Q2 2012 Earnings Call

Uploaded by GoogleIR on 19.07.2012

>> Willa Lo: Good afternoon everyone. Welcome to today's
second-quarter 2012 earnings conference call. With us are Patrick Pichette, Senior Vice
President and Chief Financial Officer; and Nikesh Arora, Senior Vice President and Chief
Business Officer; Susan Wojcicki, Senior Vice President Advertising.
Also as you know, we've issued our earnings release through our Investor Relations website
located at Investor. Google.com. Please refer to our IR website for our earnings releases
as well as the supplementary slides that accompany the call. This call is also being webcast
from Investor. Google.com. A replay will be available on our website later today.
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, our
long-term growth, and its innovation, the expected performance of our businesses 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
that we use on this call such as operating income and operating margin are expressed
on a non-GAAP basis and have been adjusted to exclude 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 reconciliations
of non-GAAP to GAAP measures can be found in our earning press release. With that I
will turn the call to Patrick. >> Patrick Pichette:
Thank you Willa, and good afternoon, everyone. Thank you for joining us. Well, this is a
special call. As we enter into a new chapter in our history at Google here with our recent
acquisition of Motorola. With it comes a new set of financial information for all of you
both at a consolidated but also at the segment level.
Speaking of Motorola, it's worth noting that given the recent close of the transaction,
we can expect this specific segment of our financials to continue to show some accounting
variability. So for example, this quarter it's a stub period, meaning it only reflects
the results since the acquisition date rather than the full quarter. And as a result of
the close, we did a number of accounting adjustments typical for such transactions.
So we'll try to do our best and answer your questions on this call, and our Investor Relations
team will also continue to support the analysts and investor community during this transition.
Now let's quickly cover our consolidated results as well as segmented reporting for both Google
and Motorola. Our gross total consolidated revenue grew
35% year over year to $12.2 billion and 15% quarter over quarter. So again, please remember
that these total consolidated numbers include a stub period for Motorola. Additionally,
there was a significant year-over-year currency headwind in Q2. In fixed FX, revenue would
have grown to 39% year over year instead of 35%. Google on a stand-alone gross revenue
grew 21% year over year to $11 billion, and 3% quarter over quarter.
Our Google website revenue was up 21% year over year to $7.5 billion, and 3% quarter
over quarter, which trends across most major geographies and verticals. Google Network
revenue grew 20% year over year to $3 billion, and 2% quarter over quarter. Our other revenue
line grew by 42% year over year to $439 million and 5% quarter over quarter. It's again worth
noting that in fixed FX our revenue would have grown 25% year over year.
Motorola grew revenue for the stub period since May 22 at $1.3 billion. Our mobile devices
revenue for that period was $843 million, encouraged by the strength of the North American
Verizon franchise, driven by the RAZR Maxx sales, although we've seen also weaker revenues
that were driven by the declining international sales of feature phones and mid-tier smartphones.
The home business revenue was $407 million. The core metrics of Google's stand-alone business
continue to perform very well against the backdrop of a somewhat different global economic
environment. Our global aggregate paid click growth was very strong, up 42% year over year,
and also up 1% quarter over quarter. Our aggregate cost-per-click growth was down 16% year over
year, and up 1% quarter over quarter. And please remember that the currency headwinds
also obviously had a quite negative impact on the CPCs in Q2.
Turning to geographic performance of Google's stand-alone business, the US, UK and rest
of the world are growing at a good pace as reflected in our results. In our earnings
slides which you'll find on our Investor Relation website, you'll see that we've broken down
our revenue by US, UK, and rest of world to show the impact of FX and the benefits of
our hedging program. So please refer to those slides for those exact calculations.
Revenue from the US was up 20% year over year to $5 billion. Our non-US revenue accounted
for 54% of our total revenue, or $6 billion, and was up 22% year over year, which includes
an $81 million benefit from our hedging program. The UK was up 20% year over year to $1.2 billion,
and in fixed FX terms, in fact the UK grew 22%. Coming back to an aggregate level for the
total consolidated business, other cost of revenue was $2.3 billion in Q2. Our non-GAAP
operating expenses totaled $3.3 billion, which excludes stock-based compensation and charges
related to the severance and benefit arrangements in connection with the Motorola acquisition
of $652 million. Our non-GAAP operating profit was $4 billion in Q2, resulting in non-GAAP
operating margin of 32.3%. For stand-alone Google, our traffic acquisition
costs were $2.6 billion, or 24.7% of total advertising revenue. Our other cost of revenue
was $1.3 billion, and that's excluding SBC of $82 million. Our non-GAAP operating expenses
were $3.1 billion, also excluding SBC of $470 million.
Finally, non-GAAP operating profit was $4 billion in Q2, resulting in a non-GAAP operating
margin of 36.4%. This continued strong margin in our stand-alone Google business segment
gives us the confidence to continue to fully fund our many strategic growth areas such
as mobile, Android, YouTube, and Chrome. Obviously Susan and Nikesh will go into more details
of our initiatives in a moment. At Motorola, our non-GAAP operating expenses,
including cost of revenue for the stub period were $1.3 billion. Keep in mind that intangible
amortization of expenses and the step-up costs attributed to stand-alone Google and Motorola
are included in these non-GAAP measures. And as a result, the non-GAAP operating loss at
Motorola was minus $38 million in Q2, resulting in a non-GAAP operating margin of minus 3%
for that specific segment. Head count increased roughly 21,500 in Q2.
Obviously Google itself added about 1,200 while the remainder of this number includes
the Motorola employees who joined in the acquisition. In total, the consolidated Company ended the
quarter at around 54,600 full-time employees. Our effective tax rate was 19% in Q2, and
that reflects not only the mix of earnings between domestic, international, subsidiaries,
and our hedges, but also capital gains offset by carried-over capital losses.
Let me quickly turn to cash management. Other income and expenses was $254 million for the
quarter, which reflects gains related to a divestiture of a business, offset somewhat
by lower interest income and by the impact of our FAS 133 expenses from our hedging program.
