Q2 2011 Earnings Call

>> Please standby. We're about to begin. Good day, and welcome, everyone to the Google Inc.
Second Quarter 2011 Earnings Conference Call. This call is being recorded. At this time,
I'd like to turn the call over to Jane Penner, Senior Manager, Investor Relations. Please
go ahead, ma'am. >> PENNER: Good afternoon everyone and welcome
to today's Second Quarter 2011 Earnings Conference Call. With us are Larry Page, Chief Executive
Officer; Patrrick Pichette, Senior Vice President and Chief Financial Officer; Susan Wojcicki,
Senior Vice President, Advertising; Nikesh Arora, Senior Vice President and Chief Business
Officer. First, Larry, Patrick, Nikesh and Susan will provide us with results on the
quarter. Also, as you know, we now distribute our earnings release through our Investor
Relations website located at investor.google.com. So please to our IR website for earnings releases,
as well as supplementary slides that accompany the 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. So 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
in 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 we use on this call such as operating income
and operating margin are also expressed in a non-GAAP basis--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 now turn
the call over to Larry. >> PAGE: Well, thank you and good afternoon,
everyone. Thanks for joining us today. It's really exciting to be with you today and share
directly with you the progress we have made in my first quarter as CEO. As you will see
from our press release, we had a great quarter, which revenue up by 32% year-on-year and a
new record for quarterly revenue at over $9 billion. We've substantially increased our
velocity and execution this quarter, which is a key goal of mine since taking over as
CEO. So I created a new product focus management structure, with clear leader responsible for
each area. New management team is working together fabulously and has already achieved
a lot in just these three months. First of all, I want to talk about Google+, which we
launched a field trial invitation only. Our goal at Google+ is to make sharing on the
web like sharing in real-life, as well as to improve the overall Google experience.
Circles lets you choose with precision who you're sharing with. Not surprisingly, this
has been very well received, because in real-life, we share different things with different people.
Hangouts allows for serendipitous interactions. Like in real-life, when you run into a few
friends, gives you seamless and fun multi-user video, and it's really amazing. Last quarter,
we launched the +1 button in search results and ads, enabling users to recommend stuff
they like and to have those recommendations show up in the search results of people they
know. This quarter, we released the +1 buttons to the entire web and many sites like Huffington
Post, The Washington Post and Best Buy has added +1 buttons. Google + is still in field
trial with limited access as we scale the system. Users have to be invited and sign
up with a profile in order to use it. However, the growth on Google+ has been great, and
I'm excited to release some new metrics for you today. Over 10 million people have joined
Google+. That's a great achievement for the team. There's also a ton of activity, and
we are seeing over one billion items shared and received in a single day. Our +1 button
is already all over the web, and it's being served 2.3 billion times a day. So while we
still have a lot of work still to do, we are really excited about our progress with Google+.
Google+ is also a great example of another focus of mine, beautiful products that are
simple and intuitive to use, and actually was one of the first products to contain our
new visual redesign. We also launched that beautiful, consistent and simpler design on
our homepage, Gmail and calendar, with many more products soon to come. Reader focus has
also been another big feature for me this quarter. More wood behind fewer arrows. And
last month, we announced that we'll be closing Google Health and Google PowerMeter. We've
also done substantial internal work, simplifying and streamlining are product line. While much
of that work has not yet become visible externally, I'm very happy with our progress here. Focus
and prioritization are crucial given our amazing opportunities. Indeed, I see more opportunities
for Google today than ever before, because believe it or not, we are still in the very
early stages of what we want to do. Even in Search, which we've been working on for 12
years, there's never been more important changes to make. For example, this quarter, we launched
a pilot that shows an author's name and picture in search results; making it easier for users
to find things they trust. Of course, when we started doing Search, people thought we
were crazy. They said there was no money to be made in search over and above a bit of
banner advertising. Most new Internet businesses have had that same criticism. Fast-forward
to today, it feels like we're watching the same movie again in slow motion. We have tremendous
new businesses being viewed as crazy. Android, I actually have a new metric to report in
Android of 550,000 phones activated a day. And that's a huge number, even by Google standards.
