Q4 2011 Earnings Call

>> >> OPERATOR: Good day, everyone, and welcome to the Google, Inc. Fourth Quarter 2011 Earnings
Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference
over to Ms. Willa Lo, Investor Relations Manager. Please go ahead, ma'am.
>> LO: Good afternoon, everyone, and welcome to today's Fourth Quarter 2011 Earnings Conference
Call. With us are Larry Page, Chief Executive Officer; Patrick Pichette, Senior Vice President
and Chief Financial Officer; Susan Wojcicki, Senior Vice President, Advertising; Nikesh
Arora, Senior Vice President and Chief Business Officer.
Also, as you know, we now distribute our earnings release through our Investor Relations website,
located at investor.google.com, so please refer to our IR website for our earnings releases
as well as the supplementary slides that accompany this 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 that we make today
may be considered forward-looking, including statements regarding Google's future investment,
our long-term growth and innovation, the expected performance of our business, and our expected
level of capital expenditures. These statements involve a number of risks and uncertainties
that could cause actual results to differ materially.
Please note that these forward-looking statements reflect our opinions only as of the date of
this presentation, and we undertake no obligation to revise or publicly release the results
of any revisions to these forward-looking statements in light of new information or
future events. Please refer to our SEC filings for a more detailed description of the risk
factors that may affect our results.
Please note that certain financial measures that may be used 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 earnings press release.
With that, I will turn the call over to Larry.
>> PAGE: Good afternoon, everyone, and Happy New Year. Welcome to our first earnings call
of 2012. It's great to have all of you here. I'm very happy with our results. Google had
a very strong quarter, with revenues up 25% year-on-year, 9% quarter-on-quarter, and we
blew past the $10 billion mark for the first time, pretty exciting. Looking back on 2011,
I am most excited by the fact that we significantly improved our velocity and execution, my priority
when I became CEO in April.
With Google+, we shipped on average a new feature every day since we launched in June.
That's more than 200 updates in total, and those things include a bunch of new hangout
features. In fact, David Beckham just did a great hangout with his fans here this morning.
We launched Circles in Gmail and Plus Pages for businesses and many, many other things.
I'm also pleased to announce that there are over 90 million Google+ users, well over double
what I announced just a quarter ago on our earnings call.
Engagement on Plus is also growing tremendously. I have some amazing data to share there for
the first time. Plus users are very engaged with our products. Over 60% of them engage
daily and over 80% weekly. As I said last quarter, Google+ is much more than the individual
features themselves. It's also about building a meaningful relationship with users so that
we can dramatically improve the services we offer. Understanding who people are, what
they care about, and the other people that matter to them is crucial if we are to give
users what they need, when they need it.
Take last week's Search announcement, which I'm really excited about. We've now included
personal results in Search so you can easily find information like photos and Plus posts
that are super-relevant to you, as well as the people you care about or are interested
in. You can even restrict all personal results or easily view Google in the World mode, just
as you would have before. I really like it, and I encourage all of you to try it out too.
Key to improved execution and velocity is focus. There are so many opportunities for
Google today. But to make a real impact in the world, we need to make hard choices about
where to focus our efforts. Since we last spoke, we've announced that we're closing
12 more products, including Buzz, Knol, and Friend Connect, integrating a whole bunch
of others into features of existing products. This means we can double down on the really
big bets we have made, like Android, Chrome, Gmail, Display, and YouTube.
And I'm pleased to say those big bets are really paying off. We're seeing extraordinary
velocity, the kind of velocity we could only dream about. Android is quite simply mind-boggling;
700,000 phones are lit up every day, and I'm pleased to announce 250 million Android devices
in total, up 50 million since our last announcement just in November. In just two days over the
holiday weekend, 3.7 million Androids were activated, and today we're announcing over
11 billion downloads from Android markets. Wow!
Ice Cream Sandwich, which is a new Android release in October, is by far our best build
yet, and there are exciting new phones. I simply love my Galaxy Nexus. It's upper-fast.
It's great for photos, has an amazing 720p screen. Chrome is on fire too. It's a wonderful
example of the kind of beautifully simple, intuitive experience that really improves
users' lives. People thought we were crazy. Who wants another browser? Turns out a lot
of people wanted to get the Web quickly and securely, and we've got an amazing, fast-growing
fan base all around the world.
From the start, Gmail had security, accessibility, get all your e-mails from anywhere on any
device, and insane storage that made it a winner with consumers, businesses, and education.
From the internal data project eight years ago, I'm proud to tell you today that Google
Gmail now has more than 350 million active users, and it's growing rapidly. But I've
always said [ph] emerging high-usage (06:26) products can generate huge new businesses
for Google in the long run, just like Search, and we have a ton of experience monetizing
[ph] successful (06:35) products over time. Take Display. We brought the science of Search
to the art of the Display, creating a business that our latest figures show has now reached
an annualized run rate of over $5 billion.
I have some exciting new numbers also for the DoubleClick Ad Exchange. Spending is up
over 130% year-on-year, and the number of buyers and sellers have both more than doubled
over the same period. I'm very pleased with the advertising on YouTube. TrueView gives
users much more choice over what they watch, and advertisers only pay when someone watches
their ad. It's not just in advertising that we're doing well. Enterprise is doing great,
with over 5,000 new customers signing up every day. In fact, last week, we signed our biggest-ever
deal, about 110,000 users at BBVA, one of the world's leading banks.
All of our experience says that well-run technology businesses with tremendous consumer usage
make a lot of money over the long term. And all of this is made possible by the exceptional
people that work here. I've always believed that you attract the best talent by working
on things that matter in the world and creating a great workplace environment. People want
to feel part of a family, even when they're at work. So I'm super-pleased that Google
topped Fortune 2012's Best Company to Work For list, which was published today. We've
taken the #1 spot three times now, more than any other company. I want to thank everyone
at Google for all their hard work that has made this possible.
Let me finish up by saying that 2012 promises to be a fantastic year. We're still in the
very, very early stages of what technology can do. By building a meaningful relationship
with users, we can start to offer them just what they need, exactly when they want it.
Everyone here at Google is super-excited about our work today and what the future holds.
It's great to be here.
Thank you for taking the time to join us today, and I'll now hand over to Patrick.
