page: Yes, thanks for the question
there. And I think that we're not going to break out more than we've already given you
there, so we thought it was important to show the tremendous success of our business, and
so we wanted to give you a nice milestone for that, but we aren't going to break out
more data. And also about headcount, like I said, I'd already said we're at the edge
of what's manageable in terms of our headcount growth, and you see the numbers, as I said,
were consistent with last quarter. I think we are always running our business very carefully
and prudently, and making sure we're investing in the right places, and we make those kind
of decisions every day, and we don't give guidance on what we're going to do in the
future. >> Spencer Wang: Great, thank you.
>> Patrick Pichette: Thank you. Let's go to the next question, please, Jamie?
>> Operator: We'll go next to Ben Schachter with Macquarie.
>> Benjamin Schachter: Hi guys, congratulations on the quarter. A couple questions. First,
could you discuss the strategy around video content? It seems to me there's sort of UGC,
premium and then, all the stuff in between. Is that how you're thinking about it, and
if it is, how are you thinking about emphasizing each area, and then just quickly on emerging
markets, you mentioned India and Brazil. Any chance you could quantify some of that, how
fast are these markets growing, how big are they overall some are these top 10 markets?
How big are they in the overall scheme of the different countries? Thanks.
>> Patrick Pichette: Ben, thanks for your question. I think we think about, certainly
YouTube is just tremendously successful, and it's growing gangbusters in every way, and
we see that site as redefining ways we think about video and I'd also note that it's a
very small percentage of people's overall video usage still, so we see opportunities
for tremendous growth there. I think the other interesting thing about YouTube is it really
blurs the lines between the kinds of content you're talking about. You can move from one
type of content to another very easily, and we're finding our users don't really think
about it that way. They think about having a great user experience, and we see it as
serving our users well, and serving all the content creators well, regardless of their
size, and that seems to be working great for us. And for the second part, Nikesh will take
that. >> Nikesh Arora: Yes, we're not going to break
out the numbers for India and Brazil, but what I can give you directionally is both
of them are very important markets for us. Our products are successful, you see search
traffic continuing to rise,YouTube is very popular, Chrome is very popular, so we're
very happy with the usage of our products and we believe there's tremendous sort of
runway in product usage in those markets because of the changing characteristics of those markets,
both from an online penetration perspective and the economic growth perspective of those
markets. So with that sort of tail wind behind us, we have great teams on the ground which
are driving businesses to come on line, and we're seeing tremendous growth in the ad side
pretty much across-the-board in Display, Search and Mobile. So we're very happy with the success
in those markets, and the progress of those markets. I'll just give you that as a direction
statement. >> Patrick Pichette: Thanks for your question.
Let's go to the next question please? >> Operator: We'll go next to Heather Bellini
with Goldman Sachs. >> Heather Bellini: Hi, good afternoon and
sorry for the background noise. I'm at the airport, but I wanted to ask if you could
give us a sense for how much growth in Mobile impacted click growth this quarter, and how
sustainable you think that level is. And also, if you could just tell us a little bit on
the progress you're seeing in narrowing the gap between CPCs, between Mobile and traditional
Search. Thank you. >> Susan Wojcicki: Hello. Yes, this is Susan
here. So first of all, we don't really break out how mobile impacted any specific part
of paid growth or CPC. I will say that our ad system is designed to be very flexible.
There are always lots of different factors at play that we see changing in terms of users,
queries, advertisers, bids, and so really, we are designing our ad system to be as flexible,
based on what we're seeing at that specific moment. In terms of narrowing the gap between
CPCs of Mobile and traditional Search, we see a lot of opportunity for us to continue
to grow Mobile, and for example, advertisers having landing pages that are mobile-enabled,
we can continue to improve a lot of our algorithms, so we see opportunity for us to continue to
improve that over time. >> Larry Page: I would mention too, Heather,
that the mobile phones are just getting amazing. You'll see our work there and other people's
works coming out that I think that your experience on phone could actually get to be better than
your experience on a computer. The phone knows where you are, and can help you even when
you're mobile and so on. So I definitely, we definitely see that the experience on Mobile
improving greatly, especially with Android. >> Susan Wojcicki: We've introduced a number
of formats, just kind of building on Larry's point so we have advertisers we can give location,
we can actually say if you search on one specific store, that store is 0.1 miles from where
you're located right now with a map, or include a phone number, when you click on the phone
number, then that's like a CPC, so we're seeing that there are a lot of formats that we can
really optimize for mobile which will make for a great user and advertiser experience.