For more details on OI&E, please again refer to the slides at the Company or call on our
IR website. Operating cash flow was very strong at $4.3
billion for the second quarter. CapEx for the quarter was $774 million versus last quarter
at $607 million. The majority of our CapEx was spent really related to production equipment,
facilities, and land purchases. And obviously we are pleased with our free cash flow which
was $3.5 billion. So now let me hand it over to Nikesh who will
cover more details of our business performance in the quarter. Then Susan will cover our
product highlights. Finally, we'll open up the lines for your questions. Please note
that Nikesh and Susan will discuss only the stand-alone Google business and not cover
Motorola. So let me turn it over to Nikesh. >> Nikesh Arora:
Thank you, Patrick, and hello everyone. Our business had a very strong quarter as you
heard with over $11 billion in revenue. I want to talk about three broad themes today.
First, how our recent big bets in the ad business are coming together into integrated platforms.
I think digital advertising is really in defrag mode.
Secondly, we'll look under the hood at how our investments in Search advertising and
ads quality are helping our Search business accelerate. Third, we're going to talk a bit
about our enterprise business which I believe is reaching a real tipping point. Then I'll
discuss some ways we're driving success for our customers and some marketing highlights.
First, our big bets. In about four years, DoubleClick has gone from strength to strength
at Google. Now it is the foundation of our Display business. This quarter we announced
DoubleClick Digital Marketing, the first modern ad platform for the modern digital world.
This was the biggest ever overhaul of our DoubleClick ad platform, it is used by thousands
of agencies and marketeers and we manage billions of marketing spent across the world on this
platform. It now spans the best of Display, rich media, exchange buying, surge, and measurement.
Two of our recent Display acquisitions, Teracent and Invite Media, which both grew by over
50% last year, are also seamlessly integrated into in this platform.
At the same time, Admeld, which we acquired, is helping provide publishers control flexibility
and more revenue opportunities. Our Display platform helps direct response and brand marketeers
navigate the whole web. For Brands, this quarter we unveiled the Brand Activate initiative,
a series of measurement and planning solutions baked directly into our platform, where our
partners are building an online measurement for GRPs, or gross rating points, and a way
to measure viewable impressions. Effectively what we want to do is we want
to drive more and more advertising dollars in the Brand space, and this platform's going
to be an effective way for us to do that. Recently in Cannes at the big advertising
festival, creative agencies loved Project Re-Brief. This was one of our demos, the possibilities
of how in modern digital marketing you can use multiple media formats to make advertising
successful. That is quite a change from 2004 when our four-line text ads weren't quite
as exciting. Another big bet that's parts of our integrated
solutions is YouTube. I think in 2007 it was when newspapers frequently said YouTube is
groping for an effective business model. I think we can declare we found our model. YouTube
now unites the world through video, from the Human Rights Channel launched this quarter,
to a Pew study confirming YouTube as a major global news platform. And for the first time,
YouTube will be powering NBC's live streaming of the Olympics in the US, while also live
streaming the games in London to 64 territories around the world.
Daily account sign ups have doubled year over year, and users uploading over 72 hours of
video every minute. This quarter we released a new YouTube app for Android, helping users
to find videos and following channels from mobile or tablet device. We believe YouTube
is a proven winner for the whole video ecosystem. Thousands of partners are making six figures,
and we're proud to work with major record labels and Hollywood studios on this platform.
In fact, earlier in May we threw an incredible digital up-front event, Brandcast, highlighting
our YouTube programming partners. Slightly over 1,300 clients attended. Some of the world's
biggest advertisers were there. They're making significant commitments on YouTube, including
people like Unilever, AT&T, and American Express. If you're counting, that's five successful
acquisitions well integrated and helping us succeed in the advertising space.
A sixth is AdMob, which helps power our mobile ads both across Android and iOS and other
mobile platforms in the future. AdMob was integrated this quarter into AdWords. This
has further turbo charged our ability to provide in-app advertising, that's more than 1 million
advertisers with 300,000 mobile apps and 350 million devices at their fingertips. The growth
of the businesses with mobile websites is stunning.
Last quarter we rolled out GoMo, which is short for go mobile. That initiative was rolled
out in eight countries, including Germany, Japan, and Brazil. Mobile-friendly websites
are [wider] for modern businesses and very important for our mobile Search business.
In less than one year, the number of advertisers with mobile sites has doubled.
Other major upgrades to Google Analytics was made for mobile apps and the new AdMob SDK
for developers rounded out an awesome quarter. For us mobile is like desktop was in 1999,
smart marketeers are going to create ROI and we're developing native ad models that generate
results for them. For example, we've had 15 million monthly calls for our click-to-call
format exclusively available in mobile devices in the US.
Let's talk about my second theme, the secret sauce of Search advertising. This quarter
showed why we are so optimistic about Search's continued growth. You know about some factors
that drive Search; the overall move to digital media and new Search ad formats. I think we
often underestimate one factor that you don't often read about -- the amount of effort our
product engineering teams put into the quality and precision of our ads. And that just keeps
getting better. This quarter we made 72 quality improvements
and launched greater option transparency for such advertisers. Effectively what this does,
it improves the relevance of our ads by making it more useful to consumers, it drives better
results for our partners, clients, and advertisers, and it helps improve modernization. Imagine
if every single Search ad was a perfect answer that drove a conversion for a customer. I
think that's the objective that our teams are aiming for.
In Q2, our improvements included better triggering of site links and ads, an improved ad rotation
system, better geographical targeting, expanded match for queue ad variance, and a whole host
of other improvements. As an example of benefits of these changes, the advertisers taking advantage
of new close variance feature, and exact and phrase matching, are seeing roughly a 3% increase
in clicks on average. Let's talk about the third theme. Let's acknowledge
where we are in our enterprise business. I think it's become clear for us that we have
a serious small but growing business which is going to be a future growth engine for
Google. I hope you read this week about a company who said competition was 50% more
expensive than Google and not as cool. That company is now a $200,000 a year Google Apps
customer. Companies, schools, and governments worldwide are moving to the Cloud faster than
ever. More than five million businesses have gone
Google worldwide, with traction amongst large organizations even such as the US Department
of Interior, Fairfax Media in Australia, et cetera. I think it's clear you can't fake
a commitment to Cloud computing, and we've invested to build and scale a business that
has gone from upstart to upper crust. Thousands of businesses switch to Google Apps from our
competitors every day. Recently we've launched products like Google
Drive, Google Maps Coordinate, as well as the ability to edit documents offline, on
a whole range of mobile devices and tablets. That just shows you the pace of innovation
that Google is bringing to the business technology. With over 1 million active applicants with
App Engine and the recent launch of Compute Engine, our Cloud platform, that makes Google's
infrastructure directly available to developers and businesses.