>> PICHETTE: Thank you very much, Larry, and good afternoon, everyone, and thank you for
joining us again. Like Larry, I'm also very happy with our results. Google had a strong
-- a really strong quarter, in fact, with revenues up 25% year-over-year, crowning a
year of disciplined investment, strong growth, and actually great operational and financial
performance. Let me go through these financial results, and then I'll turn it over to Nikesh
and Susan for more commentary on our operating performance. So let's jump right in.
Our gross revenue grew 25% year-over-year, to $10.6 billion, 9% quarter-over-quarter
growth. By the way, it's worth noting that although currency rates had an immaterial
impact year-over-year, they in fact had a negative impact on revenue quarter-over-quarter.
In fact, it if we applied last quarter's exchange rate to our Q4 revenue, these would have been
roughly $240 million higher. So FX is a key component here. Google Website revenue was
up, in fact just shy of 30% year-over-year, to $7.3 billion, and 8% quarter-over-quarter,
with strength across most major geographies and verticals.
Our Google Network revenue was up 15% year-over-year, to $2.9 billion, and 11% quarter-over-quarter.
It's important to note here that the Network revenue was, again, negatively impacted by
the Search quality improvements we made early last year, and also that the momentum in our
Display business continues, something that Susan will talk about in a few minutes. Our
Other revenue was up 50% year-over-year, to $410 million, and 6% quarter-over-quarter.
Our global aggregate paid click growth was very strong, up 34% year-over-year and 17%
quarter-over-quarter. Our aggregate cost-per-click growth was down 8% year-over-year and quarter-over-quarter.
Remember, too, that this is an aggregate number which includes both Google.com and our AdSense
properties. On this, it's important to look at CPCs and clicks together. There are numbers
of factors that affect each; again, something that Susan will address in the next few minutes.
If we turn to our geographic performance, the U.S., U.K., and rest of world all were
growing at a strong pace, reflecting in our results. In our earnings slides, which you
can find in our Investor Relations website, you'll see that we've broken down our revenue
by U.S., U.K., and rest of world to show the impact of FX and the benefits from our hedging
programs, so please refer to those slides for the exact calculations.
Revenue from the U.S. was up 23% year-over-year, to $5 billion. Our non-U.S. revenue accounted
for 53% of our total revenue, or $5.6 billion, up 28% year-over-year, which includes a modest
$25 million benefit from our hedgings program. The U.K. was up 21% year-over-year, to $1.1
billion.
Let me now turn to expenses. Traffic acquisition costs were $2.5 billion, or 24.1% of total
advertising revenue. Other cost of revenue was $1.2 billion, excluding stock-based compensation
of $77 million. And finally, operating expenses, which excludes stock-based compensation, totaled
$2.9 billion. Our stock-based compensation totaled $459 million, and the increase year-over-year
in OpEx was primarily due to payroll, increased advertising and promotional spend, and legal
and professional services. As a result of all this, our non-GAAP operating profit was
$4 billion in Q4, resulting in a non-GAAP operating margin of 38.2%, a strong margin
performance that gives us the confidence to continue to fully fund our strategic growth
areas in Search, Display, Mobile, and Apps.
If we turn to head count, it was up approximately 1,100 for the quarter, and we ended the year
roughly at 32,500 full-time employees. Our effective tax rate was 22% in Q4, and this
reflects the mix of earnings between our domestic and international subsidiaries, but also an
impairment charge for Clearwire, which is not deductible for tax purposes.
Let me now turn to cash management. In other income and expenses, our line was minus 18,
which is a large negative variance; in fact, over $300 million quarter-over-quarter. This
reflects a couple of things. First is the impact of our significant FAS 133 expense
from hedging program, which accelerated the expense of our portfolio this quarter, now
that this portfolio is much deeper in the money. In addition, as I mentioned, we took
an impairment charge for Clearwire, and so for more details on our OI&E, which changed
quite a bit this quarter, again, please refer to the slides that accompany this call on
our IR website.
Our operating cash flow was very strong, at $3.9 billion, just shy of $4 billion. Our
CapEx for the quarter was $951 million, versus last quarter at $680 million; and remember
that the majority of our CapEx spend was related to facilities and production equipment. And
as a reminder, we'll continue to make significant CapEx investments, and these have shown to
be lumpy from quarter to quarter, depending on when we're able to make these investments.
In consequence, we're very pleased with our free cash flow, which was $3 billion.
So, in summary, with such a strong performance, we continue to be optimistic about investing
in our growth agenda. Let me now hand it off to Nikesh, who will cover more of the details
of our sales performance for the quarter. Nikesh?
>> ARORA: Thank you, Patrick. I will now provide an update on our business activities. We've
had an excellent quarter. Good growth over the holiday season, robust year-on-year growth
on Black Friday and Cyber Monday has led to strong performance across our product portfolio
and $10.6 billion in revenue this quarter. Let me talk first about how our sales team
have driven the introduction of innovative ad products that deliver impressive results
for our advertising customers, and outline performance by region, and finally, review
highlights from our marketing and partnerships team.
First on Search, our core Desktop Search maintained robust growth, as we continued to help our
customers grow their businesses. Beyond our robust core growth supporting online sales,
we're increasingly helping our advertisers to use Search for branding, as well as something
interesting, which is driving in-store sales for them. For instance by using the power
of data insights, we collaborated with Carrefour in France, analyzed over two years' worth
of data, to demonstrate how €1 invested in online ads helps deliver almost €8 of
in-store sales. We expect to promote these kinds of programs further in the coming quarters.
Additionally, we saw similar success in a study that SFR Mobile, France's second largest
mobile carrier, where we demonstrated 20% marketing ROI for off-line sales resulting
from online advertising. So our Search business continues to be strong.
Let's move on to Display. As Larry mentioned, we're continuing to see great revenue growth.
Our investments have really paid off in the last few years. Display has now reached an
annualized run rate of over $5 billion, as we engage with multiple advertisers and get
tremendous support from our agency partners. What is particularly satisfying is how we're
able to drive this growth as a consequence of our continued investment in innovation,
with products like Ad Exchange and new ad formats like TrueView. I'm sure Susan will
talk a lot more about these. All these are resulting in more efficiency and revenue for
both us and our publisher partners.