Chrome is the fastest growing browser. We have over 160 million users. Now, people rightly
ask, "How will we monetize these businesses?" And of course, I understand the need to balance
the short-term with the longer-term needs because our revenues in growth serve as the
engine that funds our renovation. But our merging high usage products concentrates can
generate huge new businesses for Google in the long run, just like Search. And we have
tons of experience monetizing successful products over time. Well run technology businesses
with tremendous consumer usage make a lot of money over the long term. And I think about
our products in three separate categories: First, there is Search in our Ads products,
the core driver of revenue for the company. And Nikesh and Susan are going to talk more
about Ads later in the call. Next, we have products that are employing high consumer
success: YouTube, Android and Chrome. We are investing in these in order to optimize their
long-term success. Then we have our new products, Google+ in commerce and local. We are investing
in them to drive innovation and adoption. Overall, we are focused on long-term, absolute
profit and growth, as we have always been. And I will continue to have tight financial
management we have had in the last two years, even as we were making significant investments
in our future. I'd like to finish on our people. Great companies are no greater than the efforts
and ingenuity of their people. We're continuing to hire the best. Keeping them happy and well-rewarded
is crucial to our future. Many of you will be interested in hiring; whether we hired
a few hundred more or less than you expected this quarter. But we will optimize headcount
for the long-term in the opportunities we see. I'm happy with the investments we've
made in people, but we're probably even a little ahead of where we need to be with headcount
growth at the edge of what's manageable now. Easy to focus on things we do that are speculative,
e.g. driverless cars. But we spend the vast majority of our resource on the core products.
We may have a few small speculative projects happening at any given time, but we're very
careful stewards of shareholder money. We're not betting the farm on this stuff. All of
us at Google want to create services that people in the world use twice a day just like
a toothbrush. And we strive to make those services beautiful, simple and easy to use.
That way, we can provide huge benefit to the world. We've made a good start, but we're
only a 1% of what's possible. Google is just getting started, and that's why I'm here,
working hard to lead the company in the next level. Thank you. And again, we had a great
quarter. Now over to Patrick for the financial results.
>> PICHETTE: Thank you, Larry. Thank you, everybody. Thanks for joining us. And Larry
is going to stay with us for the Q&A. So I just wanted to make sure that everybody knows
he's not going anywhere. Okay, so let's go through the number. We had obviously an excellent
quarter with 32% year-over-year revenue growth in Q2, and it clearly demonstrate the continuing
power of Goggle's product innovation, but also the relentless momentum of the digital
economy. The strength continues to be driven by our core desktop search ads, but also increasingly,
by new emerging areas just like the Mobile, Display, including YouTube and Enterprise
that we regularly talk about. So let's turn to the specifics of our performance in the
quarter. Growth revenue grew 32% year-over-year and we've reached $9 billion in revenue, 5%
quarter-over-quarter growth as well. Note that while currency fluctuation boosted our
revenue somewhat, even in constant FX terms, our growth rates remain strong, particularly
in what tends to be a seasonally slower quarter. Google website revenue was up 39% year-over-year
to $6.2 billion and 6% quarter-over-quarter, with strength across most major geographies
and verticals. Goggle Network revenue was also up 20% year-over-year to $2.5 billion,
2% quarter-over-quarter. Network revenue is again negatively impacted by the Search quality
improvements made during the latter part of Q1, as you will remember, and know that Q2
reflects a full quarter of this impact. This impact is to be expected in the short-term,
given that it is now different publishers that are receiving traffic and may not have
yet optimized their sites for our advertising programs. Other revenue was also up 20% year-over-year,
just $310 million and 15% quarter-over-quarter. Our global aggregate paid click growth was
strong, up 18% and down to 2% quarter-over-quarter. Our UI changes to search ads such as BizURL
drove year-over-year click growth in Q2, along with the ongoing and accelerating shift from
offline to online. The slight decline quarter-over-quarter is just typically consistent with our summer
seasonality. Aggregate cost-per-click growth was also very healthy, up 12% year-over-year
and up 6% quarter-over-quarter. Note that FX also had a positive impact on CPC, and
remember too that this is an aggregate number that includes both Goggle.com and our AdSense
properties. Turning to our geographic performance, the U.S. and the Rest of the World are growing
both at very good pace, and our results reflect that. While U.K. still continues to lag slightly
in the global recovery, year-over-year and quarter-over-quarter growth in Q2 continues
to show signs of acceleration in the U.K. as well. So revenue from the U.S. was up 26%
year-over-year to $4.2 billion. And in our earning slides, which you can find on our
Investor Relations website, you'll see that we've broken down our revenue by U.S., U.K.