Lets change gears. Let's talk about countries and how our performance was across the world.
Across all products, growth in the Americas and Asia was steady relative to the first
quarter. The US and Canada remained strong. Southern Europe slowed slightly, as it was
hampered by poor macroeconomic and overall ad industry conditions, notably Spain. On
the other hand, performance accelerated in Northern Europe driven by the UK.
Our clients span a full range of industries that are making the web work for their business.
Let's take a few examples. Take the hotel and travel sector. In France, we worked with
Orkut to revamp and improve their Search investment allocation across 23 countries. In Denmark,
top travel site Momondo shifted some of their TV budgets to YouTube and other Google branding
solutions. We are particularly proud about our achievements
in the automotive sector from Detroit to Bavaria. This quarter's highlights included a contract
with Tesla, and a marquee deal with Audi to embed Google Earth in all of their cars. In
Canada, we partnered with Ford around online video content. And GM and Toyota are investing
significantly in YouTube. Switching gears to our agency partners. They're
leading the charge in the digital era. I think we have the best relationships with agencies
around the world than we've ever had before. And we are being able to move those relationships
to real partnerships that allows them to work with their customers to make the web work
for them. I'm particularly proud of the work this quarter
with our agency partners, Starcom MediaVest Group to develop a global joint account planning
project across 50 top accounts. We launched a digital training curriculum covering Google
products and digital trends and were able to train over 8,000 people. Those sectors
are good examples but our partnerships permeate all industries and across all countries.
Spanish health insurer Sanitas made a major investment in Search; now it has become our
most efficient channel for customer acquisition online, accounting for about 25% to 35% of
new customers. In France, Danone is working with us on a global initiative across our
Display and YouTube products. So is a US pharmaceutical manufacturer, Shire.
Intel in China chose AdMob for a cross-platform campaign on Android in the US because of the
reset AdMob provides them and the seamless solutions we offer. In Sweden, H&M is using
Google+ social extensions for Search advertising. Not only does it increase traffic, but it
also gives them a large number of engaged followers. They've increased their click-through
rate on AdWords because of that by an average of 22%.
Let's talk briefly about marketing. Marketing is a key focus for our consumer products.
And speaking about Google+, our marketing team continues to do a phenomenal job supporting
our investments there. Our That's a Plus campaign is now in the US, UK, Japan, and Germany,
and is helping connect communities in Google+. Just this quarter we organized hangouts with
diverse groups from Sir Richard Branson to the NBA to UEFA. And I mentioned the Cannes
Lions Festival. I'm particularly proud, not only are we providing great marketing solutions
to our partners and our customers, our own marketing team received two Grand Prix awards.
One for Project Re-Brief where we worked with Coca-Cola to take an old ad and make it relevant
in the digital media space. And two, for our UK Wide Search campaign. Not only that, they
brought back 25 additional awards -- 5 golds, 8 silvers, 12 bronze, our own mini Olympics.
That's our marketing team, showing that innovation permeates everything we do.
I leave you with two final examples that show the diversity of Google's partnerships. In
France, this quarter we moved forward with a commercial relationship with S&E, which
effectively represents French publishers to put out-of-print books into Google Play for
Android. This helps users more easily access material and enables publishers to generate
additional revenue for their content. Second, from the sublime French literary tradition
to the even more sublime Doodle for Google contest. Our US winner was Wisconsin's second-grader
Dylan Hoffman who in May beat a record 114,000 school children from 48 states. His school
earned a $50,000 technology grant and Dylan's Doodle graced the Google home page for a day.
I think Dylan's not listening to this call, but if he is, he's had a pretty successful
second quarter, as well. Congratulations and thanks to Dylan, his family and his school,
from Googlers all around the world. Thanks to all the Googlers that allowed us to have
such a wonderful quarter. I'm going to hand it over to Susan now.
Susan Wojcicki - Google Inc - Senior Vice President Advertising
Thanks Nikesh. We also had a busy and productive second quarter for all of our consumer products.
Let me start with Search. Our goal is to deliver technology that just works. Larry has described
the perfect search engine as something that understands exactly what you mean and gives
you back exactly what you want. We've made a start towards more intelligent
Search thanks to the Knowledge Graph which understands real-world things, their defining
characteristics, and their connections to one another. Our Knowledge Graph currently
includes more than 500 million things, people, and places, more than 3.5 billion facts about
them. This includes entities like landmarks, celebrities, sports teams, works of art, and
a lot more. By summarizing related content all in one
place, people not only find what they're looking for but they also make unexpected discoveries.
For example, I was making plans this weekend, so I searched for the movie The Dark Knight
Rises. From the Knowledge Graph results that showed
up on the right-hand of my search results, I was able to find out that the movie is coming
out tomorrow, some information about the film, and which actors star in it. Since I didn't
recognize all of the actors, I clicked on the photos displayed and I was able to see
biographical information as well as other movies they had been in. The Knowledge Graph
results also showed me related movies that other people had searched for. I discovered
a number of movies including movies scheduled to come out later this year and next year
that I also want to see.
The Knowledge Graph also works great on mobile. If you voice Search for Julia Roberts movies
on your phone, you will see a list of her latest films in the results. And if you're
running an Android device with Jelly Bean, our latest Android release, Google will actually
say the list of movies back to you powered by the Knowledge Graph, in addition to giving
you the traditional search results. Also on Android, we introduced Google Now,
a feature that intelligently brings you the right information at the right time. Just
before you even ask for it. For example, one morning last week, Google Now told me that
my commute would take 15 minutes longer than normal based on current traffic. All my excuses
for being late are now gone. I didn't have to do anything. The information just showed
up as a notification. Google Now also shows me other things I may
care about like weather, driving directions to my next appointment, cool places nearby,
flight updates, and scores for my favorite sports teams. As you can see, we're serious
about providing more intelligent results. We're moving beyond a search engine that just
matches strings of words to one that understands the people, the world the way people do.