On the sales side, we have continued to align our teams, now to combine Display and Search
sales, to help meet the needs of our advertising partners. We continue to activate the display
ecosystem of agencies, advertisers, and other publishers. Advertisers like Ford, GM, Electronic
Arts, L'Oreal, and their agencies continue to see the efficiency of online branding and
move more and more of their marketing spend towards our products, the Google Display Network
and YouTube.
For example, at L'Oreal, we demonstrated that online advertising is far more efficient than
television, as our new formats on YouTube, which include TrueView In-stream, In-slate,
and In-search, have provided significant reach for their branding campaigns, with millions
of impressions, great click-through, and efficient CPMs (16:56).
Let's move to Mobile. We had another record quarter for Mobile advertising, as Mobile
Search continues to search across all platforms. A number of our clients that are using Mobile
within their campaigns continue to grow rapidly. For example, Melia Hotels of Spain, with 350
hotels in 35 countries; they use Mobile Search campaigns to support their mobile e-commerce
activities. As a result, Melia has experienced a 60% increase in visitors from mobile devices,
and their mobile-driven bookings have multiplied by 12 in 2011.
We've also worked hard to develop the Mobile ecosystem. This quarter we kicked off the
Go Mobile campaign in the City of Mobile, Alabama, where we helped hundreds of customers
build their mobile sites for free, starting a program that will inspire, educate, and
empower businesses to continue to go mobile.
Let's move to Enterprise. As Larry mentioned, we are seeing great traction in our Enterprise
business, both from large partners, who tend to be early adopters and future-looking, and
at many small businesses who see Google Apps as a comprehensive and quick solution. We
now have more than 5,000 customers signing up to Google Apps every day. As Larry mentioned,
BBVA was the first major bank to go Google with apps. Costco, one of the world's largest
retailers, has also gone Google. In addition, in Q4 we signed government deals with the
states of Maryland, Utah, and five top universities, including Berkeley, Harvard, and Michigan.
Let's move quickly to country performance. From a regional perspective, we continue to
see strong performance in the Americas. However, generally, country growth rates were flat
or softened slightly, partly due to comparisons with a very strong Q4 in 2010. North America
saw slight decreases from preceding quarters. Year-on-year growth rates, however, the U.S.
certainly remained robust, boosted by a strong holiday season. In particular, Cyber Monday
led the way as the biggest day of the quarter.
Western Europe was broadly stable, as the U.K., France, and Italy held steady, while
Spain accelerated slightly for third quarter in a row. However, revenue growth in Germany
slowed this quarter. Our key emerging countries continued to see rapid growth across all of
our product areas.
Let me switch gears to marketing and partnerships. Our marketing and partnerships programs continue
to provide strong foundations for the growth of our business. You may have seen many of
our initiatives on Google+ this quarter, in addition to the hangout with David Beckham
Larry mentioned. Our sales teams have helped our customers [ph] pay (19:12) over 1 million
Google+ pages, as Larry pointed out, including global brands such as Toyota, Zappos, and
The New York Times.
Additionally, we continued the momentum of our Get Your Business Online program. In 2011,
this program has helped bring hundreds of thousands of businesses online across the
world, and we got 100,000 businesses to come online in 20 countries in Q4 alone. Last quarter,
we expanded internationally to India, Sweden, and Malaysia, as well as domestically to additional
states like Michigan and New York.
Our partnership team continues to drive great results with our partners. We renewed 35 of
our Direct Search partner deals and our long-standing Search distribution deal with Mozilla was
renewed as well. These and other efforts helped our syndicated Search revenues accelerate
in Q4, as we saw the full impact of large deals [ph] and fast growth [indiscernible]
(19:55) partners.
In closing, Q4 was a great quarter for us, finishing a strong 2011. We're excited to
continue serving our customers, partners, and users in 2012, and before I hand over
to Susan, I want to give a shout out to our business teams around the world and our partners
in product engineering for these great results.
I will now turn over to Susan, who will discuss product performance this quarter. Thank you.
>> WOJCICKI: Thanks, Nikesh. Larry mentioned last week's launch of Search Plus Your World,
and I'd like to start by talking about that a bit more. Google Search has always been
about finding the best results among billions of Web pages, and until now, those results
have been limited to the public world of the Internet. What we added last week was the
ability to search your own world, including Google+ posts, photos, and profiles relevant
to you, all from the same search box. Let me give you a few examples of how this transformed
my searches.
Last week, I searched on CES, the Consumer Electronics Show in Las Vegas, to find out
more details about the show. In addition to the public results, my search magically included
pictures my friends and colleagues had taken while at the show, as well as products they
thought were interesting to share. In addition to seeing all the standard news for CES, I
was able to get a much more personalized view of the show.
This weekend, I also searched on Yosemite since I was thinking about our summer plans.
In my results, I was able to see pictures my friends had taken while in Yosemite and
posts about interesting things to do there. There was even an article from my mom that
she had shared with my family circle, warning us not to get too close to the waterfalls.
Turning now to Ads, we continued to improve ads quality, and we launched about 20 improvements
this quarter. Patrick mentioned that paid-click growth was very strong this quarter and that
CPCs declined. It's important to look at clicks and CPC metrics together since more clicks
can often lead to decreases in average CPC and vice versa. When we make ads quality or
format changes, CPC and paid clicks may be impacted differently.
For example, when we introduced Sitelinks, we saw an increase in clicks, but the additional
clicks were on lower-CPC ads, which reduced the average CPC. Many of the ads quality changes
in Q3 increased paid clicks at lower CPCs and they were revenue-positive, with good
user and good advertiser metrics. These ad quality changes from Q3 had a cumulative effect
on Q4 metrics. Another important and key driver of the change in CPC growth was foreign exchange.
And lastly, there are mix effects with Mobile in emerging markets.
Moving on to new ad formats, these new formats now appear on about 30% of queries that show
ads. Product-listing ads, which include prices and pictures of products, saw a lot of success
over the holiday season. Traffic to consumer sites from product-listing ads was up over
600% year-on-year. This quarter, we expanded product-listing ads so they can show up to
five products, which was great for holiday shopping.
We're also working to make it more efficient for advertisers who use AdWords. Many businesses
have a large and dynamic catalog of products, and it can be time-consuming for them to select
the key words and the CPCs for each product. So this quarter, we beta-launched Dynamic
Search Ads, which generates the ads automatically based on what's on a customer website. This
enables businesses to advertise a lot more of their products; and our system can also
monitor the advertiser's available inventory and show ads only for what is in stock.
