Q2 2010 Earnings Call

>> CONNIE: Please stand by. 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 conference over to Ms. Jane Penner, Senior Manager, Investor Relations. Please
go ahead, ma'am. >> JANE PENNER: Thank you, Connie. Good afternoon,
everyone, and welcome to today's second quarter 2010 earnings off conference call. With us
are Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President,
Product Management; and Nikesh Arora, President, Global Sales Operations and Business Development.
First, Jonathan and Patrick will provide us with results on the quarter, and then Nikesh
will join us to answer your questions. Also, as you know, last quarter we began distributing
our earnings release exclusively through our investor website, located at investor.google.com.
So, going forward, please refer to our IR website for our earnings releases, as well
as supplementary slides for the company to call. This call is also being 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 we make today may be
considered forward looking, including statements regarding Google's future and investments
in our long-term growth and innovation, the expected performance in our business, and
our expected level of capital expenditures. These statements involve a number of risks
and uncertainties that could cause the 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 for a more detailed description of the risk factors that may affect
our results. Also, please note that certain financial measures we use on this call, such
as operating profit and operating margin are expressed on a non-gap basis and have been
adjusted to include charges related 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 investor--in our earnings press release. With that, I will now turn the call over to
Patrick. >> PATRICK PICHETTE: Thank you, Jane. Good
afternoon, everyone, and thank you for joining us. As Jane mentioned, Jonathan and I will
begin with the prepared remarks, but we also have Nikesh with us for the Q&A. So let me
start you by giving you some high-level thoughts about the quarter, and then we'll get into
our detailed financial performance. So overall, we are very pleased with our Q2 results. We
experienced continued, solid growth in our core, but also very strong growth in our emerging
business year over year. Taking a step back, actually, these results reflect a few really
important trends in the digital advertising. First, we are really taking notice that more
and more traditional brand advertisers are embracing search and search advertising as
a way to build their brands online. A case in point: P&G. It's one of the largest brand
advertisers in the world, and it's now one of our top advertisers in the U.S. Second,
we see also a real trend in large advertising, focusing on highly measurable but also integrated
campaigns across display, mobile, and search. So, as a result, we saw strength in every
major product in Q3. Google.com was strong with strong performance across major geographies
and most major verticals, including CPG, retail, travel, et cetera. Our growth in display was
also very strong. Our continued focus in this product area is clearly generating results.
Our display network, which includes YouTube, is growing very rapidly. The scale and quality
of our network continues to increase, and we see increased demands from traditional
brand advertisers in that space as well. In addition, we made yet another significant
stride in display this week when we entered into a strategic agreement with Omnicom media
group. We'll be working together with Omnicom to co-develop their exchange trading desk
for the double click ad exchange in the coming years. YouTube, specifically, we continue
to see very impressive growth. Uh, as brand advertisers also consider it a must-buy. For
example, and as I mentioned a moment ago, in Q2, we ran World Cup advertising campaigns
for major advertisers of the likes of Coke, Visa, Nike, Sony, et cetera. Finally, on YouTube,
I think it's really worth noting that we're very pleased, of course, with the court's
decision to rule in our favor in the Viacom case. But more important in this victory,
it's not for us, but for the users and just the web in general. Specifically for all the
blogs in the community forums across the web that do rely on this user generated content,
for sharing information, and also for free expression. Look, we were very passionate
about this issue at Google, and so much so that we have made a significant investment
of approximately $100 million to win this case. And, once again, it just was the right
thing to do, and we did it. In Mobile, our revenue continues to grow as advertisers increasingly
opt in to our Mobile-specific campaigns. And with the successful completion of the AdMod
transaction in Q2, our business is gaining momentum. And so we have a very competitive
mobile advertising platform now. And, of course, I'm depending on growth in the success of
the Android platform itself, with over, as we announced a couple weeks ago, 160,000 devices
activated daily. That's two every second. And it creates an even larger base of data-centric
smartphone users. Finally, Enterprise had another good quarter, with several high-profile
deals, including, for example, Virgin America. The world is simply moving into the cloud.
And successful products do require investment. And that's why we're focusing our resources
on products that, as you all know, leverage computer science to solve our big problems,
offer great ROIs, and very large growth opportunities. For example, in Q2, we've added approximately
1,200 employees. That's obviously counting the acquisitions of AdMod and others. But
the majority is done in engineering and sales and in the following product areas: search
monetization, display, mobile, apps, all the next billion-dollar business that are growing
incredibly rapidly. And that's why we're investing in them. Jonathan will give you more details
about that in a moment. So now, let me turn to our financial results. Growth revenue.
Growth revenue grew 24% year over year to $6.8 billion. Our Google websites revenue
was also up 23% year over year to $4.5 billion, which strength, as I mentioned, across most
geographies and verticals. Our AdSense revenue was up 23% as well to $2.1 billion, reflecting
our continuous trend specifically in the Google Display Network. Other revenue was up also
39%, year over year to $258 million, and it includes the last quarter of revenue from
the sale of Nexus One. As announced, we're discontinuing the direct-to-consumer channel
in Q3, and as a result, beyond Q3, we won't recognize any revenue or costs associated
with the sale of Nexus Ones. They are still being sold through various carrier partners,
both in the U.S. and Europe, however. Our global aggregate paid-click growth remained
quite healthy, up 15% year over year, and down 3% quarter over quarter due to typical
summer seasonality. Aggregate cost per click-growth was up 4% year over year and 2% quarter over
quarter. Know that the FX had a positive impact on our CPC growth year over year and a negative
one quarter over quarter. Remember, too, that this is an aggregate number, and it includes
both Google.com and our AdSense properties. Turning now to our geographic performance,
on a relative basis the UK lagged a bit the global economic recovery, certainly relative
to the U.S. and the rest of the world, which were strong. Revenue from the U.S. was up
26% year over year to $3.3 billion. And in our earnings slides you'll find on our investor
website, you'll see that we've broken down our revenue by U.S., UK, and rest of the world
to show you the impact of the FX and benefits from our hedging programs. So please refer
to these slides for these calculations. International revenue accounted for 52% of our total revenue,
or 3.5 billion, also up 21% year over year, which includes $79 million benefits from our
hedging programs. This is compared to $124 million of benefits in Q2 of last year. If
we used, uh, fixed exchange rates, our international revenue would have been roughly $24 million
lower year over year. The UK was up 8% year over year to $770 million. Let me now turn
to expenses. Traffic requisition costs were $1.7 billion, or 26% of our total advertising
revenue. Our cost of revenue was $735 million, including stock-based compensation of $8 million,
and also expenses related to the sale of the Nexus One. And finally, all operating expenses
totaled $2 billion. This also including $301 million of stock-based compensation. The increasing
year-over-year OpEx is really primarily due to increases in payroll, professional services,
and advertising and promotional spent. So the result of all this: um, our non-GAAP operating
profit, which excludes stock-based compensation increased to $2.7 billion in Q2, resulting
in a non-GAAP operating margin of 39%, essentially the same as last year. As I mentioned already,
our head count was up approximately 1,200 heads versus Q1, and end of quarter with 21,805
full-time employees. And, again, that reflects the acquisitions as well. Our effective tax
rate was up to 24% in Q2 versus 22% in Q1, essentially due to the mix of earnings between
domestic and international subsidiary and the impact of our hedging program. Let me
quickly turn to cash management. Other income and expense was 69% for Q2--$69 million, sorry,
for Q2, which includes good progress in our portfolio management performance, although
it was somewhat upset by the impact of our hedging expenses with FASB 133. For more detail
on DOINE, again, please refer to the slides that accompany this call on our website. In
addition, we've announced today a $3 billion commercial paper program in a related credit
facility. This to us is an important step in establishing a more capital, efficient
structure that'll provide us with low-cost, working capital availability and flexibility.