Just as the Knowledge Graph connects real-world thing, Google+ is a social spine that is starting
to connect everything across Google. With the new Google+ local feature, accessible
from desktop and mobile on Maps, Search, and Google+, users can find and share nearly 100
million places and local businesses like restaurants and museums.
Users can make decisions about where they want to go based on Zagat scores, summaries,
and reviews from friends and people they trust who are on Google+. Once they've decided where
to go they can use a new Events tab in Google+ to plan their activity and to share photos
and comments before, during, and after the event.
We've also redesigned the Google+ app for both Android and iOS and we recently announced
a Google+ experience for Google, for Android tablets and the iPad. More users are now accessing
Google+ from mobile devices than from desktop. To date, 250 million users have upgraded to
Google+, meaning they've signed up for Google+ and created a profile. We're excited about
this momentum, but we know it's still early days as people build a community on Google+.
Moving on to shopping. This is another area where we're helping people more quickly turn
their intentions into actions. In May we announced a new commercial model built on product listing
apps. It's called Google Shopping, and our transition to the new model will be complete
in the fall in the US. By having a commercial relationship with merchants, we believe consumers
will see more reliable and up to date information about prices and product availability and
merchants should receive higher-quality traffic to their sites.
We're also experimenting with new commercial formats on Google.com that have product summaries
and larger product images. These new formats are clearly labeled sponsors and they help
shoppers more easily find and compare different products, or refine searches by brand or product
type. Try searching for camping tents to see an example of these new results. Users can
find special offers and deals with Google Shopping and can shop with confidence when
they see a Google-trusted store badge on a retailers site.
On the platform side we had a lot of key announcements and launches at our Google IO developer conference.
Let me give a quick summary of the highlights. We announced 1 million new Android devices
are being activated each day with more than 400 million devices now activated worldwide.
We showed off Jelly Bean, our latest version of Android, and the Nexus 7, our tablet that's
built for Google Play. More than 20 billion apps have been downloaded from Google Play.
We announced that Chrome has 310 million users worldwide, which is up from 160 million last
May. We brought Chrome for Android out of beta, and we introduced Chrome for iOS which
became the most popular free app in the apple app store within hours of its availability.
We launched our new infrastructure service product called Google Compute Engine which
lets developers and businesses run Linux virtual machines on the same infrastructure that powers
Google. Google Documents became editable offline and we announced Google Drive for iOS. Drive
is a place to create, share, and store all your content. It's available even without
an Internet connection. And it functions across Windows, Mac, Android, Chrome OS and iOS.
We have 3D cityscapes in Google Earth for mobile, announced that travelers with an Android
device can now access offline maps of more than 150 countries, and expanded our Street
View map -- our Street View feature in Google Maps to provide panoramic imagery in more
than 3,000 cities across 40 countries. And then of course there was Sergey's surprise
demo of Google Glass with a live video hangout with skydivers wearing Google Glass and jumping
out of an airship nearly a mile above downtown San Francisco and then landing on the roof
of the IO Conference Center. To see this demo for yourself, you can search on project glass
demo on YouTube. I definitely recommend this video. Thanks all for your time. And now back
to Patrick. >> Patrick Pichette:
Thank you, Susan. I'm never going to jump off of one of these balloon planes. It was
an absolutely unbelievable experience. And thanks for Sergey's innovation on that one.
One more thing just before we turn to Q&A, just two announcements. One, we have just
launched our Google+ Investor Relations page, which is designed really to be a great source
for Google products updates and Company news relevant to investors and shareholders. So
please be sure to check it out, and let the IR team know what you think of it. That's
just launched about an hour ago. And as we're about to open the lines, I just also want
to invite David Drummond, our Chief Legal Officer. He'll be joining Nikesh, Susan, and
myself to answer any questions that you may have. Welcome, David, to the call, as well.
And we're going to turn on now Jamie to the Q&A section. Let us know how you want to operate.
>> Operator (Operator Instructions)
Mark Mahaney, Citi. >> Mark Mahaney:
Two questions please. First on Motorola. The comments at the time of the acquisition was
that it would be accretive. Do you still feel that that asset can be? And any thoughts you
would give us as to how you would make what has been pretty consistently a loss-leading
asset that's Motorola Mobile, how you would make that accretive? A product question on
Search. What do you find in terms of the appetite or the interest in voice Search,? Google's
had a voice Search capability for a while. But as you've noticed over time, have people
more interested in using that less, the quality of that, versus whatever regular Search? How
interesting do you think that is as a growth area for Google in the future of voice Search?
Thank you. >> Patrick Pichette: So, I'll just answer
the Motorola question, then let Susan jump in on the Search. On the question of Motorola,
look, we're totally excited about this opportunity that we have at Motorola. Our Management team
has been there only a few weeks. Clearly, everybody should expect some changes in Motorola
that we have talked about the in the public domain. When we said Dennis and the Management
team is there resetting and retooling it. But we have nothing really to announce right
now. I think we're -- we have to let them do their work. But I can tell you there's
a palpable excitement at MMI for all the employees but also for the plan.
I just want to come back, Mark, to your point on accounting. If you actually took out the
accounting issues that were related to closing the transaction, whether it be the stub period,
the amortization of intangibles, and some of the adjustments that were related to the
acquisition, in fact on the mobile side, they didn't have -- they had a pretty stable and
good quarter. There's a lot of accounting noise in the data. So I think it's going to
take one or two quarters before all that noise comes out. Susan, do you want to comment on
the voice Search? >> Susan Wojcicki:
Sure. Yes, voice Search has been an area that Google has been investing in for a number
of years. We believe like we have really good technology here because we've invested for
so long on this. And you know, as I mentioned in my -- when I talked beforehand, now with
the Jelly Bean release, we have the ability not only to ask a question but also to have
the answers given back to you. I definitely recommend that you test that out. it is very
powerful. We think in the right circumstances users will want to -- some users will want
to type, and some users will want to have voice. And so in the circumstances where they
do, we've developed a really amazing technology that is leading edge on that.