For small local businesses, we ramped up AdWords Express. This product lets businesses get
up and running with a campaign in just a few minutes. Customer sign-ups have more than
tripled in the past six months. We now offer AdWords Express in the U.S., U.K., Germany,
and France, and we are trialing it in several other countries.
In Display, which now has reached a $5 billion annualized run rate, as Larry mentioned, we're
creating a comprehensive solution to buy and sell Display ads across many types of digital
media, such as desktop video and mobile. One key driver of growth has been our success
in audience-buying. This technology enables marketers to deliver ads to specific audiences
across the Web, such as end-market hybrid car buyers or adventure travelers. Many audience
buyers purchase via the Ad Exchange, which now has customers in 26 countries and is growing
very rapidly.
We also expanded to video and mobile inventory on the Ad Exchange. And on the Google Display
Network, we're also growing audience-buying. From Q3 to Q4, the number of active advertisers
using interest-category marketing increased over 60%, and that was from an already large
base. By understanding users' interests, we've been able to serve much more relevant and
useful ads to our users.
Our success in Display has also been driven by brand advertisers, with video formats being
an important factor. Our TrueView in-stream Ads give viewers the option to skip the ads.
This means that users who see the ads are more likely to be interested in those products,
and advertisers are incented to create compelling ads. View rates range between 15% and 45%,
and the people who choose to watch those ads are highly engaged. Over 60% of our in-stream
ads are now skippable. It's an increase of over four times since the beginning of the
year. We now serve TrueView video ads across the Google Display Network and on YouTube
Mobile.
I'd also like to give a quick update on Offers, which has been bringing online users to offline
stores and services. Offers are now live in over 30 cities, and we're starting to feature
national offers from partners like REI, JetBlue and Toys”R”Us. We expanded our collection
of deals to include offers from partners so that users get a wider variety and partners
get access to a broader user base.
And lastly, among the many launches that we did in the quarter, I'd like to highlight
one project we did called Memories for the Future. This site compares before and after
Street View photographs of the areas affected by last year's tsunami in Japan. We drove
thousands of miles so that future generations can see what happened.
Thanks, all, for your time; now back to Patrick.
>> PICHETTE: Thank you, Susan. So what we'll do is we'll turn it over to Jamie to set up
the Q&A session.
>> PICHETTE: Thank you, sir. And we'll take our first question today from Brian Pitz with
UBS.
>> PITZ: Great. Thanks. Maybe you could just give us a sense for mobile usage. Did you
see a major shift in mobile usage among the consumer during the holiday? And then I've
got a quick follow-up.
>> PAGE: Yeah, thanks, Brian. This is Larry. Let me give that question to Nikesh.
>> ARORA: Yeah, thank you, Larry. Thank you, Brian. Look, we're seeing mobile usage grow
by leaps and bounds. It's happening by a proliferation of Android devices around the world. It's
happening by a proliferation of tablets around the world, and it's happening generally by
people getting more and more active on their mobile devices as they discover the utility
and the various apps that allow them to be able to go find things, whether they're local
searches, they're product searches, or they're searches to generate things on Google. So,
yes, we are seeing tremendous mobile usage, and we also saw -- seemed to be an uptick
during the holiday season where people were looking for products and searching for e-commerce-related
activities during the holiday season.
>> PITZ: So just as a follow-up to that, so do you think that the reason for the significant
decline in the CPCs, the down 8%, is a function of the clicks going through mobile more so,
or is it more some of the other factors that you explained to us? Because I'm just trying
to get a sense for the down -- 8% CPC number was, I guess, significantly different than
what we were expecting. And I understand the trade-off with the clicks, but is mobile largely
responsible for that?
>> ARORA: I'm going to pass that question on to my friend Susan, here, who's going to
talk about the CPC.
>> WOJCICKI: Hi. Hi, Brian. So there are definitely multiple factors whenever we look at these
metrics because these metrics are aggregate. But I would say the two biggest factors this
quarter were FX as well as the changes that we had made, either ad quality or format changes,
which increased the paid clicks. And again, we're revenue-positive, advertiser-positive,
user-positive, but those clicks, as I explained, may be lower CPC, like an example that I gave
in my script with Sitelinks. So those were the two factors, but again, it's always important
to remember there are many factors that contributed to these aggregate numbers.
>> PITZ: Great. And just a quick housekeeping; Patrick, can you just clarify what's in that
$5 billion Display run rate? Is that comparable to the $2.5 billion you provided before? Thanks.
>> PICHETTE: Yep, it is exactly the same definition, so you take out all the text ads and then
you look at both mobile and desktop. So we go back to the same definition.
PITZ: Great. Thank you.
>> PICHETTE: Let's go to the next question, please.
>> OPERATOR: And we'll go next to Spencer Wang with Credit Suisse.
>> WANG: Thanks. Good afternoon. Two quick questions; I guess first for Nikesh. It looks
like international, excluding the U.K. revenue, probably slowed the most kind of sequentially.
Was wondering if the macro-economy played at all a role, and if so, any sense of magnitude
there? And then secondly for Susan, with respect to the $5 billion Display run rate number,
there's obviously a lot of stuff that goes in there between YouTube and mobile and the
ad network. I was wondering if you could just give us some maybe color on what the blended
TAC rate would be for that $5 billion. Thanks.
>> PICHETTE: So I'll take both questions, if you don't mind. So, first, we don't provide
a TAC rate on the blended. And you're right, that if you think of the big properties that
are in there, so we'll have the GDN, we'll have YouTube, we'll have all of the additional
elements of our Display business, which includes the Teracents and all of the other optimizers,
but also the AdMob on mobile, so that's a kind of key element. But we don't comment
on the details of the blended TAC on them.
On the economy, look, we had actually quite a solid Q4 performance, and we're really pleased
of our revenue growth. Despite the FX issues -- so you have to separate the FX issues from
the economic fundamentals of our business, and performance in Europe was actually quite
healthy despite the environment that we got there. And that's driven by the secular shift
of offline to online continues, and the secular shift of more mobile continues, so from that
perspective, right? Obviously, we don't control the economy and we don't control exchange
rates, but we're actually quite pleased with the performance that we've had internationally,
in addition to the U.K. and the U.S. So thanks for your question.