>> Patrick Pichette: Thank you for your question. Let's go not next question, please, Jamie?
>> Operator: We'll go next to Justin Post with Bank of America-Merrill Lynch.
>> Justin Post: Thank you. Larry, I know you have to be careful because of litigation but
maybe you could help us understand what steps Google can take to help defend the Android
ecosystem on a big picture basis? There's a lot of questions about some licensing threats
out there. And then secondly, maybe it's for Patrick. Can you tell us what verticals performed
well in the quarter? I know you've been able to do that in the past, but which verticals
really did well in the quarter, and maybe others that might have been a little slower,
thanks. >> Larry Page: Yes, thanks, Justin for your
question. I think we are very, like I mentioned, we're very excited about Android and we see
our partners and the whole ecosystem continuing to grow hugely, and while there's been lots
of people trying to attack that and so on, we see absolutely no signs that that's effective
and ultimately, we think that other companies actions there will alienate their customers
and their relationships with the other companies. So if anything, we see our strategy as getting
stronger there. Obviously, we announced our intention around Motorola, and we're serious
about protecting the Android ecosystem, and making sure that it continues to be incredibly
successful but we feel good about our efforts there.
>> Patrick Pichette: And on my side, Justin, look, we again are quite a reflection of the
economy around us, so the US some of the verticals that have been stronger, right? Travel, auto,
you go to rest of world interestingly, retail, which is not as strong in the US than it would
be in the rest of world, because there's more activity in real estate and retail in rest
of world. And in the case of the UK, automobiles have been kind of particularly strong, and
so these are the kind of verticals, again they are a snapshot and reflection of the
economy around us, and maybe Nikesh has more color commentary on it.
>> Nikesh Arora: Thank you, Patrick. I agree with everything Patrick said. I think the
only sort of non-secular event happening that we are continuing to see strength in the CPG
verticals because we are doing well in Display and CPG are traditionally verticals that advertise
more in display. So there was a bit of a opportunity there, whereas search wasn't their prime focus
but those guys are doing really well with the display offerings we have for them. But
I agree with Patrick with everything else. >> Justin Post: Thank you.
>> Patrick Pichette: Thanks, Justin. Let's go to the next question please?
>> Operator: We'll go next to Doug Anmuth with JPMorgan.
>> Douglas Anmuth: Great. Thanks for taking the question. 2 things. First, one business
you didn't really talk about was Google Offers. I was hoping you could add some more color
there in terms of your strategy, and what you think you can do differently in this space.
And secondly, I know this is probably tougher, but just related to MMI, we've obviously seen
examples in the past around CPTN and Intel and McAfee around writing in concessions in
certain ways. Is that something that Google would potentially be willing to do in terms
of licensing patents to open source software and also delivering product updates and road
maps at the same time as for MMI. Thanks. >> Patrick Pichette: Okay, I think Nikesh
will take the first question there. >> Nikesh Arora: Thank you for your question.
I guess it's early days for Google Offers. As I mentioned, we have expanded from one
Portland trial to over 11 cities in the US, and we are leveraging some of the sales efforts
we already have with our ads business. We are leveraging our relationships with small
and medium size businesses. Google Offers for us is just one part in the overall opportunity
to work with SMB, so it's early days. We're very happy with the progress we've made so
far. You might have seen us launch Google Wallet, it's also part of an enablement strategy
for that, so, so far so good. Very pleased with the progress so far.
>> Larry Page: And as you know, Motorola Deals is under review and I think it will be premature
for us to comment about anything we might do with regards to that.
>> Patrick Pichette: Thanks for your question, Doug. Let's go to our next question please,
Jamie. >> Operator: Thank you. Our next question
comes from Scott Devitt with Morgan Stanley. >> Scott Devitt: Great, thanks. Just had 2
questions. In certain areas like shopping, payments, travel, reviews, and mortgages,
the Company seems to continue to get deeper into the purchase network, closer to the actual
transaction and Susan, you noted the ITA example on the call. I was wondering if you could
talk a little more broadly about this more vertical approach, the benefits of it, and
the categories you're particularly focused on and then secondly, non-cash stock based
comp I think was up 31% sequential, and 50% year-over-year, Patrick, you noted the annual
grant. I was just wondering if this is the new run rate or if there was something one-time
or potentially there's been a change in the cash versus non-cash comp. Thanks.