and Rest of the World to show the impacts of FX and the benefits of our hedging programs.
So please refer to those slides for the exact calculations. Non-U.S. revenue accounted for
54% of our total revenue or $4.9 billion, up 38% year-over-year, which includes only
$4 million of benefits from hedging programs; compared to last year where we had $79 million
of benefits for Q2. Year-over-year growth in fixed FX would have been 29% versus the
30% I just mentioned. Japan's future revenue was again negatively impacted by the aftermath
of the disaster there; but there again, we see signs of faster recovery, faster than
they expected at first. The U.K. was up 27% year-over-year to $976 million, and year-over-year
growth in fixed FX was still have been a healthy 19% for the U.K. Let me turn to expenses.
Traffic Acquisition Costs were $2.1 billion or 24.2% of total advertising revenue. Our
other cost of revenue was $1.1 billion including stock-based compensation of $51 million. And
finally, our operating expenses, which exclude stock-based compensation totaled $2.6 billion.
The stock-based compensation totaled $384 million in Q2. The increase in year-over-year
in OpEx was primarily due to payroll, increased advertising and promotional spend and also
professional services. So as a result, our non-GAAP operating profit was $3.3 billion
in Q2 which exclude the stock-based compensation, resulting in a non-GAAP operating margin of
36.7%. Headcount was up approximately 2,450 versus Q1 ending the quarter with 28,768 full-time
employees. When we exclude ITA adds of roughly 450, the net headcount growth is roughly similar
to Q1. Our effective tax rate was 19% in Q2, and the effective tax rate is down due to
the mix of earnings between domestic and international subsidiaries, as well as our hedges. Let me
turn now to cash management. In Other Income and Expense, our result was $204 million for
Q2, a solid portfolio management performance from our team--was--which like every quarter,
is offset by the impact of our hedging expenses associated with FaS 133, which it's--in itself
was also significantly lower in Q2 gave us these great results. For more detail on OI&E,
again, please refer to the slides that accompany this call on our IR website. Operating cash
flow, very strong, $3.5 billion for Q2. CapEx for the quarter was $970 million versus last
quarter of $890 million, so pretty much in line. The majority of our CapEx spend in Q2
was related to facilities, expenses, and production equipment. And regarding specifically this
facility expenses, like last quarter, we just happened to have a great opportunity in Q2
to purchase buildings in Dublin and in Mountain View, and we took that opportunity. 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 actually make these investments. But overall,
we can be nothing but pleased with our free cash flow which was $2.6 billion for Q2. As
Larry mentioned earlier, we continue to deliver growth with a disciplined agenda. This means
investing and making sure that our resources are deployed wisely with focus and a balance
between that short and long-term that Larry covered. So with those financial highlights
covered, I'm going to turn it over to Nikesh who will actually cover now our sales performance
in the quarter. Here you go, Nikesh. >> ARORA: Thank you, Patrick. I'm going to
give you a quick update on our business activities which spans sales, partnership marketing,
and customer service around the world in support of our product and revenue. Let me start by
focusing on the first priority of our sales team, the need to continue to drive revenue
growth in core and new businesses. This quarter, we continue to drive revenues in our core
areas like Search, as well as new areas like Display, Mobile, and Enterprise. Core Search
and Desktop has done very well this quarter, with Google.com accelerating and our large
advertisers continuing to spend more as they see more value in Search. We've also been
able to drive tremendous focus on small advertisers around the world, with programs like GXPO
which I will talk about slightly later. Broadly, however, our sales teams are getting better
in tailoring Integrated Solutions for our clients, using the full area of our advertising
products. These solutions create greater opportunities to improve our customers marketing ROI. Clients
have used Search to focus their targeting capabilities, such as audience and topic targeting
to help improve the marketing effectiveness. Some of our most successful Search clients
include people like GM and EgyptAir. On the other hand, in addition to our core desktop
Search business, we continue to be very excited about our investments in Display and Mobile.