And it's also an excellent time to do it, given the historical low interest rates. Operating
cash flow was very strong at $2.1 billion. CAPEX for the quarter was $476 million, again
primarily related to our data center operations. And as a reminder, we continue to make significant
CAPEX investments, and they just turn out to be lumpy from quarter to quarter. Our free
cash flow therefore stands at $1.6 billion, in a very good position. So if you take a
step back from all these numbers, here's where we stand: we are very pleased with our Q2
performance, seeing growth across revenue, margin, and cash flow. And it really paints
a picture of where we are--very confident of our future. And that's why we continue
to attract and hire among the best talent in the world to further invest in our growth
agenda. So with that, and before we open it up to questions, let me turn it to Jonathan
for his comments. Jonathan... >> JONATHAN ROSENBERG: Okay, well, thanks,
Patrick. So let me start with Search. Search used to be pretty simple. You'd enter a query,
and we'd return a bunch of links to Websites, but now the Web is much, much more complicated.
There's videos. There's books. There's music. There's news. Just about any type of media
you can name is online. So the scale of the Web now is grand, and it isn't slowing down.
To keep pace, we migrated a whole lot of our index to a new infrastructure which we call
"Caffeine." And Caffeine is basically a new way of updating our index. So now when we
find a new Web page or new information, like a video or an image, we add them straight
to the index without a delay. This means that the results that you get are a lot fresher,
and, in fact, they're about 50% fresher than before. But then, once you get your results,
you need tools to work with them to get to the right answer, and we've launched a new
UI that has a bunch of options on the left-hand side to help you filter those results. I especially
like the timeline feature, which I think is great when you're doing research and you want
to see results from a particular time. So you can enter, say, "oil spill" and click
on "timeline" and 1969, and you can read all about the big Santa Barbara spill that led
to the ban on offshore drilling in California. On the other hand, sometimes you just want
an answer. The query is effectively the result, and we're getting much better at knowing when
that's the case and giving you what you need. So enter, for example, "Barack Obama birthday,"
and you'll see what I mean. You'll see his birthday listed, August 4, 1961, and citations
for the different sources where we got that information. All this works in Suggest too.
Try typing "capital South Africa." By the time you get to the first A in Africa, we
tell you it's Pretoria. I point all these things out, because the great things about
features like these is most people don't even notice the changes. They just notice that
they get their answers fast. I think I mentioned on the earnings call back in January that
we're working on putting more wood behind fewer arrows, and Search innovation is definitely
one of those arrows. Our pace here is actually accelerating. Voice Search added six languages.
We launched spelling full-page replacement, Suggest with spell correction, and over 100
quality enhancements. So there's lots of stuff going on. In fact, there's so much, that we're
putting out a weekly blog post to document all the Search improvements. But interestingly,
as Search gets better, it actually creates another huge challenge for us. The ads need
to keep pace and get better too. Otherwise, what would happen is people will click on
relatively fewer ads, and that--well, that would be bad. So this dynamic where consumers
are in control holds for all types of media and not just Search. It used to be consumers
had to watch, see, or listen to whatever the advertiser wanted to show, but now they don't.
I think this is a fundamental shift for the advertising industry. When people don't have
to watch your ads, what do you do? Well, you have to make ads people actually want to watch.
I was in Piazza San Marco in Venice a couple weeks ago, and there was this huge billboard
advertising a ski jacket. It was, like, 90 degrees, and we were sweating in shorts and
T-shirts. And I looked, and I thought, "What a waste of money." So I took a photo of the
ad with my smartphone, and I sent it to my team as proof there's lots of upside in improving
ads. And this quarter we made great progress on that upside. We added new ad formats, and
we focused even more on quality. The new formats let advertisers put more useful information
into their ads, such as pictures of a product or a local address or a phone number. It turns
out that when you're searching for something from your phone, you're much more likely to
click on the ad when it has a phone address in it. This seems obvious, but now we actually
know from the data that it's true. One of our customers, Carnival Cruises, increased
bookings from mobile phones by 175% when they included click-to-call ads. Lastly on ads,
I know you often ask about headroom and ads quality, and I'm thrilled to say we had one
of our most productive quarters there in the last couple of years--over a dozen launches
on Search with a strong impact on revenue. We did things like put better ads on the second
page of results when we realized that the ads weren't as good. And we also had over
20 quality improvements on the Google Display Network. Display, by the way, is going very
well. One recent development is that we're working closely with our agency partners to
help them move to what they call an "audience-buying model." And I think this is another fundamental
shift in advertising, where the ultimate goal is to designate a particular audience on our
network, like, say, women between 18 and 35 who like basketball, and then we automatically
target that audience for you. We're also making progress with features like Remarketing, which
we launched last quarter. Advertisers can reach people who've already visited their
sites. Interest-based advertising, which we launched last year, is also working very well,
and so is the DoubleClick Ad Exchange, which we launched in Q3. We've got several of the
top ad networks on it, and we're attracting some big buyers, like agency holding companies.
Advertisers really like the technology, which is real-time bidding, and publishers like
that it's open to all advertisers and ad networks who they want to work with. We want to be
open in everything we do. We believe open systems are better for the Web. They're better
for competition. They're better for the user. This is not philanthropy. When the Web is
better, more people use it more often, and that means they search more often. Android
is a leading example of this. As Patrick mentioned, we're now activating over 160,000 Android
devices every day. This is up from 65,000 last quarter. What's even more interesting
there is that most of these devices are developed completely independently of Google. One of
those is the Sprint Evo, which is actually my favorite phone right now. Has a big screen.
It's got great video. It accesses a Wi-Fi hot spot for me. It has 4G bandwidth, at least
when you're around Mountainview. The Android market is also open, of course, and now has
over 70,000 apps. That was around 30,000 in April. As you look at all these new apps being
created, you also realize that your mobile phone isn't alone anymore. It's actually connected
to several million computers 24 by 7. This is letting us do things that we used to think
were impossible. We just released a new version of Goggles that lets you take a picture of
something in another language with your phone, and it translates it for you. I actually used
this a lot to read menus on my vacation in Italy. You literally don't have to guess what
you're going to eat anymore. Or say you want to read about how the locals are celebrating
their World Cup victory. Congratulations to Spain, by the way. Anyway, you just go to
elpais.com and Chrome or Toolbar automatically translates it for you in a second. So cloud
computing also means that enterprises can take advantage of these innovations. We just
launched this feature where if you have, say, a .pdf or the image of a scanned document,
you can upload it to Docs, and we'll convert it to text, so you can edit it. You don't
have to install any special software or anything. If you're a Google Apps customer, it's just
there, and it works. Of course, the cloud is pretty good for wasting time too. I hope
you played with our special Pac-Man doodle. We put it up on May 22nd to celebrate Pac-Man's
30th birthday, and we estimate people spent 4.8 million hours playing it. If you missed
it, go to google.com/pacman. Bloop, bloop, bloop. Thank you for your time. Back to Patrick.
>> PATRICK PICHETTE: Thank you, Jonathan. And, yeah, there was these great reports of
billions of billions of kind of productivity lost over that little Pac-Man, so obviously
we did something right somewhere. Um, Connie, can you actually turn on the Q&A process,
and I'm gonna invite Nikesh to also join us at this time.
>> CONNIE: Thank you. The question-and-answer session will be conducted electronically today.
If you'd like to ask a question, you may do so by pressing the "star" key, followed by
the digit 1 on your touch-tone telephone. If you're using a speakerphone, please make
sure your "mute" button is turned off to allow your signal to reach our equipment. Once again,
it's "star 1" for questions, and we'll pause for just a moment to assemble the roster.
And we'll take our first question from James Mitchell from Goldman Sachs.