>> PAGE: Thanks, Patrick.
>> PICHETTE: Let's go to the next question, please.
>> OPERATOR: And we'll take our next question from Mark Mahaney with Citi.
>> MAHANEY: Thanks. I just wanted to ask about YouTube. I know that's within that Display
bucket. Could you quantify it at all? Is the growth that you're seeing out of YouTube similar
to what you're seeing in the overall Display bucket? And specifically, are you seeing signs
that TV ad budgets specifically are migrating online into assets like YouTube? When you
ask advertisers who are spending more money on YouTube, where those dollars are coming
from, where are they coming from? Thanks.
>> PICHETTE: So let's do a one-two punch quickly. YouTube is doing absolutely terrific. And
on the advertising side, Nikesh would probably be the better answer to give the details,
or Larry, whichever of the two.
>> PAGE: Yeah, I assume the advertising side -- I think we're tremendously excited about
our growth on YouTube, and the amount of success we're having in advertising there is very
significant, but it's not significant compared to the overall kind of video advertising space.
It's a tiny percentage of that. We have a huge amount to grow. So I don't think the
advertisers are thinking about it as being a significant percentage of their other spend
on video, so we don't really see that. So our next question?
>> OPERATOR: And we'll go next to Ben Schachter with Macquarie.
>> SCHACHTER: On Android, the numbers are obviously very, very strong, but can you talk
about the monetization potential that's beyond Search? What has to happen with Android for
you to actually make money on this and how are you going to do it? And then secondly,
the revenue growth did decelerate more than I think most people expected, and you had
such strong tailwinds with Mobile and Display. Do you think that some of the deceleration
came from people going to information directly through apps or going directly through vertical
search, like going to Amazon directly for commerce or Expedia directly for travel? Thanks.
>> PAGE: Yeah, Ben, maybe I'll take that first one there on Android. I think we are in the
very -- as I mentioned in my remarks, we're in the early stages of monetization for a
number of our new products, and Android is one of those. I think we do make money from
Search on it. We mentioned that we're a very strong advertising business in mobile, which
we obviously -- a lot of those people are on Android as well. And I think that you'll
also see -- we announced 11 billion downloads on Android market. Obviously, a lot of those
are free, but we also are having a lot of people buy stuff there too. So we see a lot
of potential for us to make money on Android, and I think you'll see us increase that a
lot over time. It's hard to give you details about that right now, but I'm very, very optimistic.
>> PICHETTE: On the second part of the question, let me jump in. If you look at our growth,
first of all, you're right that FX played a part. You also have to remember that last
year at this time, we had such a strong comp. We had such an amazing Q4 of 2010 that the
year-over-year comparison, in a way, represents also this really high level in which to start
from. And so from that perspective -- and if you also look at our mix between our own
Google websites versus all of our network, our core properties continue to be actually
very strong. So for all these reasons, I wouldn't be worried of the way that you've described
it, in fact. We continue to have very strong growth. Thanks for the question, Ben.
Let's go to the next question, please.
>> OPERATOR: And we'll go next to Heather Bellini with Goldman Sachs.
>> BELLINI: Hi. Thank you for taking the question. I just had another follow-up on CPC, and as
you look out to the first half of the year and given the metrics that Susan rank-ordered
are impacting them in Q4, how do we think about how those metrics that you rank-ordered
might impact them in the first half of the year? Or just even looking out over the next
quarter, what are the things we should be paying attention to?
>> PICHETTE: Yeah, at the highest level -- and then maybe Susan can jump in if she wants
to add additional. If you think of the core elements of it, she mentioned quality, and
all of the Panda changes and everything that we talked about, its full year is going to
be represented only by next spring. And then FX we don't control ourselves.
>> BELLINI: Right.
>> PICHETTE: So obviously it has a significant impact. The rest of it is actually the mix
between how the innovation that we drive through our products, which is if you have a great
product that drives a ton of clicks, and it happens to have lower cost or CPC, then that's
still for the benefit of everybody. So then that's really about our innovation agenda,
but we don't give forward guidance on that.
>> BELLINI: Right, but it just looks like those trends that you mentioned that impacted
Q4 are in existence as we look out, at least initially, into 2012.
>> PICHETTE: I think you have to make the call on the FX yourself, and then on the...
>> BELLINI: Yeah, aside from FX obviously, right.
>> PICHETTE: Yeah. And then the quality, I think we're going to flow through the year,
sometime in the spring.
>> WOJCICKI: The one thing I would just add is the way we think about the business is
we're focused on how do we provide better ads for our users and for our advertisers,
and we look at all of those metrics combined. And what we saw in Q3 was we made a bunch
of changes. They were small; there was no one individually that actually affected things.
But it just so happened that the changes that we made drew more attention and caused an
increase in paid clicks. And so as I mentioned, there are many factors, but really what we
really use as a guiding metrics are to understand that something is revenue, advertiser, and
user-positive.
>> BELLINI: Thank you.
>> PICHETTE: Thanks for your question. Let's go to the next question, please.
>> OPERATOR: And we'll go next to Carlos Kirjner with Sanford C. Bernstein.
>> KIRJNER: Hi. Thanks for taking my question. How can you reconcile the 50% year-on-year
growth in Google partner revenue with the 130% growth in the DoubleClick Exchange and
the $5 billion run rate for Display? It seems that something must be decreasing, and how
do you make these numbers close?
>> PICHETTE: Look; I think that you have to remember -- in the highest level, you have
to remember that sites and network lines in our financials are not good proxies for Search
and Display revenue, right? In its most simple term, YouTube, which is Display, ends up in
our Google sites, and yet AFS, which is Search, is included in network. So when people actually
do the math, it's really easy to get confused between these lines, so I would kind of caution
you to have one which is growing at 15, obviously being -- jumping to the conclusion that that's
the Display. That doesn't work.
>> KIRJNER: So does that mean that a material portion of the $5 billion comes from YouTube?
>> PICHETTE: All I'm saying is we don't give the breakdown, but I just want to make sure
that you -- caution you that because of these mix issues, it can lead to interpretations
that are wrong.
>> KIRJNER: Thank you.
>> PICHETTE: Thanks, Carlos. Let's go to the next question, please.