>> Mark Mahaney: Thank you, Susan, thank you, Patrick.
>> Operator: Spencer Wang, Credit Suisse.
>> Spencer Wang: I guess one question in two parts for Patrick
on Motorola. You talked a little bit about some of the accounting noise, Patrick. It
doesn't sound like it's finalized yesterday. I was wondering if you could give a rough
sense of the purchase price allocation in terms of the hard assets versus goodwill versus
other intangibles so we can sort through some of that noise. The second part is, I was wondering
if you could just talk a little about the Motorola Home business in terms of how that
fits in, if you guys consider that strategic. Thanks.
>> Patrick Pichette: Okay, so on the details of the purchase price,
we haven't given in terms of the asset, and obviously the IR team can follow up with you
on that. I think in our disclosures, the press release and the like, you will see, for example,
intangibles was $30-some million in the case of Motorola and $32 million I believe, for
Google, just on intangibles. It gives you a sense of the numbers for the stub period.
As it relates to the Home business, again, a bit of the same story that I told Mark prior
which is we've just got into the place, and we are in the process of evaluating every
business of MMI and every division of it. So it's a little bit too early to comment
on big changes now. I just need a bit of patience for us to complete our homework as we've been
there just for a few weeks. >> Spencer Wang:
Sure. Thanks a lot, Patrick. >> Operator
Carlos Kirjner, Sanford Bernstein. >> Carlos Kirjner:
I have two questions, one on mobile and one on Youtube. On mobile, have you conducted
any studies on the impact of mobile adoption on search query demand by end users? And do
you have a perspective on what portion of mobile queries are incremental versus cannibalistic
for handsets and tablets? And on Youtube, I think one or two quarters ago, Nikesh referred
to Google Analytics as the unsung hero of the business. Thinking about Youtube brand
advertisers, how do you give them visibility into brand advertising ROI in Youtube, and
do you think you'll be able to do that to get the dollars to flow and overcome the obvious
challenges that you may have there? >> Patrick Pichette:
So, Nikesh should answer the second question. Susan, on cannibalization of mobile versus
desktop. >>Susan Wojcicki:
Yes, definitely. We've spent a lot of time looking at that to try to understand how those
two different types of devices and how those searches interact with each other. And the
analysis is very complicated. But I will say we believe that mobile searches are mostly
incremental. For example, on weekends when users are out and about, we usually see a
rise in mobile activity. Then when users come back on Monday, we see a rise of desktop.
So although it's not a one-for-one, we do believe that they are mostly incremental.
>> Carlos Kirjner: And does it vary, Susan, between handsets and tablets?
>> Susan Wojcicki: Advertising In terms of queries?
>> Carlos Kirjner: No, in the incremental versus cannibalistic?
>> Susan Wojcicki: I think we're still in the process of trying to run our analysis
and try to figure that out. I think the thing that handsets and tablets have in common is
they're both on the go. And people are willing to take them, although people use tablets
certainly in the office environment, as well. So I would say we're still doing the analysis
on that.
>> Carlos Kirjner: Okay. >> Patrick Pichette: So we have a clearer
view on the handsets, and on tablet there's more analysis to be done. On Youtube, Nikesh?
>> Nikesh Arora: Carlos, hi. Yes, on Youtube, there are two different issues, right. If
you're talking about performance advertisers, they're able to look at ROI on Youtube, versus
other performance media on the online space. It gets more interesting when you start talking
about Brand. Because Brand is not just about the online space, Brand is also about the
television space. And we've done some very exciting things with single-source panels
where we worked in Germany with thousands of users and tried to look at advertising
effectiveness and efficiency, not just on Youtube and online video but also compared
that to television. And we're incorporating that into our Analytics and our sales pitches
to show how the ROI is available on Youtube. We've noticed not only do you get higher ROI
but you also get higher reach and higher frequency capabilities on Youtube because you are looking
at users on a very large online platform. >> Carlos Kirjner: Thank you.
>> Operator: Ben Schachter, Macquarie. >> Ben Schachter: Two questions. I was wondering
first if you could update us on Larry's health situation. And then I know it's early, but
can you update us on the usage of Chrome for iOS devices? And any comments you can give
to help us understand the importance of that product and also how you plan to market it?
And then also, historically you've talked about self-driving cars and some of these
other projects as relatively low-investment, high-media profile projects. But it seems
with Google Glass and some others, they're taking more management time and focus. Should
we be thinking about those differently? Thanks. >> Patrick Pichette: Okay, why don't I let
Nikesh talk about Larry's situation. Susan can talk about the second question on iOS
Chrome and then I'll just take the third one. So Nikesh?
>> Nikesh Arora: There is no more new news on Larry. Larry has lost his voice And we
said that means he cannot do any public speaking engagements for the time including today's
earnings call. But he continues to run the Company. And he is here and involved in all
the strategic business decision that we're making. Susan?
>>Susan Wojcicki: Yes. And on Chrome for the iOS device, from the moment we launched, it
was very popular in the app store. We've seen it as one of the top apps. It's something
we've invested for many years on Chrome. It has got a lot of really compelling features
from security, being very fast. And we continue to expect to see growth just because of the
users using it for the different features that make it a really great product.
From the other things, the self-driving cars, and Google Glass, those continue to be projects
that from a headcount perspective are very -- are small, we've talked about them being
small but they have the potential to be very big. And I think they are also projects that
-- we sort of think about them as moon shots a lot of times, like projects that we think
can have really amazing capabilities. But again, they get the Company excited, but in
terms of actual resources, it's a very small number.
>>Patrick Pichette: The fact that Sergey is actually leading the Glass project doesn't
change any of the strategy. From that perspective, it's just very exciting, and fun to share
it with people when we have such exciting demos. But I wouldn't change any of the strategy
in terms of the real focus of Management and our capital intensity.