>> JAMES MITCHELL: Thank you very much. And thank you for the Pac-Man distraction a few
weeks ago. My question was about the sequential increase in operating expenses. I was wondering
if there was any adjustment to bonus accruals that went into that sequential increase, or
was it entirely due to head-count additions and acquisitions in marketing?
>> PATRICK PICHETTE: The bonus accrual would have a small impact on it. So it is really
about head count, about TVCs, about marketing. >> JAMES MITCHELL: Great. Thank you.
>> PATRICK PICHETTE: You're welcome. [pause] >> CONNIE: And we'll take our next question
from Spencer Huang from Credit Suisse. >> SPENCER HUANG: Thanks. Good afternoon.
Two quick questions. First, in terms of the paid-click growth of 15%, I was wondering
if you could just give us a sense of, you know, how much of that is coming from mobile
today currently versus, say, last quarter. And then the second question, maybe for Patrick,
just on TACT it was down a little bit--your thoughts sequentially. Can you just give a
sense of where you think, on a percentage basis, that's trending, especially with the
MySpace deal coming up shortly. Thank you. >> JONATHAN ROSENBERG: Yeah, this is Jonathan
on the mobile question. Mobile is certainly growing faster than other clicks. So everything
else being constant, there is a disproportionately larger group of mobile clicks this quarter
than in quarters in the past, but we don't really have any more detail than that.
>> PATRICK PICHETTE: In the case of TACT, it's been--I mean, most of the TACT that we
have today-- Because as you said so, rightly, that MySpace deal is ending now. I mean, we
shouldn't see any-- There's no--there's no big jump anywhere in the TACT going forward,
and it's been pretty stable, actually, around, I think he said 27% or... And so there's very
little variability. >> SPENCER HUANG: Great. Thank you.
>> PATRICK PICHETTE: Thank you, Spencer. >> JANE PENNER: I think we're ready for the
next question. >> CONNIE: And we'll go next to Imran Khan
from JP Morgan. >> IMRAN KHAN: Yes, hi. Thank you so much
for taking my questions. Two quick questions-- one, you know, the 1,200 or so head-count
increase--could you give us some sense, like, where are you allocating those head count.
Is it in Search or in a new--Most of the head counts are going through new initiatives.
And also, secondly, in terms of the cost-per-click, can you give us some sense of the difference
of cost-per-click mobile versus desktop and how quickly you think it can narrow? Thank
you. >> PATRICK PICHETTE: Great. So why don't I
start with the 1,200? So remember, 1,200, just to give a bit of clarification, there
is probably around 300 of those 1,200 that, in estimate, that come from MNA. So really
kind of organically, if you think about it, more like 900, which was not unlike last quarter.
The--I mentioned in my core notes, Imran, the--most of the head count is in engineering
and sales, and most of the head count, like the vast majority, is going to the four core
areas of focus of the company. So they are about Search and Search Monetization. They
are going to Mobile and Android. They are going to Apps, and they are going to Display.
We see so much momentum in each of these right now that that's where the bulk of the resources
are going, because that's where the focus of the company is. On the CPC, Nikesh?
>> NIKESH ARORA: On the CPC--Hi, this is Nikesh. On the CPC, I don't think there's enough data
for us to actually look at the trend in terms of whether it's closing or not, but you have
to understand, the mobile advertiser sees mobile as a very different platform vis-a-vis
the desktop advertiser. You know, you see high CPCs where there are transactions that
can consummated on the mobile, i.e. in digital entertainment. You don't see as high CPCs
as when you're trying to give directions to a certain restaurant or a place where they
might conduct commerce. So there's still some disparity between the CPCs on the desktop
and mobile, and within Mobile, depending on the verticals, there's disparity depending
on the type of advertiser. >> JANE PENNER: I think we're ready for the
next question. >> CONNIE: And we'll take our next question
from Justin Post from Bank of America. >> JUSTIN POST: Okay, yeah, my questions are
about Android. Can you talk about how much investment is going into that platform, and
then how do you think about it? Is this an investment that just needs to keep going just
so you can compete in the mobile market. Or, you know, you're not charging for it. Is this
a real installed-base revenue opportunity, and we're gonna start hearing more communication
about how you're gonna monetize it down the road? Thank you.
>> PATRICK PICHETTE: Okay, so let me give you a high-level answer to kind of give everybody
comfort, right? Android is not-- in terms of cost, it's not material to the company.
And not only that, but let me give you a further kind of proof point of the value of Android,
is some of the key products that have been launched over the last few weeks and two months
have not been developed by Google at all. I think that the last Android X or the Motorola--what
is it?--Droid X has been developed by Motorola directly with Verizon and not involved any
of the Google resources. So it's not a huge resource investment. It's a formidable return,
in that what you have is the entire ecosystem exploding. And I'll let Jonathan give you
really the sense of that one. So from a cost side, it's nonmaterial. Jonathan.
>> JONATHAN ROSENBERG: Yeah. Well, I mean, we gave some data just on the scope of the
numbers, the 160,000 Android devices as well as the growth in apps from 30,000 to 70,000,
but I think the most important, the most obvious thing to think about from our perspective
is, what's the most popular app on these devices? The most popular app is a browser. And what
do people do with the browser on these devices? They search an order of magnitude more than
they have on any previous type of smartphones which they'd had in years past. So the combination
of people browsing on these smartphones connected on very, very fast networks and searching
on them is basically the formula around, you know, how Google makes--how Google succeeds.
>> JUSTIN POST: I don't know if I can get a follow-up, but I mean, are you seeing search
activity really strong on mobile devices with Android, and do you think you're losing any
ground relative to search activity within applications? Thank you.
>> JONATHAN ROSENBERG: Android search grew 300% in the first half of 2010. So, yes, search
on Android devices is exploding. >> JUSTIN POST: Thank you.
>> PATRICK PICHETTE: I think that there--another way to kind of frame it in numerical numbers--I
mean, the mobile has grown 500% in the last two years, in terms of the traffic. So think
of that, and then think of Android being an accelerator of that, because every time you
bring the NPV of all these platforms coming forward, you get a lot more. So that's how
to think about the problem and the solution that we bring.
>> JANE PENNER: Next question, please. >> CONNIE: And we'll take our next question
from Doug Anmuth from Barclays Capital. >> DOUG ANMUTH: Great. Thanks for taking the
question. Two things I wanted to ask--First, just on the macro environment, can you comment
on what you saw at all during 2Q, in terms of whether the environment seemed to change
at all, either in the U.S. or Europe? And then secondly, just given the $3 billion commercial
paper program, and, you know, can you update your current thoughts on returning cash potentially
to shareholders? Thank you. >> PATRICK PICHETTE: Okay, let me start with
the last one first. I mean, really, the commercial paper is a fantastic opportunity for us, given
the portfolio that we've put in place for our cash to actually have the working-capital
flexibility around it. So now if I need working capital for my day-to-day operations, I have
that flexibility through commercial paper. That's really the essence of what we're doing.
We have made no decisions at all on, you know, share buybacks. As I said to everyone, it's
a topic that is regularly debated, brought to the board for debate, and we have nothing
to announce on that one. On the macro side, I would say--Look, there's kind of two things,
right? Everybody reads the press. Everybody's seen everything that happened in Q2--the Europe,
the death, the this, the that. I mean, for us at Google, it's been a great quarter. We've
had--Our business has been a great quarter, and we've seen no impact of what's going on
in the macro world to us. And that's why we said--you know, for the last three, four quarters,
we've said, "We're really pleased with how, you know, we're kind of performing in this
kind of economy." And that's why we feel confident about the future and feel confident about
investing now. And that's why we're doing it.
>> DOUG ANMUTH: If I could just follow up quickly on the first one on cash--can you
comment on how much of your cash is international versus in the U.S.?