>> OPERATOR: And we'll go next to Doug Anmuth with JPMorgan.
>> ANMUTH: Great. Thanks for taking the question. Just wanted to go back to the CPCs for a minute,
and it sounds like -- we can obviously take the FX out, but it sounds like you're saying
that the improvements in 3Q were perhaps a much bigger factor than the mix shift toward
mobile in terms of CPCs. Susan, can you provide any more color there in terms of the improvements
that you made which you could drive a meaningful shift like that? And then secondly, TAC as
a percentage of advertising revenues have been down for many straight quarters now,
and here they ticked back up a little bit. Can you clarify that at all, the reason for
that? Thanks.
>> PICHETTE: Yeah, on the latter, let me just jump in on the latter, and then I'll let Susan
give a bit more commentary. On that, it's just mix issue between partners. So as you
have partner mix, it will just affect -- but it's not a dramatic number, by the way, right?
It's still kind of hovering around 24, so it hasn't plummeted in any way, shape, or
form.
>> ANMUTH: Is it more partner mix, or is it possible that it's more mobile mix, like desktop
to mobile?
>> PICHETTE: Yes is the short answer. But partners mix affects it as well. Like it's
not only mobile, I guess, is my point. I'll let Susan give you more details on -- colors,
if any, on the changes that we've done that would have impacted the CPC.
>> WOJCICKI: Hi, Doug. So the two biggest factors, as I mentioned, were the FX and also
the changes that we made in terms of ad quality or format changes that we made. And those
were changes that we made in Q3. There was no one significant one that drove the metrics.
There were -- like this quarter we made 20 different changes; last quarter we made something
similar; and it was the combination of those different changes. Now, it's important to
remember that we rolled those out over the course of Q3, and so that meant that if we
rolled one out at the end of Q3, that you wound up seeing that impact in Q4. And so
there was a cumulative effect.
But again, there was not any one big one. It was the sum of a bunch of other changes.
And those changes that we wind up making are changes that may make the ads more readable;
they may be more visible; they're UI treatments or quality changes. There are a bunch of different
things that make it more visible so the users are noticing the ads. And we see those as
positive. We measure the metrics -- how do our users respond, how do our advertisers
respond -- and they are revenue-positive.
>> PICHETTE: Yeah, another way to think about this is, in many quarters, we would have a
bunch of them that would actually move down the CPC, a bunch of them that would have moved
down on click. It just happens that in the latter part of this year, they kind of all
moved one way, which is neither good nor bad. It just happens that the quality teams and
the advertising teams actually have kind of unheard of these type of opportunities, so
it's a bit of circumstantial as well.
>> ANMUTH: Thank you.
>> PICHETTE: Thanks for your questions. Let's go to the next question, please.
>> OPERATOR: And we'll take our next question from Jeetil Patel with Deutsche Bank Securities.
PATEL: Great. Thanks. Two questions. First of all, I think, Larry, early on, you talked
about shuttering a couple of products and then doubling down on key products that are
showing quite a bit of success. I guess, can you speak to -- are you still innovating across
new products around the consumer and anything that's not tied to advertising, as we look
ahead? Second question, can you talk about -- I guess when you look at mobile distribution
costs, in general, do you envision a scenario where mobile distribution costs stay about
where they are today, or how do you think those kind of play out over time as you think
about the development of the mobile market?
>> PAGE: Yeah, thanks, Jeetil. Maybe I'll take the first question and Nikesh can take
the second part of the question. I think we -- I didn't mean to imply in any way that
we were stopping innovating, and I think we will continue to launch new products in new
areas and things that are not necessarily advertising supported, as we have been doing
for a while, and I'm very excited about that. But we may not launch a hundred such things;
we may launch a few of those such things over the next few years.
I think we'll try to make sure we're more concentrated in our efforts and make sure
we're producing really amazing products for our users and for our customers that are really
well thought-out and work really well and so on, and we put a lot of effort into those
things. But we just -- really just been concentrating our efforts around our innovation and making
sure we're doing a really great job on the things that we really care about and that
really matter to the world. And so that's very consistent with sort of everything I've
said. Nikesh?
>> ARORA: Yeah, I think on mobile distribution is pretty similar to what happens on Search
today. Many consumers get their mobile applications from Google directly on their devices. Some
people get them through our distribution partners and some people get them through our carriers.
And to be honest, the distribution costs really depend on the mix of those devices, and you
can see, traditionally, the mix is less and less specific to other distribution partners
in the middle, and more and more people are organically getting access to the device and
applications that they choose, even with the large plethora of opportunities and options
that they have.
>> PICHETTE: Great. Thank you for your question. Let's go to the next question, please.
>> OPERATOR: And we'll go to Justin Post, Bank of America Merrill Lynch.
>> POST: Thank you. A couple things. Patrick, on the hedging program, you had $134 million
loss on the expense of getting the hedges, but you only made $25 million, and it was
a pretty volatile quarter. Do you have a lot of backlog saved up for next year in profits,
and is this working the way you want? And then maybe for Larry; obviously, CPC growth
is really accelerating. Can you explain why that's good for Google and why you think you're
going in the right direction? And the mix seems to be a big controversy, but obviously
you're making these changes. Can you really explain the positive benefit to the user experience
or to the company? Thank you.
>> PICHETTE: All right. So on the first question -- actually, thanks for your question, Justin,
because I'm sure a lot of people are thinking about that. Our hedges -- so the cost that
we accelerated is actually relative to the entire portfolio of hedges that we have that
spans over 18 months forward. So think of it as a complete program that extends 18 months
out, and of which -- think of it like a bond ladder with a lot in the short term and less
in the long term. All of those hedges you have to mark-to-market, and when you have
to mark-to-market it, they're so much in the money; then you have to actually accelerate
your expensing of them.
So you're absolutely right that today, as we stand or as we close our books on the 31st,
they signaled about the weakness of the euro because the euro had lost quite a bit in the
quarter and relative to our portfolio, so we would -- if things stayed exactly the same,
we wouldn't reap a lot of benefits in the coming quarters and wouldn't have those expenses
because we took them all in one shot. So I hope that makes sense. And it's really tied
to FASB 133 that doesn't allow you to just do it any early.