>> Patrick Pichette: Why don't I answer the last question first and then flip it over
to Susan. I mean, it really, you're seeing the full-year impact of our salary raises
last year flowing through in all aspects of our compensation, so when we did the equity
refresh this quarter, obviously, it's augmented by the fact that people have 10% more salary
and all of the corollary issues around it. So it is a one-time item, but you're changing
the plateau if you wish, and then it flows through into the next year and then it will
stabilizes itself. That's the best way to think about it and then on the issue of the
verticalization? I'll let Larry take a crack at it, please.
>> Larry Page: Yes, thanks, Patrick. I think that we really think about Google as providing
the exact right answers when you need them, and those things are not necessarily particular
websites or whatever. They are actually maybe actually trying to get very specific pieces
of information like you do, with an airline ticket for example, as we were talking about,
so I think we see this as a general instance of a problem of just making search work better,
across anything you might want to be able to do, and we're pursuing that in a lot of
different areas, and have for our whole history basically. So I think you'll see us do a better
job of providing a great user experience on more and more specific things over time and
that's what we do when we make a better search engine.
>> Scott Devitt: Thank you. >> Patrick Pichette: Why don't we go to the
next question. Thank you for your question, Scott.
>> Operator: We'll go next to Ross Sandler with RBC Capital Markets.
>> Ross Sandler: Thank you, guys. I've got 2 questions. First, a quick follow-up on Android.
So we've seen some of the Android partners now agreeing to pay Microsoft licensing fees,
so in order to protect the ecosystem, is Google planning on subsidizing a portion of these
fees, or is there, how does that strategy play out?
And then second question on Google Wallet. Is the long-term plan here to partner with
other financial transmitters like PayPal and maybe the credit card networks for some of
the heavy lifting in the payment space or does Google plan on kind of vertically integrating
with the banking system to offer customer service and risk management around transactions
for the Google Wallet customers? Thanks. >> Larry Page: Well, thanks, Ross for your
questions. I think that maybe I'll answer just generally. Rather than seeing for example,
Microsoft competes in the marketplace with their own SmartPhones, they've really continued
resorting to legal measures, to hassle their own customers, right? So it seems kind of
odd, and we haven't seen the details of those total agreements, and I suspect that our partners
are making good deals for them, themselves there, and so while there's a lot of press
around that, we're really looking forward to our announcements with Samsung next week,
which I think will be very exciting and like I said, we see Android growing gangbusters,
and we don't see anything that's going to stop that.
On your second question about Google Wallet and so on, I think we're at a very early,
we just released a phone with Sprint, the Nexus S that's sold out, and has had tremendous
demand, and we think that the customers who have gotten that experience are amazingly
excited about it, and like Susan mentioned, she can buy her coffee that way, and that's
an amazing experience, and we're just at the very early stages of that.
>> Patrick Pichette: Thanks, Larry for your answer. Why don't we go, Jamie to the next
question, please? >> Operator: We'll go next to Jeetil Patel
with DB. >> Jeetil Patel: Hi, a couple of questions.
Can you talk about in the Mobile business as a whole, how do you structure some of the
revenue-sharing agreements that you have on the advertising side relative to in-browser
searches, and I guess who is it typically that you're typically paying for that distribution,
the wireless carriers, the handset vendors and how do you see that evolve going forward
and then I have a quick follow-up around kind of vertical integration. You've seen companies
launch new devices, hardware-wise to layer on top of some of the content and applications
they sit on, you've obviously looked at Motorola now, and you're stacking from hardware OS
into the applications environment. Do you think that as you look at mobility, the world,
there's a unique opportunity to develop a much richer, deeper relationship, and I guess
maybe a little bit more elaboration on the vertical integration there, that you're looking
at. >> Larry Page: Yes, I mean I think it's an
exciting time. There's a lot of innovation going on in different business models and
so on, I think we're very excited about our Android ecosystem, and the growth of that,
and I think that we have a very successful strategy there as you see from the numbers
that we talked about, over 190 million devices and growing quickly. So I think there's many,
you're asking about different kinds of structures, but we're very excited about the structure
we have now, and about continuing that growth and continuing to evolve that platform ecosystem.