Let me first focus on Display. We've seen continued healthy growth in our Display product
space to across all fronts: Advertiser, publisher and technology solutions. Ninety-eight of
the top AdAge 100 advertisers have bought Display across YouTube and the Google Display
Network this quarter. Customers continue to use our DoubleClick products and we are happy
with the increased use for the DoubleClick Ad Exchange and Invite Media for ad buying.
With our announcements to acquire Admeld, we hope to deliver even better solutions to
our publishers and buyers. Continuing on Display--on YouTube, where we have over three billion
daily views, we have had great success bringing popular content to our users, further increasing
audience engagement. Take for example, our April broadcast of the Royal Wedding which
generated 100 million YouTube views. Our range of platform and content means that advertisers
are beginning to use them for superior branding solutions. A great example of our branding
products in action was T-Mobile's launch of the Samsung S4G on YouTube. In this campaign,
T-Mobile took over YouTube running ads in their homepage, watch page, Mobile. That particular
campaign helped them reach 46 million unique users. Continuing to talk about revenues,
our Mobile business continues to be another area of robust growth. The number which Larry
just shared of 550,000 Android, that and the success of smartphones and general Mobile
Data devices around the world is acting as an accelerator to our Mobile advertising efforts.
Let me just take one quick example. One format which is launched by Susan's team called Click-to-Call
or Click-to-Share has been particularly successful. Unilever is a great use case of these formats.
They integrated our AdMob product into a very large campaign of launching a new product
to use the banner to drive traffic to a campaign Mobile site and achieve unprecedented results
with almost 700,000 unique visitors accessing their content. Another leg of our revenues
is the Enterprise Business. We've seen great results in enterprise as well, in particular
apps for business continues to grow as organizations move to the cloud. We've had key wins at Intercontinental
Hotels, [INDISTINCT] State of Wyoming. In addition to that, some small simple changes
in our product side have allowed us to tremendously accelerate Google Apps for small businesses.
Looking at our revenues from a slightly different perspective, geographies and customer segments,
we've seen strong growth in regions and across customers of all sizes. First, let's take
a look at geographies. We maintained our strength in large, mature countries while we accelerated
in emerging ones. Now, a large majority of countries even though some are facing economic
challenges, this secular trend of online advertising and the effectiveness of the teams to continue
to drive healthy revenue growth is showing great results. Several countries are worth
noting. As Patrick mentioned, the U.K. has accelerated this quarter with strong growth
by small advertisers. In Japan, we've seen recovery, driven primarily by Display and
Mobile spending by large advertisers. Our focused execution in Canada and Spain has
led to these markets beginning to show recovery. Finally, we saw tremendous growth in emerging
countries especially Brazil and Russia, where our Display products are getting strong adoption
from advertisers. Across each country, we focus to improving the product knowledge and
selling capability of our sales force. Our frontline teams can now sell Search, Display,
and Mobile to the needs of our customers, which is a great trend we're seeing of integrated
products selling across multiple Mobile online--Mobile ad formats. As a result, we're becoming better
advisors in the digital space for our large advertisers. For example, Nike, Sony Ericsson,
Telefonica; all of them partnered with us to create integrated solutions down there,
sponsorship of Copa América. Outside of revenue, one key area of responsibility is marketing.