>> PAGE: I can say a little bit about CPC from my perspective. And I don't have the
detail here for the quarter or whatever, but I do think that CPCs do vary a fair amount,
and we're not surprised by that. There are lots of product changes that we can make that
can increase CPCs or decrease CPCs and kind of have an inverse effect on the number of
clicks and sort of not change the actual dollars spent, for example. And that's not that surprising
because we can do things and product changes that affect people's attention to ads, as
Susan mentioned, or that affect the quality of the conversions that advertisers receive,
where they might receive better-quality clicks, or each CPC that they get, that's more likely
to convert into what they care about.
And so we are constantly optimizing all those things across a number of different product
areas and ad placements and everything else. And our advertisers are doing the same, and
the algorithms are also doing all that. So I think in any healthy economy like we have
of advertising, we're going to see variation in the different factors we use to measure
it, and I'm not surprised by that.
>> POST: Are you happy with the results in the quarter? Are they going the direction
you expected based on the changes you made?
>> PAGE: As I said, I'm very happy with our results overall in the quarter, and I think
those are a function of all the metrics that we gave you. But, yeah, I'm happy with our
results.
>> WOJCICKI: Yeah. One additional thing I'd like to say about the increase in paid clicks
is the increase in paid clicks, in a lot of ways, is a proxy for were the ads useful,
did the users find them interesting enough to click on them, did we have enough advertisers
who served ads? So an increase in paid clicks shows that our advertising system is working,
that we have more advertisers, we have more clicks. And as Larry alluded to, there are
many, many different variables that go into it, but an increase in paid clicks is something
that we see as a sign that our advertising system is in demand and is healthy.
>> PAGE: Maybe we can get our next question, not about CPCs.
>> PICHETTE: Next question, please, Jamie.
>> OPERATOR: And we'll take our next question from Scott Devitt with Morgan Stanley.
>> DEVITT: Thanks. I'll ask about paid clicks and their relationship to CPCs. There's third-party
data that suggest that paid clicks continue to grow faster than free clicks, and so the
34% paid click growth that you reported would seem to make that fairly accurate that there's
a mix shift that's occurring in favor of paid versus free. And with Search quality improvements
as the driver of this potentially, it would seem that advertisers would be paying more
for better distribution; yet CPC is down. And so if you were to look at your business
on a same-distribution basis and normalize for mobile and increased ad coverage and all
the other potential drags on CPC, the question is a simple one -- if you look at advertisers,
are they paying more or less on a unit basis for distribution?
>> PICHETTE: I think that -- let me make two statements on this. The first one is we shy
from talking about anything about specific, which is third-party data, because typically
we find there's so much errors and methodology issues with them. And I think that what we're
seeing -- what we have clearly seen this year, once again, is more holiday shopping happened
online this year again. Nikesh talked about record Cyber Sundays and Fridays that are
black, and all of these things have hit record this year again, and we're seeing again the
transition of offline to online. I think that Susan's last point is really the critical
point, which is, as we're moving and exploring formats that really work well for both the
advertiser and the user, you should see a symptom, which is more clicking, and that's
exactly what we see.
And if there's a slight pressure on the CPC as a consequence of it, but overall we get
a better result, that's actually a pretty healthy environment and an innovative one.
And then it just -- again, as we mentioned, as Susan said, it happened that in Q3 we had
just a number of them that just went one way, and I wouldn't read any data points in that
and saying that that's the future or that it will not revert back to others. That's
just the nature of experimentation in our systems.
So with that, why don't we go to the next question, please.
>> OPERATOR: And we'll go next to Jason Maynard with Wells Fargo.
>> MAYNARD: Hi, guys. I guess I'll spare you on CPC. I actually have a couple questions
for Larry on Google+. Last quarter, I think you referred to it as your social layer, and
I guess I almost think of it like Google's -- it's like your social operating system,
I guess, to a certain extent. So I'd love to get your vision on how you think G+ can
improve engagement across all your properties. And then the second question would be, identities
that are on Facebook and Twitter, do you think ultimately those firms will open up the data
stream and we could see even richer results with, clearly, Facebook and Twitter-like information?
Thanks.
>> PAGE: Yeah, thank you. Thank you, Jason, for the question. It's a great question. I
think we see -- as I mentioned in my opening remarks, I think we see really engaging with
users on really deeply understanding who they are, by getting them the right things that
make sense for them and so on, is really, really important. And I think we're at the
early stages of that, and Google+ is a big part of that effort. And if you look at some
of the things we've done -- and I think that if you look at it in Search, you could do
a search now and get somebody's name and have that name really appear as [ph] chip (51:20)
in the search. And that means that it's no longer a string they were searching for; it's
actually a real person. So that notion of identity is really a deep, deep part of what
we're doing, and it's an example of how we can make all of our products better by really
understanding people.
So we definitely think about that, and there's a reason why we called it Google+. And so
I think you've got the right idea in general about that. I think with other big companies,
other big companies that work on social data and so on, I think we've seen very much a
general tendency to wall that data off into a walled garden and not make the data available.
Where we have publicly been able to access that data -- for example, in Search, we provide
a lot of third-party social data in Search, and we love doing that and we'd love to have
more such data. But in general, I would say that companies generally have been walling
that data off, and we'd love to be able to use more of it.
>> MAYNARD: Great. Can I maybe ask a follow-up and get a prediction from you in terms of
how many G+ users you expect in a year or so?
>> PAGE: Oh, my goodness. I won't try to predict that, but we're very excited about the growth
we've had, and we're certainly seeing a tremendous number of people being added every day.
>> MAYNARD: Cool. Thank you very much.
>> PICHETTE: Yeah, thanks for your questions. Jamie, let's go to the next question, please.
>> OPERATOR: And we'll go next to Ross Sandler with RBC Capital Markets.
>> PICHETTE: Go ahead, Ross.
>> SANDLER: Thank you. Can you hear me?
>> PICHETTE: Yes, we can.
>> SANDLER: Okay. Two quick questions, neither on CPC. Susan, on Google Offers, quick question
there; given Groupon and LivingSocial's early success in this space, it seems like scale
is an advantage in the local and national deals area. Is there any reason why Google's
only in 30 markets to date? It seems like you've got all the merchant relationships
that you need, so is there something else that's preventing a broader rollout? And then
a follow-up for Nikesh on Europe, you mentioned in your prepared remarks that Germany was
a little weak in the quarter. Can you give us a little color on which verticals -- was
it travel, retail, finance -- a little color on the verticals that were weak, or was it
broad-based? Thank you.