>> PATRICK PICHETTE: It's about 50/50. >> DOUG ANMUTH: Thank you.
>> PATRICK PICHETTE: Thank you. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Brian Pitts from UBS.
>> BRIAN PITTS: Great. Thanks. Would you talk about your advertiser and user adoption of
some of the new product ad formats that we're actually seeing on your site? Are these ads
having a material impact on CPCs? 'Cause we understand they're being sold on a CPA basis.
Thanks. >> JONATHAN ROSENBERG: I mean, this is Jonathan.
I can give you a quick review of the top formats, and then maybe Nikesh can chime in and give
you a sense of some of the specific customer experiences that he's had. The click-to-call
ads on the high-end mobile phones are doing very well. The click-through rates go up 6%
when you put ads with a phone number, 8% percent when you put a local address. So click-to-call
is doing very well. It's easy to see some of those. If you just want to take a look
for yourself, if you try "travel agency" from a smartphone, you'll see them. There are thousands
of active campaigns on click-to-call. So you can take a look at that. Sitelinks is also
making pretty good progress. We've given you examples on past calls, where you type a big
brand like Sears, and then you see the more useful links that you can get through, and
the click-through rates on those can go up as much as 30% over the ads without the Sitelinks.
But we changed the way we do Sitelinks, and we've added a new one-line format, and that
also allows Sitelinks to show up in more places. You can try "flowers" if you want to see that.
The other format that's getting some adoption is the-- We're adding the seller ratings,
which shows merchants ratings out of six stars aggregated from reviews on the Web. You see
that if you look for things like digital cameras, and that's doing pretty well as well.
>> PATRICK PICHETTE: Nikesh, any further thought? >> NIKESH ARORA: I guess from an advertiser
perspective, they've always had a sense that over the last few years we've actually had
some disparity in the quality of our natural search and quality for ads. Things like Sitelinks
create tremendous parity between what people get in natural search and what they get from
an ad format. So there's tremendous appetite on our large advertisers to be able to send
their consumers or users to a deeper part of their Website, which Sitelinks allows.
So the adoption of Sitelinks, the adoption of click-to-call-- A call, as Jonathan said,
is extremely sort of more lucrative for them, because they can actually track it, and they
can actually track the transaction that it creates. So these new ad formats are definitely
helping and are getting out there. One thing that Jonathan did not touch upon is the ad
innovation on the Display side as well. We've had tremendous new formats. We've launched
the whole YouTube front, where we actually increase the inventory because we get more
and more content where we can show ads on. In addition to that, we also have new ad formats,
which effectively--I mean, imagine a basic ad and now getting it to be an auto-expandable
masthead that shows up on YouTube, which allows us to impact the pricing of the ad format.
So the more richer the ad, the more an advertiser is willing to contribute, because it creates
a more engaging experience and, therefore, a higher revenue opportunity. So I think across
the board in the ad formats are both--we're seeing more appetite for them, and at the
same time, they're allowing us to create more return for the advertiser, allowing us to
price them better. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll take our next question from Ross Sandler from RBC Capital Markets.
>> ROSS SANDLER: Hi. Just two quick questions. Patrick, you said the costs for Android are
fairly immaterial, so can you talk about the operating margins in the display business
on a revenue ex-TAC basis? How much of the margin compression that you're seeing right
now coming from display growing faster than search? And then second question is looks
like the ROW regions accelerated a bit in the second quarter if you strip out the hedging
and currency impact. Can you talk about, Nikesh, which regions are driving that, and can you
specifically talk about the environment in Europe, you know, given the macro. I know
you talked about it for a second earlier. But just any further color about Continental
Europe. Thanks. >> PATRICK PICHETTE: I mean, it's, uh...the
display business has, you know, to a certain extent, if you take it as a blended, slightly
lower margins, if you take the double click platform, for example, which is more transactional.
But overall I think that, you know, they still are quite healthy and they don't--if you think
of CPCs the way I think about them is you have, really, kind of two big components that
work--the innovations that Jonathan talked about that actually drives CPC up. And then
because those products perform better, they add pressure to the auction and therefore
drive CPC up. And then the two--the two or three components that actually drag them down
in the short term, actually, it's not as much display as the places like Brazil and India.
They're growing very well, so internationally, and because they don't have as strong an auction
right now, right, the CPCs are slightly lower, but they're growing. So that's positive. And
then we already talked about mobiles themselves as being lower CPCs. These are the two that
actually are growing incredibly rapidly in that, you know, on the mix in the short-term,
they kind of put a bit of a--a downward spin on the CPC formula. But both of them, as we
know, they're growing more rapidly, so it's real dollars net in. And then on top of that,
we know there's gonna be future pressure in them. So I'm pretty pleased about the performance
of those. On the issue of, uh...Europe and FX, everybody's got a model out there, right?
We've lived an incredible roller coaster of FX over the last year, so if you look at currencies
like the euro and the pound, right, they were quite similar or on par over a year. But the
last quarter versus this quarter, a huge change. And then in addition to that, if you look
at places like the real in Brazil, the Canadian dollar, the yen--I mean, those have quite
increased year over year. So when you do your models relative to, you know, FX and NOINE,
just take in consideration the fact that year over year, the net-net position is it's been,
you know, it's been strengthening, all in. Quarter over quarter it's been, you know,
going down all in. And on top of that our FX--kind of our hedging program is really
a long-term hedging program. So this quarter we've reaped, up, 78 million, 79 million of
benefits in that. So it's a tough puzzle to solve. But please take the time to look at
year over year and quarter over quarter, 'cause it's a puzzle to build. I hope that answers
your question. >> JANE PENNER: We'll take the next question,
please. >> CONNIE: And we'll take our next question
from Jeetil Patel from Deutsche Bank. >> JEETIL PATEL: Great, uh, two questions.
Do you think that Android and Mobile represents a bit of a defensive strategy, since you kind
of pride yourself on the lack of costs in that business as a whole, and at the same
time you're adding head count as a whole in the company? And second, I guess, just curious--you
know, the feedback we keep getting in the industry is that the Android kind of infrastructure
and support seems to be lower than what at least your ecosystem would like. Um, I guess--what
is the appetite to create other revenue streams outside of advertising inside, let's say,
Mobile in the form of, let's say, an app marketplace that is pretty vibrant. Thanks.
>> PATRICK PICHETTE: So let me just give a kind of the highest level answer is, um...it's--the
answer is yes. It's both. I mean, obviously having--we did it for offensive reasons, not
defensive reasons, right? We believe that actually open platforms that create the ecosystem
where developers can actually create a whole set of new generations of apps is incredibly
important. And in addition to that, right, we do know that these new formats, like these
smart phones, create an entire new set of activities in which you live and you will
search and you will transact. So from that perspective, I think that it's obviously both.
I take your comment that if the market in general is saying they want more support from
us in that space, right, we're investing heavily because we believe, one, that, you know, search
advertising, or acquisition of AdMob by the investments we're making is because for us
advertising is completely nascent in the space relative to kind of text search. And then
second is we ourselves are doing a lot of innovation to cloud computing and others to
actually create a whole new generation of apps ourselves. So I think that, yes, defensive,
yes, offensive, but in the end benefiting everybody, and I'm glad to hear you say that
you want us to invest more in it. >> JEETIL PATEL: Well, it seems like your
handsome vendors are aggressively investing and, uh, we haven't seen it from your side,
at least as we talked to some of your partners out there. I guess, you know, it seems like
do you think that other models outside of advertising need to be explored at this point?
Thanks. >> PATRICK PICHETTE: I'm not sure I understand
your question. Other models such as what? >> JEETIL PATEL: Well, let's say consumer
application, so, you know, there are other companies that have created, you know, business
models around, obviously, game downloads app, you know other app downloads that are changed.