>> Ben Schachter: Thanks. >> Operator: Scott Devitt, Morgan Stanley.
>> Scott Devitt: I have two, please. You've previously referenced the talent or last year
increased cash compensation by 10%. I was just wondering given the transition of a number
of companies that you compete with for talent into the public markets, could you just give
an updated view on the cost and availability of talent in the valley? And then secondly,
on a last 12 months basis, Google's generated $12.5 billion in unlevered free cash. So you
now have an 8% unlevered free cash yield. And you're generating cash at a run rate that
equates to about 30% of the current cash position. I was wondering if you could just talk a bit
about the way that you're currently thinking about capital allocation or specifically a
share repurchase. Thanks.
>> Patrick Pichette: Okay, let me start with the second one first.
We continue -- and I know that I sound a bit like a broken record on this, but on a very
regular basis we actually debated with our Board. And our cash position is really a strategic
asset to us given all the innovation that's happening and all of the options that are
available to us. It has been such a -- you just take Motorola which we just closed. It
was a real strategic asset to us to actually be able to pounce.
So we haven't changed our position in terms of share repurchases or dividends or any of
the others for a time being, which does not mean we don't evaluate. We do take a good
look at it. We just think that it continues to be a strategic asset for us. And so that's
why we haven't changed our position as of yet. In the case of the talent, I think that
the valley continues to be hot. It's a hotbed of innovation. There's a lot of -- a lot of
need for that talent, especially at the very -- the engineering front. And we're delighted
by our strategy. We continue to see really benchmark levels for our retention purposes,
and we continue to attract the very best talent. For us, it is an absolute strategic asset
again for the Company. Googlers, the engineers that are here and the salespeople, they really
make a huge difference to the velocity of the Company. So the valley has not changed.
It continues -- despite everything else that's going on in the world out there, the valley
continues to be absolutely hot. And we're so pleased to have seen our strategy pay out
so well. So thanks for your question, Scott. Very good question. Let's go to our next question,
please, Jamie.
>> Operator: Heather Bellini, Goldman Sachs. >> Heather Bellini: I have two questions.
First, what are you seeing in terms of mobile CPC trends, and how do you see these trends
playing out over the course of the next 12 months? The second question is, with the Nexus
7 on the market, can you talk a little about your plans to accelerate content acquisition
in particular in video and books, thank you. >> Patrick Pichette: I think Nikesh is perfectly
suited for both. >> Nikesh Arora: Hi, Heather. Thank you for
your question. I think the good news is that we're seeing phenomenal growth in the mobile
queries across the board, whether it's tablets, whether it's mobile phones, whether it's geographical,
we are seeing phenomenal amounts of mobile queries across the board. I think as I said,
mobile is right now where Search was in 1999. We had a situation where we -- Susan's team
was doing phenomenal product innovation to keep driving more and more efficiency for
the advertisers. We were working with advertisers to get them to get better landing pages, better
sites, get them to understand truly the opportunities in the mobile space.
For example, you can make phone calls. So we have a product called click to call. Now
the Search takes on a whole different meaning because there's a better conversion and people
actually click and make phone calls. So we are seeing mobile CPCs are healthy, and we
expect in the long term that they will continue to be healthy and follow the trajectory that
Search has followed. More inventory, more effectiveness, more ROI for the advertisers,
better pricing in the market. In terms of your second question, Nexus 7,
I think we have made tremendous amounts of headway in the content space. We have a lot
of content in Google Play. We're working closely with the music industry, with Hollywood Studios,
et cetera, to get more and more content in the platform. And I think given that there
are models out there where other people are offering content in the platforms, it is becoming
pretty standard that you can have the ability to offer content to the end user, and we are
making tremendous amounts of progress across the board.
>> Operator: Doug Anmuth, JPMorgan. >> Doug Anmuth: I just wanted to ask two things.
Just first following up on the mobile CPC question. Can you just give us some color
on what percentage of advertisers are bidding on smartphones and tablets in addition to
the desktop? And then secondly, Patrick, can you also just help us understand the accounting
around the Nexus 7 tablet and how we should be thinking about that on a gross versus net
basis and the impact it may have going forward? Thanks.
>> Patrick Pichette: Okay, so I'll let Nikesh cover the CPC, and I'll circle back after.
>>Nikesh Arora:I think I already said that in my prepared remarks that we have over 1
million advertisers working with us in mobile advertising. It's over 300,000 mobile apps.
So I think it's a substantive number in terms of number of advertisers that are involved
in the mobile space. And I think usually people get involved in mobile space don't distinguish
between smartphones and tablets. They actually -- they want to find the most effective ROI
they can get and they want to capture as many queries as you can get on either device. Patrick?
>> Patrick Pichette: The issue for the Nexus 7, we have two sets of accounting -- obviously,
it's distributed on its own by others like you can get it at Best Buy and otherwise.
When you use the Play store to actually buy it, we book the revenue, and then we book
the cost, as well. And the cost will be other cost of revenue rather than CAG or TAG because
they're neither of them. That's how the accounting is set.
>> Susan Wojcicki: Yes. And this is Susan, just one more thing I would add, Doug, on
your question about the mobile CPCs and the percentage that are bidding, is a lot of our
campaign structures are set up so that when an advertiser participates and they bid, they
actually can -- set up one campaign, and it can run across everything. We adjust those
prices dynamically for them. We have, it's called smart pricing. And so some advertisers
do bid specifically on mobile. And then some advertisers have bundled campaigns. And we
adjust those prices. So it's not just advertisers that are bidding only for mobile that are
participating in mobile.
>> Operator: Justin Post, with Merrill Lynch. >> Justin Post: When you look at your international
results ex FX they actually were stable or even accelerated. Yet we're hearing a lot
of issues over there. Can you talk about geographic mix, what countries are doing well, or vertical
mix? And any product enhancements or new products you've launched that are really helping your
revenue growth there? And then secondly, TAC to distribution partners was up about $40
million quarter over quarter and continues to be a bigger chunk of your Google website
revenues. What drove the quarter-over-quarter increase? Was that mostly mobile, or were
there other factors? Thank you.