And maybe Nikesh can take the second part. >> Nikesh Arora: Thank you. I think Larry
is right there. There are many interesting models out there. As you know, Android is
an open ecosystem and our mobile strategy is a very partner-focused strategy. So in
many cases, we work with various partners to deliver the experience to the end-user,
and there are different partners, there are different value they bring to the equation,
whether it's distribution, whether it's making Google Search part of the services, whether
it's allowing us to be an ad serving platform. So each of the relationships is slightly different
and they have different negotiated deals with them, but generally speaking, I think we believe
there's a fair value transfer to whoever in the ecosystem brings value to the table. And
we get our fair share for providing services in that ecosystem.
>> Larry Page: We've been very successful with these models on the web and we have a
lot of experience with it, and I think we're good at doing those kind of deals.
>> Jeetil Patel: It seems like owning content at least in the mobile space seems to be a
differentiator. Is that something that you possibly look at longer term, is that owning
more the content structure out there? >> Larry Page: I think again we're not going
to comment on what we might or might not do. I think that we've had very successful models
for a long time without owning content. And I think many of the models you see don't involve
people owning content, but actually selling it or distributing it in various ways, and
I expect that will continue. >> Patrick Pichette: Thank you for your question.
Jamie, let's go to the next question please? >> Operator: We'll go next to Jason Maynard
with Wells Fargo. >> Jason Maynard: Thank you, good afternoon
guys. One of the threads through a lot of these questions in the Mobile market is how
do you increase monetization and where we're at. And one of the things I'd love to get
your view on is, where are we at in the process of bringing together some of the disparate
local services, how does Offers intertwine and when does that take on a little bit more
of a unified field versus a set of one-off products that a user would use?
>> Larry Page: Thanks, Jason. I think that's a great question. I think the first thing
to keep in mind is that we're still very early in the mobile business and you see it's incredibly
exciting business, just a lot of activity. The user experiences are getting tremendously
better and just growing like crazy and there's a lot of economic activity and so on. So we've
done well by having a long term view of that, and I think that we also sort of want to balance
having total integration with really fast iteration and fast progress and experimentation
and I think you definitely, I mentioned our unified look and feel that we've rolled out
on Google, which I'm very excited about, and we'll continue to do things like that, that
really unify experience and make it more intuitive for people. But we're also going to do some
experimentation also on new things and have a little bit less integrated, so it's always
a mix of that. I think that Offers specifically, we think
about our local business as being, how do we help merchants and users, users like yourself,
get really good information and help the merchants get the right users at the right time, and
for the right amount of money and so on. And that's a very hard problem, across a whole
bunch of different areas, basic information about merchants interaction between the merchants
and end-users and we have things going on in all of those spaces. And it's going to
be a mix of again rapid iteration, and also the integration of those things into then
a more cohesive whole and I'm very excited about that space. Our next question?
>> Operator: We'll take our next question from Anthony DiClemente with Barclays Capital.
>> Anthony DiClemente: Thank you very much. I have 2. The first question is for Patrick
or Susan. You sized your Mobile business as a run rate which was very helpful. I was wondering
if you could do the same for your Display business, particularly interested YouTube,
and so if you could comment on pricing and volume trends at YouTube in the quarter, at
least directionally, that would be helpful, and then I have a follow-up.
>> Patrick Pichette: So as you know, we don't provide any guidance. We had this extraordinary
moment this quarter in Mobile where we had a confluence of so many things going on and
that we thought it was, on a one-time basis, again, appropriate to kind of provide number
of users, the Android ecosystem that's going gangbusters and therefore, we thought appropriate
to round it up with kind of a snapshot of where we stand. So for that reason right,
and because of the competitive nature of the environment in which we are, we don't divulge
typically these numbers and you shouldn't expect us to actually give you more information
in the future on them, whether it be Display or Mobile or others.
In the case of YouTube it's the same thing. As Larry said, we're incredibly pleased about
the growth of YouTube, whether it be the number of videos viewed a day, the revenue growth
rates, the performance overall of the content, and the ad system within it, so all I could
say is this is a really kind of well-growing property for us, in which we're really excited.
>> Anthony DiClemente: Okay, thanks. And then just for Larry, I'm just wondering if you
could comment on your broader media strategy. Unlike traditional cable providers, the Google
platform isn't limited by geography, it's not limited by the contiguous networks or
territories, so I just wonder, there's been some conversation in the marketplace about
a multi-channel video offering in the US made to supplement your media product and so I
was just wondering if you could talk a little bit about that, even just philosophically,
that would be helpful. >> Larry Page: Yes, it's hard to talk about
what we might do in the future again, but I think in general, I just think there's a
lot of opportunity in providing better services for end-users around media, and you see that.