Obviously, you have as well, but it seems like you're--you seem to be--maybe it's early
days but, you know, still early in that development. >> PATRICK PICHETTE: I think you're absolutely
right that it is early days, and I think that the 70,000 apps that we have is actually a
demonstration of effervescence of that ecosystem that's actually just building now.
>> JONATHAN ROSENBERG: Yeah. This is Jonathan. I mean, it is at a very nascent stage. I think
we also--there's a lot more infrastructure that needs to be built to support a lot of
the commerce. You know, we substantially intend to improve the billing capabilities in the
market, and that's obviously one of the things that we're investing in pretty aggressively.
But I don't think of this as defensive at all. I mean, there's a huge opportunity for
incremental usage of searches I talked about earlier, and when we see an opportunity for
people searching more, that's obviously something that we want to participate in. So we see
this platform as winning. We think that gives us an opportunity to build the Mobile internet,
and we think that in the long run that's gonna be good for Google. It's gonna be good the
applications developers, and it's gonna be good for consumers. So we're investing...we're--we're
investing in building that winning platform. >> JANE PENNER: I think we're ready for our
next question. >> CONNIE: and we'll take our next question
from Steve Weinstein from Pacific Crest. >> STEVE WEINSTEIN: Right. Thank you. I was
hoping you could help explain some of the movement in the P&L expenses. Um...you mentioned
that most of the hiring is going into engineering and marketing. When I look at the sequential
increase by dollars in terms of expenses, you just had a large increase in G&A, about
48 million sequentially, and that's compared to only like 20 million in sales and marketing.
So can you explain a little bit more-- was there anything in the G&A line that is one
time or not repeatable? Why are they moving like that?
>> PATRICK PICHETTE: Yeah, I-- you have to look at--there's a couple of things. One is
our recruiting. If you go year over year and quarter over quarter, we had kind of three
big elements. One is...we had our recruiting machine that started to build last year was
not built in Q2 of last year. So if you think of the hiring infrastructure and the people
infrastructure has actually been kind of, uh, been building and now you see the full
flow- through. We also have had in G&A in general, another area--if you think of everything
else that's kind of people. Uh, we've talked about legal. We've had a number of legal costs
to this quarter that have also flowed through just because of a number of legal activities
that we've taken. So these are the two biggest components that actually would explain the
big variances. >> JANE PENNER: Ready for the next question.
>> CONNIE: And we'll go next to Mark Mahaney from Citigroup.
>> MARK MAHANEY: Thank you. Two questions, please. A year ago, you talked about being
close to profitability on YouTube, given all the momentum that you've seen over the last
year. Do you feel like you're a lot closer? Are you profitable with the YouTube asset?
And then secondly, when you sell display ads, do you feel like you're selling them to existing
search customers, or do you think that it's opened up a significantly larger customer
pool or a mix of those two? Thank you. >> PATRICK PICHETTE: So let me talk about
profitability, but Nikesh will have the answer to your second on display. Look, we don't
comment on YouTube. What I can tell you is we're incredibly pleased by its trajectory.
I mean, YouTube is, you know, take a step back--it's 2 billion views per day. In its
fifth year of existence, it's one over a billion monetization videos per week. It's a huge
kind of a first page, and it's aggregating audience, and you see it today to the top
brand advertisers showing up for it, right? So when the World Cup you saw the Sonys and
the Cokes and the-- I mean, this is the power of YouTube today. It's like a world-wide audience.
So in that sense, I would argue, you know, just read in the tea leaves-- it's a great
business for us. On the display side, Nikesh. >> NIKESH ARORA: Yeah, just to add to what
Patrick said, to be fair, what display and YouTube has given us is allowed us, in the
case of large search customers, to complement the portfolio in terms of being able to offer
integrated campaigns, which go all the way from random sites like YouTube to networks
like the Google Display Network and to be able to sort of coming alive with search.
Not only that, many advertisers now actually coming alive with television ads as well as
their print program, so you see a much more integrated campaign capability that begins
to happen. We've had examples recently like Patrick mentioned in Sony slogan at the World
Cup. You know, what's interesting is Procter & Gamble has become one of our larger advertisers
this quarter. It's primarily driven by the ability of CPG companies to both see the value
of search in their ability to build a brand where they figured out that people research
online and purchase search usage. This is online purchase also and just call it the
ripple effect. People like P&G are beginning to see that impact. Other consumer companies
are beginning to see that impact. In addition to that, you know, we're seeing, like Patrick
mentioned, the Omnicom deal, which we just announced, agencies are beginning to realize
that this is an integrated buy. This is a buy you need to do across multiple properties,
not just YouTube, the Google Display Network and the search network, hence the notion of
trying to create a trading desk, not just with people like Omnicom but, but we have
deals in places, publicity's in, and GroupM, etc., as well.
>> JANE PENNER: Ready for the next question, please.
>> CONNIE: And we'll go next to Jason Helfstein from Oppenheimer & Company.
>> JASON HELFSTEIN: Yeah, hi, thanks. Can you comment on Android Flash Chrome as an
operating system? So when we think about Android in and of itself on a Mobile device or on
a, particularly on like a cell phone, we can see kind of the revenue opportunity over time
with ads, basically, on apps. When you think about Android or Chrome as perhaps an operating
system for tablets or for computers, is there ever a revenue opportunity in the software,
or should we think of it the same way as we think about Android today? Thanks.
>> JONATHAN ROSENBERG: I think-- this is Jonathan--I think it's probably too early to answer that
question. I think we're mostly focused with Android on building out the platform, on getting
more smart phones out. And on the Chrome side, you know, we're--we're--it's still too early
to say. >> JASON HELFSTEIN: Thank you.
>> JANE PENNER: Next question, please. >> CONNIE: And we'll take our next question
from Scott Devitt from Morgan Stanley. >> SCOTT DEVITT: Thanks for taking the question.
Regarding paid clicks, up 15% year over year, it's been pretty consistently in the teens
for almost two years now. I was wondering if you could just talk about maybe the top
three or four drivers that's keeping that rate at such a robust level for such an extended
period of time. Thank you. >> JONATHAN ROSENBERG: Uh, this is Jonathan.
Um, I think the biggest thing is just the continued secular shift in advertising from
things offline that are not measurable to the ROI-based model of search advertsing where
the advertisers can actually see the benefits and the ROI that they're, uh, that they're
receiving on the money they're spending. We did see a good bit of that during the recession.
I think there was a disproportionate fraction of budgets that were spent on things where
the ROI could be tracked. I think on our side we're doing a lot in terms of ads quality,
as I mentioned in my scripted remarks, and I think the ad format efforts that both Nikesh
and I talked about also serve to increasingly drive clicks.
>> NIKESH ARORA: Just to complement this--I think that we have seen, in fact, I would
argue, you know, the paid clicks moved quite a bit over the last couple of years in response
to the recession. We've seen that, and we've seen the great recovery in Q1 and Q2 and on
a year over year basis. I think that, uh, for us what's really interesting is, you know,
people are...people are searching, people are con--the secular trends, as Jonathan said,
are happening. And because people are searching, people are clicking, and the quality of the
ad network and the products themselves continue to improve. I mean, we just see the symbiotic
relationship happening. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Youssef Squali from Jeffries.
>> YOUSSEF SQUALI: Thank you very much. Two quick questions. The first for Patrick. Patrick,
Patrick, as you look at your business needs for the next couple quarters, do you think
that your level of hiring and your level of CAPX, which this quarter has doubled from
the prior quarter, is--is sustainable? Is it at the level you need to--to get to where
you want to get to? And second, um...what are your reviews in contextual searches that
have been implemented by the other search competitors in which, at least on the surface,
seems to have you guys losing some market share. Thanks.