>> Patrick Pichette: So let me jump on TAC, and then let Nikesh answer the first question.
So TAC it's really a mix, right. It's -- obviously TAC reflects a mix of different distribution
methods that include toolbars, Chrome distribution, mobile distribution, and also obviously the
AFS business, as well. So there's -- if you look at our revenue mix between Google Properties
and Network, Network was a tad stronger. So that will drive TAC, as well. And then in
mobile is also one of these contributing factors. We don't break down all the specifics, but
it's not only mobile. We have a number of factors that are at play here. On the first
question, I'll let Nikesh circle back to you. >> Nikesh Arora: I alluded to some of this
in the prepared remarks. I think as I said, growth in the Americas and Asia has been steady
this quarter. The US and Canada have stayed strong. As I mentioned, as you said, there
have been some issues internationally. Southern Europe we saw a slight dip as we think it
is hampered both by pure macroeconomic conditions and overall ad industry concerns. Spain was
a notable lowlight or highlight depending on which way you look at it in that conversation.
On the other hand, performance accelerated for us in Northern Europe driven by the UK.
UK has been a little depressed over the last few quarters. It's finally coming back, and
we're seeing strength again. In terms of your question around the sectors,
I'd say travel has been strong pretty much across the board in the US and the UK and
around the world. Auto was strong in the US for us. Health care has been strong in the
UK. And generally across the world, we've seen strong sort of performance both in finance
and local. And we are seeing more and more sort of excitement and enthusiasm in sectors
like CPG and entertainment given the shift to Brand. But I'd say this is a snapshot in
time. These things change quarter over quarter.
>> Justin Post: Thank you.
>> Operator: Anthony DiClemente, Barclays. >> Anthony DiClemente: One I think for Susan.
Just if you can help us with the order of the magnitude of the drivers of the divergence
that we continue to see between CPCs and volume. In the past you've talked about -- of course
mobile is one of those drivers. But then FX, we have a sense of that property mix, emerging
markets, and ad quality changes is all driving that. I was wondering if you could give us
an order of magnitude of how important each of those few drivers were in the quarter,
and then how we should think about those trending going forward, if we should expect that divergence
to normalize or should we actually expect it to continue to diverge? That would be helpful.
Thank you very much.
>> Patrick Pichette: Susan, you want to give some comments on it, or Nikesh?
>> Nikesh Arora: I think I have the CPC better on this quarter. You can't have a good earnings
call if you don't talk about CPC. So here we go. CPC is an important metric for us.
But if you take that independently, it's not necessarily a reflection of the fundamental
health of our business. This quarter I'd say the biggest impact in CPC was actually FX.
We have four or five factors that impact CPC, but the biggest impact this quarter was FX.
We have clearly an impact of mobile versus tablet versus desktop. We have an impact of
emerging versus developed markets and what's happening from a macroeconomic point of view
as we talked about. We have an impact of Google.com versus Network, so as you see TAC or you see
Network playing a bigger role it impacts CPC. Finally, ads quality changes also impacts
CPC. I would say this quarter the impact has been felt because of FX. But from a positive
perspective, we see any time there's a change in CPC, which is more attractive for the advertiser,
that allows the advertisers get a better ROI. So for us it's an opportunity for the advertiser.
>> Patrick Pichette: It's important to note that the 16% -- there was a big chunk of it
that was CPC versus last quarter. As the euro went down 9% year over year, it obviously
makes a big difference. Thanks for your question. >>Anthony DiClemente: That's the biggest one.
Thank you. >>Operator: Ken Sena, Evercore Partners.
>>Ken Sena: Can you maybe talk a little bit more about the Offers business and do you
feel as strongly about that business as you did in the past and maybe how that business
actually will come into play with Google+ or Payments or Maps? Thank you.
>> Susan Wojcicki: Yes. Hi, Ken. So yes, Offers continues to be an area that we're investing
in. We have -- we think that there's a lot of things that are really important about
Offers. The way it's a local business, it works with both small and large business.
It's got -- it's very -- there's a lot of user interest in it. So it is an area that
we are continuing to invest in. We are also as we continue to develop it our business
model continues to evolve. And for example, we're putting a little -- we're working with
a lot of different offers and providing distribution for them in addition to generating our own
offers with our own sales team. But it continues to be an important area for us, and we will
continue to invest in it in the cities that we are currently operating in.
>>Ken Sena: Thank you.
>>Operator: Ron Josey, ThinkEquity.
>>Ron Josey: Going back to mobile and the opportunity there, Nikesh I thought it might
be interesting if you could talk a little about perhaps what you've seen in terms of
the campaign. That there's been an acceleration now that AdMob is fully integrated into AdWords
knowing that there's over 1 million advertisers and 300,000 apps. Wondering if there's been
acceleration since that's happened. Thank you.
>>Nikesh Arora: Hi, thanks, great question. I think as I said we are seeing phenomenal
amount of growth in the mobile query space. And it's the consequence of more device, it's
a consequence of more adoption of tablets around the world, it's also a consequence
of people getting more and more comfortable with their devices and using them more often.
So with the number of question asked around the AdMob, AdMob just got completed in early
June. So it's a bit early to say we're seeing acceleration.
But generally our performance throughout that integration has been very strong. We've effectively
had a very -- what we've done about six months ago is we took all of our sales efforts, and
we took our specialist mobile salespeople and had them train all of our sales forces
around the world. That in fact has even contributed more than just that integration part. But
we think the integration is just going to turbocharge that effort, and hopefully continue
to help us drive mobile. And mobile's going to be here for a while. I think that's a fact
of life for us now. We are -- mobile's sort of becoming as core as desktop Search was.
So we're making sure that all of our salespeople around the world are fully equipped and working
with every advertiser, not just 1 million, to make sure that people can see ROI in both
mobile and desktop simultaneously. >>Ron Josey: Thank you.
>>Operator: Jason Maynard, Wells Fargo. >>Jason Maynard: I have one question just
on the shift of mobile. And specifically around this will be both Nexus as well as Motorola.