And we continue to use marketing as a strategic blipper. We use marketing to both drive customer
acquisitions as well as the usage of our key consumer products. I'm very proud of my team's
work on getting businesses online, GXPO as I mentioned in Q2. We successfully launched
in Brazil, Canada, Australia, Thailand. The objective is to try and bring another million
small, medium businesses across 20 countries online for the first time. As you know, more
advertisers get more queries, have more ad serves against it resulting in a more robust
option for us. In addition, we also saw strong results from our own advertising campaigns,
including the most recent one around Google Chrome. The web is what you make of it. I'm
sure many of you might have seen Justin Bieber or Lady Gaga in these campaigns. These campaigns
have shown tremendous effectiveness and have also convinced more users to switch to the
Chrome browser. Last but not the least, I want to spend a quick minute on talking about
something we're more and more passionate about, which is continuing to drive better customer
satisfaction on an advertiser front. We continue to improve service and support across all
customer segments. We've started providing large set of advertisers proactive full support
and on boarding help, which includes signing up for campaign building, signing up and getting
assistance, as well as free full support after they become a customer of ours. As a result
of these initiatives and others, spending by our small businesses continue to accelerate.
Overall, as Patrick and Larry have mentioned, Q2 was a great quarter. I'm very proud of
the wok of our teams across the world in various countries. We have done a tremendous amount
of effort to serve our customers, partners and users. Now, I'm going to turn over to
my business partner, Susan, who is going to talk about all the positive impact that our
products will have this quarter. >> WOJCICKI: Thanks, Nikesh. Larry started
the call by talking about a few of the quarter's product highlight and I'd like to cover some
more of them. So let me begin with Search. We're always looking for new ways to help
our users find answers to their questions. This quarter, we brought two of the most popular
mobile search innovations to the desktop; Voice Search and Search by Image. Voice Search
traffic for Mobile devices is up six times in the past year. So we thought this would
be a useful feature for our desktop users as well. It's especially useful for searches
that you know how to say but not how--not how to spell like Bolognese sauce or Schenectady,
New York; neither of which I could easily spell. With Search by Image, you can draw
out pictures of places, art, or even mysterious creatures like the Loch Ness Monster right
into the Google search box, and Google can identify and tell you about those pictures.
In addition to these changes, we released about 100 other quality improvements to the
Search algorithm. More and more people are searching and using apps from mobile phones
where Android has had terrific momentum. There are now 135 million Android devices that have
been activated in total, up from 100 million just two months ago. There are also now over
400 different Android devices available globally. Android market is also picking up momentum.
It has over 250,000 different apps, and users have downloaded apps over 6 billion times,
which is double the downloads from just a few months ago. We're expanding beyond apps
too. This week, we started renting movies and selling books on phones from Android market.
And earlier in Q2, we launched Music Beta, which lets users upload their personal music
collections and playlist to the cloud. All of this media, movies, music, books and apps,
are instantly available on your Android devices, no cable required. Smartphones are also becoming
key to the shopping experience. Making shopping mobile and local is a vision behind Google
Wallet and Google Offers. We announced the Google Wallet mobile app in May in partnership
with Citi, MasterCard, Sprint, and First Data; and we are now testing it in field trials.
And as of this week, Google Offers are available in San Francisco, Oakland, New York, and Portland.
And now on to Ads, which is the product area that I manage. On the Search Ads side, we
had a great quarter for quality with over 50 ads quality improvements and a big upgrade
to the ads relevancy system. We launched the latest in a series of small tweaks for a search
add format. This format, this quarter, we added the landing URL to the headline so that
users know where click will take them. This may seem like a small thing, but we launched
several of these small tweaks over the past year and cumulatively, they have had a big
impact. There were also a lot of quality improvements across our Display Network; over 20 launches,
making it one of our strongest quarters from a quality perspective. In general, Display
advertising is moving to a scientific model based on technologies like real-time bidding.