>> PATRICK PICHETTE: Let me-- I'll let Jonathan talk about contextual search in detail. On
the issue of market share, just to kind of give the highest level answer, I mean, there
has been a lot of debate about people's methodologies from external sources on market share. So
I would just--even the press itself kind of cautioned all these numbers of late. So I
would just find of put the flag out again to say just be cautious. I mean, we are very
pleased with our results right now in terms of market share.
>> YOUSSEF SQUALI: Do you feel you're losing market share?
>> PATRICK PICHETTE: And, uh, no. And the issue that we have is if you think of--now,
I just want to go back to--because there's been so much noise on this data, I think it's
important just to mention it. The...if you go back to the fundamentals of hiring and
CAPX, CAPX, right, is lumpy. And here's a perfect example of lumpiness, right? To be
able to work in Scandinavia in the winter is difficult. We said that we're building
a data center there? Now it's spring and we're working there, so we're also, you know, adding
machines. And it just happens that when you get the generations of chips available and
everything available, then you start rolling out. We had a bit of...kind of the lumpiness
shouldn't surprise anybody, and I think that everybody that, you know, I had discussion
with when we were kind of, like 189 million or clearly on, you know, also unsustainable
low levels, so we're kind of running our plans accordingly. So just stay tuned for CAPX.
But it just happened to be lumpy. In terms of hiring, I think that it really is the case
that, you know, we--I'm gonna take a step back to three quarters ago when we said, look,
for us the recession is over. For us, we see great products and we have a mindset of the
next half decade and the big platforms we are building that are creating, you know,
these huge ecosystems. And for us search, you know, is one and Mobile and Android, as
we just talked about, is one. And then Display is amazing, right? It's really growing. And
to not put resources to actually shield this ecosystem which is the next decade...you know,
it's just such an opportunity. So that's why we're investing aggressively. We think it's
the right thing to do at the moment in the company. So...and that's the balance we're
striving. Even Q3, right, if you think of head count, you have a lot of... people--I
shouldn't call them kids--the people that we just graduate from University are gonna
join us, right? So there may even be, you know, you can think of the bump of the accepted
but not started because they're gonna go backpacking for the summer before they come and join us.
But I mean, ultimately, right, we're looking at a trend of, you know, continuing to invest
in that it's the right thing at this time in the history of the company. So that's on
CAPX and on hiring. And then on contextual search, there's something that you want to--you
need a more refined answer for Jonathan? I'm not sure I understood.
>> JONATHAN ROSENBERG: I guess I'm not sure exactly...what data you're looking at or what
examples you're referring to. >> YOUSSEF SQUALI: Well, just-- I mean, there--the
two main competitors have adopted some processes that, um, in a way inflates their--the number
of searches that are run on their databases. And you guys don't do it. I wanted to just
know if this is something that, um, you guys are gonna pursue as well, or...
>> JONATHAN ROSENBERG: I understand. Right. So...I mean, generally, we don't comment on
the third-party data, but what you're alluding to are basically the methodological problems
that have been publicized with respect to auto-roll slideshows that generate. Yeah,
basically, if you think about it from a search perspective, it's--it's a spurious request
because it's not really an incremental search. >> YOUSSEF SQUALI: Right.
>> JONATHAN ROSENBERG: So the thing that matters to us is, ultimately, consummating transactions
by conversions that we're sending to advertisers. So what we care about is the number of genuine
searches that users are running where they wanna get directly to an answer or a website
or where they're interested in actually clicking on an advertiser's ad. It wouldn't help us
in any respect other than in generating accounts in shared data to...to cause our--to cause
the total number of searches to artificially go up. If there wasn't user intent behind
them, it was of value to our advertisers. So the basic answer to your question is no.
>> YOUSSEF SQUALI: Okay, makes sense. Thanks. >> PATRICK PICHETTE: Thanks, Youssef.
>> JANE PENNER: Next question, please. >> CONNIE: And we'll go next to Jordan Rohan
from Stifel Nicolaus. >> JORDAN ROHAN: I'd like to delve a little
further into some of the growth that you're seeing in the rest of the world territories.
Can you talk about how much directionally growth you're seeing out of Asia versus Europe,
if that's a breakdown that you're willing to give? And if not, can you talk about, uh,
you know, which--which countries really stand out from a growth perspective, on the positive
side? Thank you. >> PATRICK PICHETTE: I'll let Nikesh answer
that. >> NIKESH ARORA: Well, you know, I'd prefer
not to talk about regions, because in every region, there are countries which do fantastically
and there are countries which are challenged. You know, if you were asking about Greece,
I wouldn't have to answer the question. So similarly, there are countries like Russia,
like Brazil, like India which are growing fantastically for us and continue to show
good growth. It's a combination of more advertisers, a combination of internet penetration getting
higher, a combination of people getting savvier, advertisers getting more and more ready for
the E world. So we're seeing good growth this quarter. We saw good growth in Brazil, India,
Russia. And then we saw great growth. So then we saw good growth in many other parts of
the world, so, you know, even places like France performed for us wonderfully this quarter.
Even the larger marketplace like Australia and New Zealand performed well for us. So
I am loathe to give an answer on a specific territory. I prefer talking about countries
because I don't know how to go visit Asia. >> JORDAN ROHAN: Fair enough. Countries are
even more helpful. Thank you. >> JANE PANNER: Next question, please.
>> CONNIE: And we'll go next to Sandeep Aggarwal from Caris and Company.
>> SANDEEP AGGARWAL: Oh, thanks for taking my questions. Actually, I have two questions.
One is if you look at the sponsor clicks versus CPC last quarter, paid clicks were up 15%,
CPC was up 7%. Sponsor-- Paid clicks remained at the same level, but CPC have come down
quite a bit. I know some of this is mix shift, some of this is FX. But I guess my question
is, you know, is there any competitive dynamics or maybe increased focus towards organic search?
Or changing user behavior playing any role in terms of some weakness in CPC? And then
I have a follow-up. >> JONATHAN ROSENBERG: Uh, this is Jonathan.
I think probably the easier way to answer the question is to just give you my quick
observations on the things which are clearly driving CP-- contributing to driving CPC's
on average up, versus those that are impacting them in the other direction. Um, I don't see
anything from a user perspective or share perspective that is obvious that's impacting
the overall equation. I think we are seeing, on the positive side, conversion rates improving,
which is driving CPC's up. I think your comment about the relative shift in mix to google.com
from AFC does contribute positively to CPC. Google.com is obviously higher. So any mix
shift there, everything else being constant, increases CPC. The obvious things that we've
talked about in the past that push it in the other direction are emerging markets--Brazil,
India--Nikesh talked about some of those examples earlier. Mobile growing in the mix, you know,
and people increasingly looking for, you know, longer tail queries that monetize lower to
add into their campaigns. Those are--those are the overall factors.
>> SANDEEP AGGARWAL: And... >> PATRICK PICHETTE: Sorry, Sandeep, go on
with your follow-up. >> SANDEEP AGGARWAL: Yeah, so Patrick, actually,
you know, the other revenue, actually, on a yearly basis is showing visible slow-down
versus last quarter. And you specifically made commands that DoubleClick was very strong.
And then, you know, you have a NexusOne, which is contributing second quarter, in terms of
the, you know, kind of increment revenue source. In spite of these things, other revenue was
noticeably slowed. So was it because there was some kind of slow-down in the Google Enterprise
business? Or what else is going on there? >> PATRICK PICHETTE: No, in essence it's one
word, it's NexusOne. So the quarter over quarter impact of NexusOne is driving, you know, substantially
that change. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Aaron Kessler from Think Equity.