How important to you do you think it is for ultimate mobile monetization to actually control
the whole experience on the device? And given that you've got all sorts of different competitors,
some who subsidize evidently, some obviously selling full-price hardware/software combos,
what do you think the right mix is for Google, and when do you think you'll sort this be
out and be a little bit more declarative in the market with your intentions? Thanks.
>>Nikesh Arora: I think I will -- this is Nikesh again Jason. Thanks again for your
question. As I said, mobile is very, very important. I think it's better to go back
and think about what's happening in the marketplace. We said we're very committed to mobile. It's
evident in our commitment to Android and our ecosystem, as well as our Motorola acquisition.
We believe that mobile is very very important, critical to the future.
I know it seems a little complicated when you look at the different competitors and
how you talked about subsidies, et cetera. We simplify that by focusing on how do we
provide the best experience to the user. Providing the better experience to the user is effectively
working really hard with Andy Rubenstein on Android, making sure he's creating the best
experience for the end user. And in that process he works with the best OEMs in the marketplace
to make sure that the combination of hardware and software allows for the best experience
to be delivered. I think for us what's important is to get that experience delivered, and we
will work with whatever industry models are out there. Either we work directly with operators
to try and make sure that happens at the hands of the end user, and more often than not we
work with OEMs to see how we can get the best-of-breed experience in the hands of the end user. I
think that's what we're going to be focused on. So I think that's quite declarative in
terms of intentions.
>>Patrick Pichette: Just to close, open is really important to Google. And in that context,
you see our strategy is very focused on end users and being open. We're going to get a
lot of benefit -- we already have and continue to get a lot of benefit out of that. So it's
a complex question, though, Jason, there's no doubt about it. Thank you so much for your
question. Let's go to our next question, please.
>>Operator: Lloyd Walmsley, Deutsche Bank.
>> Lloyd Walmsley : Wondering if you could tell us a little bit about the rollout of
the shift to paid inclusion for Google Shopping and when you expect it to be fully rolled
out. What you're seeing today in terms of paid clicks and CPCs now that some of the
shopping links have been moved to higher-end results, and where do you think CPCs there
can go relative to just core paid Search. >> Patrick Pichette: I'll let Susan answer
this one. Susan?
>> Susan Wojcicki: Yes. Lloyd, so we made this decision to move to a commercial model
because we felt that ultimately this would drive a better experience for users in having
more up to date information, more accurate price, inventory availability, and so we are
in the process of rolling that out. We think it will be rolled out, we expect probably
completed around the Q4 timeframe. We are working really hard with all the merchants
to get them all on board. And again, we think this is actually really good for both the
merchants and the users. We actually don't refer to this as paid inclusion. Just -- that
actually is a term from the people have been in the industry for a really long time of
meaning putting in paid things into the Search results in a nonmarked way. We're very, very
clear when we show this. We do mark everything very clearly as sponsored, and again we believe
that actually moving to this model is good for both users and for the merchants. And
we're really looking forward to this transition. Thank you.
>> Operator: Kevin Kopelman, Cowen and Company. >> Kevin Kopelman: Could you give us a sense
of how big your mobile Search queries are as a percentage of total Search queries? And
also on Motorola, I know you're not giving us a business update. Could you give us what
the Android unit growth was in the quarter on a pro forma basis? Thanks.
>>Patrick Pichette: On the last one, there -- on the mobile side, the non home side,
it's all Android. And on the Search query splits, we don't actually provide the details.
We provide the geographic split but don't give the details of the other one. So I'm
sorry, Kevin, if we can't be more helpful in the granular details on this issue. Let's
see, we have time for one more question. Let's jump on one last question. Jamie?
>> Operator: Jason Helfstein, Oppenheimer. >>Jason Helfstein: I'll just help you just
two. One, can you just talk about the growth of Google+ member growth. Are you happy -- I
think you alluded to how that's going. What can you do to drive faster member growth,
and is that part of the strategy, or you just let it organically evolve? Kind of a push
versus a pull strategy there? Second, can you give us a breakdown of depreciation between
Motorola and MMI for the quarter? Thanks.
>> Patrick Pichette: Well, you'll have in the segmented reporting, you'll find that
information. So after the call, this is for your second question, Jason. On the issue
of depreciation, I think that the team can circle back with you and give you the split
because we do the segmented reporting. On the first question, which is about Google
growth and our success there, why don't I let Susan cover that one.
>> Susan Wojcicki: Sure. Yes, so we -- overall we've been really pleased with the growth
that we've seen. We talked about the 250 million accounts that we have at Google+ accounts.
And I do think it's also really important to remember that Google+ just celebrated its
one-year anniversary. We actually celebrated at IO. And so we see the Google+ account growth
as going really well. We think that one of the most important things is that when you
have a Google+ account you have the ability to share. We've talked about Google+ being
the social spine across all of our products, the ability to make all of our products better.
Not just the stream which is an important part but also, for example, your Search experience.
So that if I have a friend, the friend went to a hotel, and +1 that hotel, if I'm going
to that same location, I would be able to see that information at the time that I'm
doing that search. And so we have many, many use cases where we thinking about part of
Google+ will be a better experience. So we're working across the board to make sure that
our products are integrated, we have a number of integrations across the products, probably
local was the most significant one that we did this quarter. We find that having those
integrations by making the products better also drives more usage of Google+. So yes,
thank you, Jason, that was an important question. >>Jason Helfstein: Thank you.
>>Patrick Pichette: And with that, we've got to run. I want to do two things. One is thank
Nikesh and Susan as well as David for joining you for the call and Q&A. Also, thank all
our Googlers. These last 90 days and the great results that we're posting now and the beginning
of the collaboration and integration of Motorola, all these things are possible because our
Googlers do phenomenal jobs every single day. So I want to thank everybody, and then as
I close, remember, go and look at our Google+ website for Investor Relations. And I think
you'll find it pretty interesting. So with that, Jamie, I'll let you close the call and
wish everybody a happy summer.
>>Operator: Thank you, sir. That does conclude today's conference. We do appreciate everyone's