There's tremendous growth in all these businesses that are doing that. And I think we're obviously
in a good position to help users find the content and the media and so on that they're
looking for. And we're in a great position to also help those companies and publishers
and authors and content creators to find the right users, and get paid both through advertising
and directly. And so I think that's just logical place for us to be, and a logical place where
you'll see a lot of activity in general. Take the next question?
>> Anthony DiClemente: Thank you. >> Operator: We'll go next to Jim Friedland
with Cowen & Co. >> James Friedland: Thanks. 2 questions. First,
you talked about shutting 20 products, and you've got further products in Q1 I believe,
and is there any way you can give us sort of a percentage in terms of how much resource
that opens up, is that sort of a 10% increase, or any kind of color you can give us there.
And second, what level of Google Plus users do you need to see a material improvement
in ROI and search, and really move the needle for the business there, and just maybe in
terms of active users? Thanks. >> Larry Page: I think those are great questions,
Jim, thank you. I think that I'm not prepared to give you specific numbers about projects
we shut down or whatever, but I will tell you its been a pretty significant effort we've
had to really streamline our business, and we've made, like I said, tough decisions about
where we should be focusing, so that we really can generate amazing products and businesses,
and those are not easy decisions. So I think there's significant resources involved in
the kinds of things we're talking about, and it's also a fair amount of work also for us
to just go through that process, but I'm excited about that increased focus for us.
I think as I mentioned on Google Plus, I think we're seeing tremendous growth which I'm very
excited about. We're still very early. It's been out just slightly more than one quarter
now and not even fully open until only for a very small part of that, so I think we're
very early in that, but on the other hand, I encourage you to all try out Google Plus
and sign up and flock to it and you will see data in Search about what other people are
doing, and you'll see someone had plus-one something and so on, and I think those things
can be very meaningful to you as a user. So I have no doubt that there will be a significant
impact from that. >> James Friedland: Great. Thanks very much.
>> Patrick Pichette: We have time for one more question so Jamie could you give us the
last question, please? >> Operator: Thank you, sir. That final question
comes from Colin Sebastian with RW Baird. >> Colin Sebastian: Great. Thanks very much
for taking my questions. Just 2 brief ones, first on Chrome and your efforts their to
expand penetration. Can you talk about the specific drivers of growing distribution,
adoption, maybe how we might expect us to impact margins over time. And then secondly,
the growth in the Google site revenues, I wonder if you could add a little bit of color
there on the specific uptick, if that's an acceleration from display on YouTube as well
as Mobile or is that the core Search-related? Thanks very much.
>> Patrick Pichette: I'll take the latter, and then maybe Nikesh will cover the chrome.
On the latter the answer is yes, yes, yes, and yes. So yes, YouTube, yes Mobile and yes,
formats and that's why you see such an acceleration of our revenue and that's why we're so excited
about it and maybe Nikesh, of you have comments on the Chrome and our penetration and how
it's working? >> Nikesh Arora: I'd love to answer a question
like that like yes, yes, yes, yes but unfortunately that's not how the question is phrased. As
far as Chrome is concerned, as we have talked about in previous quarters, Chrome is very
strategic for us, because we believe it is a phenomenal user experience and has user
benefit. It just improves the user browsing experience so phenomenally that we believe
it's important that chrome be distributed and shared with almost every user around the
world, and a lot of our marketing efforts and distribution efforts have been focused
around getting Chrome in the hands of our users. We are doing distribution, with partners,
our partners encourage people to download Chrome.
We are doing distribution where we do direct advertising to consumers to get them to download
Chrome with a clear user benefit of better browsing, better video watching and better
security, so we are doing a lot of that. I think I'm not going to comment on the margin
part but you have to understand a great consumer experience from Google as part of Chrome makes
Google makes users use more Google services, so from that perspective, we're very happy
with the distribution strategy we have in Chrome and we don't see any abatement of that
strategy. >> Colin Sebastian: Thanks very much.
>> Larry Page: I want to thank everyone for all the time that you spend with us. We had
a great quarter, very excited about our progress so far and I also want to thank all of our
employees who have worked so hard to make these results that you all see, so thank you
all very much. >> Patrick Pichette: Jamie, we'll let you
close the call. >> Operator: Thank you, sir. That does conclude
today's conference. We appreciate everyone's participation.