>> AARON KESSLER: Yes, hi. A couple questions. First, on China, just trying to clarify, is
it your understanding that the government's okay with your new solutions in terms of your
search link on this dot cn site? And is there updates on trends and traffic you can give
us that you're seeing in China? Also, just in terms of clickthrough rates for mobile
on sponsored ads, any comparison you can give us there versus how you see clickthrough rates
on PC? Thank you. >> PATRICK PICHETTE: Okay, so I'll answer
to China, and then I'll let Jonathan talk about the clickthrough rate mobile versus
PC. On China, look, we--we're basically at the same place when we last discussed, or
last time I talked about it, which is, we have our license renewal. But-- And apart
from that, certainly from a financial perspective, I just wanna reiterate to everybody...right,
revenue from China is not material to our revenue. And...and having said that, right,
we had, you know, decent revenues for Q2. And so, I--given the sensitivities of everything
that's going on with China, I hope you will understand why, you know, I don't wanna talk
more about it. We're working very closely to kind of continue to work through the situation.
Thank you. On the clickthrough rate, mobile versus PC, Jonathan, insights?
>> JONATHAN ROSENBERG: We don't actually break out the click- through rates on mobile versus
the PC. I mentioned there are new formats and efforts that we've offered that are starting
to increase them, like the click-to-call offering. I think the main thing that's really gonna
fundamentally have to change there, which is the big difference between mobile and desktop,
is that today on a mobile phone, people are actually less likely to consummate a transaction.
Because the logistics of actually entering a credit card or, you know, being signed in
on a browser is somewhat more time-consuming and onerous. So I think that for the mobile
system to move very aggressively is going to require more of those commercial transactions
actually being taken and placed on the mobile devices. On the display side, the AdSense
for mobile is actually doing very, very well. And one of the reasons that's doing well is
sort of the opposite of what I just stated in terms of effect. On a mobile device, the
display ad is something that really kind of gets in your face. The screen is relatively
small, so you see it. It's unlike a desktop in that you're not typically doing multiple
things at once. So display I think is relatively closer to the desktop than is search-based
ads. >> AARON KESSLER: Great, thank you.
>> JANE PENNER: Next question, please. >> CONNIE: And we'll go next to Sameet Sinha
from JMP Securities. >> SAMEET SINHA: Yes, thank you very much.
I just wanted to--if you could comment on this Omnicom deal that you had signed--Can
you talk about what the ramifications are? What sort of advertisers do you expect will
participate? And any of the details would be appreciated.
>> NIKESH ARORA: Yeah, sure. You have to understand, as we look at display, there are two significant
changes that are happening. One is display buying, which traditionally has been advertisers
buying sites is slowly and surely shifting to audience buying. So I, as an advertiser,
no longer wanna buy tiffany.com or newyorktimes.com only. I wanna be able to say I'd like 18 to
35 year-olds who are savvy, who understand technology, and who would be interested in
my product. As you go towards that audience-buying notion, what advertisers are looking for is
they're looking for specific inventory and specific audiences, whichever site they might
be on. So it becomes even more important for some sort of trading desk-type phenomenon
to exist where an advertiser can buy across any publisher they'd like to buy. Now that
makes it even more important that you can find some trading desks which are exchanged,
where you can have every publisher represented. Because if you have seven different networks,
it's suboptimal as an industry to have an advertiser to have to go to seven different
networks to be able to accumulate audiences with different standards and different ways
till seven different networks look like it. So effectively, the ad agencies which are
buying advertising for advertisers would like to have a common platform which allows them
to buy across these entire networks. And that's what we're working on Omnicom with. Where
they believe that if they have the right trading environment setup for the advertisers, gonna
be tremendous value for the advertisers, because advertisers come to a one-stop shop and buy
across networks. And also, allows for tremendous efficiency because the best seller of advertiser
may not be the best acquirer of the publisher. So therefore you can separate that in some
sort of an ad exchange context, which is what Omnicom is working with us on. And if you
get it right, there's hundreds of millions of dollars at stake in this kind of a deal
because that allows very effective buying across the board on a network. And every player
in that ecosystem can get their fair share of the profit.
>> SAMEET SINHA: Great. Thank you. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Mayuresh Masurekar from Kaufman Brothers.
>> MAYURESH MASUREKAR: Hi, could you talk a little bit about search remarketing? It
seems that you are, by far, the leader in source, so a lot of despair I would need Google
for doing this well. So what kind of growth or traction have you seen for search remarketing?
And what's the pricing for this product compared to all the display alternatives? Thank you.
>> PATRICK PICHETTE: We don't do search remarketing. We do remarketing on the display side. We
basically are able to go look at what we call interest based advertising. If you understand
that certain users are interested in certain things, we have--based on their having chosen
to allow us to use that information, we have the ability to then market them and show them
ads. And that is way more effective than blindly trying to show advertising to users. Clearly,
we're seeing tremendous success in that area. But that's all we do in terms of free marketing.
>> MAYURESH MASUREKAR: And what's the pricing for this compared to other alternatives?
>> NIKESH ARORA: The pricing is very simple. The more effective the advertising is, the
more likely the advertisers are willing to bid more money for it. So you should expect
the more efficient we make advertising, the more relevant it becomes, the more R.O.I.
generates the advertisers, they're willing to compete more aggressively with other advertisers
with the same piece of real estate. So we see that--we see the effectiveness of that
reflected in the higher CPC for a pretty good product.
>> MAYURESH MASUREKAR: Thank you. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Colin Gillis from BGC Financial.
>> COLIN GILLIS: Patrick, on the acquisitions this year, what is the philosophy, you know,
in the financial discipline used to determine the purchase price? And then separately, was
ITA a competitive risk? >> PATRICK PICHETTE: I'm not going to comment
on the last piece. Um, what I'm gonna say is, look, we have--there's a real kind of
triangulation between three factors in our strategy for acquisitions. So think of it
as talent, intellectual property, and then price. And so what we're looking for is the
sweet spot where when we find teams of people that are--you know, have clear leadership,
that if you think about it, the venture capital world is actually kind of voted by them surviving
as long as they have. And they have as a team, you know, great talent-- engineering talent,
specifically. On top of that, for the second piece of it, which is they have proven that
they actually have good intellectual property. Whether it be...you know, whatever the app
they're working on, or whatever in the case that you just mentioned of ITA, right? A lot
of interesting kind of structure of data. So the third piece is obviously price. There's
a price after which, you know, it's not worth it to us. And then there's a price, you know--there's
a trade-off of, you know, on price. And what we do is we do every one of them. We ask ourselves
the question. You know, we look at the intellectual--and then let me put the overarching last fit,
which is how does it fit within those four areas that I've talked about earlier, which
is where we're trying to accelerate our development. So you know, AdMob is a perfect example of
that where, you know, great technology, fantastic team with the right price that basically takes
a huge chunk of what was our engineering road map and bring it today. Integrate it into
the team. And then we have much smaller teams, sometimes of 12 to 15 engineers that have
a great piece that actually, you know, Ontoo is another one like that. Right? When you
think about the video codec. So it's always a trade-off. And there are many cases where
we look at them and we don't buy them because we can't find the fit somewhere in those three.
So, I mean, that's how we think about it. And it is disciplined. And we have debates
about them. And sometimes, you know, we kind of--we often say no. That's how we think about
it. >> COLIN GILLIS: There are ample deals that
you walk away from just because the purchase price at the end of the day?
>> PATRICK PICHETTE: Oh, yes, we do. [chuckles] Yeah.
>> COLIN GILLIS: Jonathan, while I got you on the line, talk a little bit, or help us
frame how additive are mobile searches? You know, like, is there a rate of search growth
you could share for users across all devices? Maybe tied to the same log-in?