>> WOJCICKI: Hi, Ross. So right now we have 30 markets to date, and that's just what we
have to date. So as there are more markets and as that makes more sense for us over time,
then we will roll out more markets. But I do think that there is -- it's very important
to understand what's working in a specific market and in a city and perfecting that and
really understanding the dynamics that make sense for us for the success of that city.
And so as we expand, we'll expand with that knowledge and we'll expand as it makes sense
for us in terms of the users, the solutions, and build in all of those learnings that was
made in those initial 30 markets.
>> PICHETTE: Nikesh, any comments on your side?
>> ARORA: Yeah, I guess in terms of verticals, generally, auto has been strong around the
world. We've seen that. And then in different markets, different verticals have been special.
In terms of the U.S., we had education, we had health. So there have been different vertical
performances around the world. Germany has been a market which has been doing really
well for us the last few quarters, so part of it is we're running up against some very,
very tough comps versus last year. But it was general sort of weakness across the board;
it wasn't specific to any particular vertical that has changed.
>> SANDLER: Great. Thanks.
>> PAGE: I should mention, too, you can actually go to Google Insights for Search, and you
can look at our Search query graph over time for any of these verticals yourselves and
find some great data.
>> SANDLER: Great. Thanks, guys.
>> PICHETTE: Thanks again for your question. Probably have time for one or two more questions,
so let's go with the next question please, Jamie.
>> OPERATOR: And we'll go next to Herman Leung with Susquehanna International Group.
>> LEUNG: Great, thanks. Just two quick questions. First, I remember last year in the fourth
quarter, there was a pretty big change that you guys made on the quality side, and which
I think you mentioned a bit on the prepared remarks; wondering if that -- how much of
a headwind that was relative to the fourth quarter of this year, if there's a way you
can sort of quantify that. And then the second question is the hiring rate that you guys
have made, 1,100 people this quarter, wondering -- that's a bit of a slowdown from the previous
quarters in the past; wondering if there was something there to look into. Thank you.
>> PICHETTE: So a one-two punch on this one, Herman. On the first one, we mentioned it
because we thought it was material. It was such a big impact last year. We don't comment
on the specifics, but it was sufficiently material that that's -- you're absolutely
right that it created a little headwind for us this year, no doubt about it, and that's
why we mentioned it. On the second question, you'll remember that in Q3 we kind of had
a double-hitter where Larry had already said that we had reached what was kind of tolerable
in terms of the pace of hiring...
>> PAGE: The edge of what's manageable.
>> PICHETTE: The edge of what is manageable. Thank you, Larry, for that clarification.
And we also had, at the end of Q3, all of the -- we had the summer, everybody that leaves
-- comes from school comes in into Q3, so we had quite a bit of a bump in Q3. We're
really pleased by -- and you can see in our results now that, actually, it's a good evidence
of we have managed down our numbers into Q4 and a good evidence of we are managing it
to make it digestible for us.
Thank you for your question, Herman. Why don't we go to one more question. We just have time
for one more.
>> OPERATOR: And we'll take our final question from Youssef Squali with Jefferies & Company.
>> SQUALI: Thanks a lot for squeezing me in. So, first, one product we didn't talk much
about much is Google Wallet. So I was wondering if, based on your early tests, is that a product
that you're planning on doubling down on, and if so, what is the path to wider adoption?
And second, on MMI, I know the deal hasn't obviously closed yet, but just given the size
of that transaction, it certainly has the potential to really change Google's growth
and margin profile pretty significantly, which is a big concern to many. So at a very high
level, Larry, I was wondering if you could maybe just talk about your commitment to be
a principal in the handset business. And if so, how do you avoid channel conflicts with
the partners?
>> WOJCICKI: Hi, Youssef. This is Susan. So I can talk a little bit about Google Wallet.
So as Larry has mentioned a number of times, we want to focus on products that people use
every day, so products that are core, and all of us use our wallet every day, and we
think that's a big opportunity for us. So we are continuing to invest in our wallet
business, and we see a lot of opportunity. And for example, there might be opportunities
in the future in terms of how online and offline are linked together and better opportunities
with the way different parts of our business wind up working. So we are very excited about
wallet and we will continue to invest in it.
>> PAGE: And I should mention, on Motorola, obviously, we're going to break that out separately,
so you'll be able to track the changes to margins and so on. [ph] I think that [indiscernible]
(58:56) you'll be able to track the businesses separately, so that should not be an issue.
We've been very clear that Motorola is obviously going to remain a licensee of Android, and
Android will remain open. And when we announced the deal, we really said our strategy is working
with different manufacturers on lead devices when they continue, and Motorola will bid
just like any other OEM for those devices, so that process will be unchanged.
And obviously, I think we have done a great job managing our partner ecosystem. That's
a difficult thing to do, and I think we do it quite well. And I expect we're going to
continue to do that well with Motorola. And obviously it shows our commitment to Android
and making sure that we have the freedom to innovate, as do all of our OEMs.
>> PICHETTE: So even more specifically, you can expect segmented reporting for Motorola.
So Google will continue to be very clear in terms of its performance and transparency
to investors. Motorola will also, on its own, be very clear and transparent to investors.
And just before we close the call, just a reminder to everybody is -- the head count
question that was asked a minute ago reminded me. As we launch into Q1, it's important to
remember that there's a lot of expenses as people kind of think of resetting their models.
I just want to remind everybody, because every year we go through this, that employer taxes
and 401(k)s and all of the things that launch into Q1 typically get reset. And so I just
wanted to give a friendly reminder to all the people that have financial models out
there to make sure to take that into consideration because it surprises everybody every year.
So rather than get another surprise at the end of Q1, I just thought I'd remind everyone.
>> PICHETTE: On that note, I think it's really -- I'd love to, once again, on behalf of the
four of us here, thank profusely our Googlers. They do an amazing job, and as we said, landing
a great quarter, crowning a terrific year, and really well set for an absolute exciting
year for 2012, and look forward to it. So on that, Jamie, I'll let you close the call.
>> OPERATOR: Thank you, sir. That does conclude today's conference. We appreciate everyone's
participation.