>> JONATHAN ROSENBERG: I don't actually have any data. But intuitively, I think that they
are additive because what-- I mean, think about it this way, when you're at your desktop,
if you have your PC at your desktop and your mobile phone, you're not gonna do the search
on your mobile phone. So almost all searches that you were otherwise doing on your desktop,
I think you're still gonna do on your desktop. On the other hand, there are times when you
are out with your mobile phone and you didn't have your desktop device. Then obviously those
are, you know, by definition incremental. Unless, of course, you know, in theory, you'd
remember to go back and do that search when you came back to your desktop. But I don't
think that there's much evidence that that's the case. I think the vast majority of them
are incremental. I think they're also slightly different usage patterns across desktop and
mobile. You tend to see more use of the mobile devices on weekends, which is not surprising.
But they don't actually have any more specific data that proves, you know, those observations
or that hypothesis. >> COLIN GILLIS: But I would imagine those
curves, including the transaction curves, you know, ultimately bend towards each other
over time. >> JONATHAN ROSENBERG: I guess I don't understand.
I don't understand exactly what you're saying. >> COLIN GILLIS: Our usage--our mobile usage
in the way we use our mobile, especially as we get more broader band, you know, you've
talked about your 4G connections. >> JONATHAN ROSENBERG: Sure.
>> COLIN GILLIS: And our desktop usage. I mean, ultimately there should be much difference
between the two of them over time. >> JONATHAN ROSENBERG: Well, I think the mobile
usage is--will grow, and it in many ways will be incremental, because you'll be able to
do a lot more when you're out in the field. And you know, for example to--within a store
scan a barcode with your smartphone, look at the price on the shelf, and determine whether
or not you actually would prefer to consummate the transaction through a web-based alternative,
and then automatically complete the transaction is the kind of thing that's all gonna be incremental.
And I think as these devices are able to do more of that, people are gonna do it.
>> COLIN GILLIS: Makes sense. Thank you. >> JANE PENNER: Next question, please.
>> CONNIE: And we'll go next to Heath Terry from FBR Capital Markets.
>> HEATH TERRY: Great, thanks. Look, Patrick, in looking at YouTube beyond views, you know,
it's obvious that the majority of those views still aren't being monetized in any way. But
what's standing in the way of more monetization of this inventory, which, you know, for the
most part, still seems to be the user-generated content side of things. How significant is
it, and does the Viacom ruling change your ability to monetize that inventory?
>> PATRICK PICHETTE: I'm gonna let Nikesh give you the kind of high-level answer, and
then I'll circle back on the Viacom specific. >> Nikesh Arora: I'm gonna let Patrick talk
about the Viacom stuff. But you have to understand first of all, YouTube is five years old, right?
So this is a phenomenon that has been created over the last five years. We look at YouTube
and we monitize it many different ways. We monetize the home page of YouTube, we monetize
watch pages on YouTube, we do promotion videos, and we're looking at various new ways of looking
at how we can put ads into content. Now, part of the process that has been going on is we
have to continue to free up more and more inventory for it to be available for us to
advertise on. So we've done a lot of deals recently where-- whether it's music societies
around the world and various countries around the world, where we are getting permissions
to be able to show advertising in those places, which allow us to create more inventories.
So that's the inventory side of things. And we believe we're on a good path to continue
to create more and more available inventory. In addition to the inventory side, we have
to now keep getting advertisers to start giving us quality video advertising, which can be
put onto YouTube. And my view on this is that, you know, we're on the very, very early stages
of video advertising. Because what advertisers do, they will splice a video ad that they've
created for television and they will stick it on YouTube. Now if you understand, YouTube
allows you two more things which television does not. A, it allows you to interact with
the ad, which TV does not, and most of the ads on video ads, so far, are not interactive.
So they expect as that begins to happen, people will start creating more and more interactive.
The second thing which it allows you to do is it allows you to create some- thing of
personalization. The ad your grandmother sees, and I see, and my daughter see need not necessarily
be the same ad for anything. So you know, both those features, we think, will come into
play more and more on the advertising side. So as we get more personalization, more interactivity,
as we get more inventory clarified for YouTube, we think that it's going to create more modernization
opportunities. And couple that with the previous conversation on display and the ability to
buy audiences, that will just provide sort of the icing on the cake as this thing goes
forward. >> PATRICK PICHETTE: So, look, on my side,
on the issue of Viacom, right, we're still in appeal, so I don't wanna comment on the
specifics. What I can say is two things, right. Obviously, with more clarity from this judgment,
it gives us more room for experimentation that we didn't have before. Because, you know,
until these rules are cleare, you don't know exactly where the bar is. And with that clear
bar, we now have much more room for experimentation. And then on-- just a comment on if there was
ever a great illustration of Nikesh's point a minute ago, I mean, just look in the last
few weeks about the Old Spice experiment on YouTube. And if you have not tried that, just
go on YouTube and check Old Spice. About the interactivity of Twitter, Facebook, you know,
YouTube in advertise--It's just absolutely phenomenal. So it just gives you a glimpse
of where the world is going. And it tells you again about we're just scratching the
surface. >> HEATH TERRY: Great. Thank you.
>> PATRICK PICHETTE: Thank you. We'll go to the next question.
>> JANE PENNER: Yes, operator, we have time for one more question.
>> CONNIE: And we'll take our final question Richard Fetyko from Merriman and Company.
>> RICHARD FETYKO: Thanks, guys. If you break down the components of your display strategy
and revenue streams, how would you rank the revenue opportunity of each, between YouTube,
AdSense display, network, and the ad exchange in the long term?
>> PATRICK PICHETTE: I'll let Nikesh answer it.
>> NIKESH ARORA: I think it's very important to understand that all these things work to
compliment each other. You know, the ad exchange allows a buyer to buy across multiple networks.
So without an ad exchange, it makes it very inefficient for advertising to be bought,
and therefore the buy's not going to go as fast enough. So you want to make sure you
can create some consistency and standardization in the way display advertising has been bought.
If you want to take the big TV dollars to start coming into display, as they had been
in the early years. I believe Google Display Network is our ability to prove that we can
create a network of our own of multiple publishers, and create premium capability for our advertisers
to be able to target those publishers. And last but not the least, you know, YouTube
becomes our owned and operated property. Sort of like us operating Google.com and our Google
network. So clearly, the margins on our owned and operated properties are higher. And that
allows us to have a premium property in this space. And it also allows us to accumulate
tremendous amounts of content, which we can then offer to advertising. So you have to
understand, all these three are very relevant to the overall strategy. And not trying to
prioritize any one over the other, but clearly, YouTube being able to monetize, bringing more
TV dollars into YouTube is fantastic. Google display network being able to monetize that
opportunity across multiple publishers is great. And without Adex, which is the glue
that will bind all these networks together, it is hard to see that industry growing as
fast as we'd like to see it grow. Let me--If you'll allow me to CFO answer, these are each
and every one of them billions of dollars of revenue opportunities. They're not hundreds
of millions, they're bill--The way we think about it in terms of addressable market, this
is already a $20 billion industry that is growing really fast. And so for us, every
one of them we attack. And that's why, again, we continue to invest in the total ecosystem.
Listen, we've had--Thank you very much for all of your questions. I wanna thank Nikesh
and Jonathan again for joining me. I wish to thank every Googler that's on the call
listening to us. I mean, our engineers, our sales force, our support staff--all these
people. I mean, every 90 days, you know, we look at our results and we continue to be
so pleased. But it is really the great hard work of all our Googlers. And so for that
perspective, I just wanna give two thumbs up again to the Googlers for a fantastic job
over Q2. And with that in mind, I'll turn it back over to Connie. I wish you a great
summer, everyone, and we'll talk to you in Q3. Connie, you can close the call, please.
>> CONNIE: Thank you. And this concludes today's conference, we thank you for your participation.