But this technology, when you land on a web page, advertisers decide what they want to
pay for the ad space, and then auction is held. And the best ad is matched with the
publisher's ad space. It's a lot more efficient. It provides better performance for both advertisers
and publishers, and more relevant ads for users. Real-time bidding is an important technology
shift that we are investing heavily in. Invite Media, which is the buying platform for advertisers
and agencies that we bought last year, has doubled its client list in that--in the last
year, with over five times growth outside of the U.S. Mobile Display is starting to
take off too with traffic on the AdMob network up more than three and a half times in the
past year. More and more of that traffic is coming from tablets, so we launched a new
set of formats designed specifically for tablets. These formats are web-based. They use HTML,
and brand advertisers don't need to make different versions of their ads for different models.
Nikesh also mentioned our great momentum with YouTube where we're getting strong performance
from the YouTube skippable ads. Because users can choose to skip these in-stream ads, the
people who choose to watch them are much more engaged. More and more advertisers are choosing
to make their ads skippable. And now, over 1/3 of in-stream ads on YouTube are in a skippable
format, which is a pretty remarkable stat given that we launched this format in December.
Finally, I'd like to update our progress on Chrome. Larry mentioned how we passed 160
million users which is more than double year-on-year. This quarter, our partner Samsung and Acer
Search have been Chromebooks in seven countries. Chromebooks are designed to be fast, to just
work, and to get better over time. Thanks to our automatic updates. And they're now
available through Amazon and Best Buy. Chromebooks are also available for schools and businesses
via subscription model. The subscription includes Chromebooks, of course, administration, warranty,
and support, starting at $20 a month. So overall, it was a very busy quarter for us. But maybe
the coolest thing we did was the Les Paul doodle we ran last month. It was a guitar
you could actually play, and users recorded over 40 million songs while it was up. That's
about five years of music. I'm looking forward to hearing your questions and comments. And
for now, back to Patrick. >> PICHETTE: Thank you, Susan. So Jamie, our
operator, is going to help us through this. Jamie, you can just set up the call for Q&A.
And as I said, we'll have Susan, Nikesh, Larry, and myself to answer any questions you may
have. >> Thank you, sir. To ask a question, please
signal by pressing the star key followed by the digit ones. If you are using a speakerphone
toady, please disengage your mute function or pick up your handset to ensure that your
signal reaches our equipment. If you find that your question has already been asked
and answered, you may remove yourself from Q by pressing star 2. Again, that is star
1 on your touchtone telephone to signal with a question. And we'll take our first question
from Spencer Wang with Credit Suisse. >> WANG: Thanks. Good afternoon. Two quick
questions, if I could. First, for Patrick or perhaps Nikesh. International revenue growth
as you mentioned was really strong. I was wondering if you could just provide a little
bit more color on perhaps what's driving that? If you could give us a sense of how much of
that is core Search versus some of the newer initiatives like Mobile, YouTube, and Display.
And then the second question is for Larry. I was wondering if you can just talk a little
bit, Larry, about the patent strategy. Our understanding is you guys have about 650 patents.
So just given the Oracle situation, I was wondering if you could talk about the patent
strategy to ensure that you guys can continue to innovate going forward. Thanks.
>> PICHETTE: So I'll let Nikesh answer the first part of the question, and then Larry
will talk about the patent issues. >> ARORA: As I mentioned in my prepared remarks
that we've seen tremendous growth across pretty much all product areas. So the growth you're
seeing international is driven by Mobile, by Display, by Search. Clearly, international
is not one market. There are many different countries so we have seen different effects
in different markets. You know, places like Japan, as I said, have been driven more by
Display and Mobile. Various parts of Asia are just getting up the curve for us on Display
and are strong contributors in Mobile. Having said that, you know, Russia has been very
strong for us. Brazil has been very strong for us. Brazil in the back of Mobile and Display
as well, and as well as core Search. So if you think about what we're seeing, we're seeing
more and more a pickup of Display and Mobile because we have established sales team are
pretty much on almost every major market around the world to help sell Display. And the Mobile
tick up based on tick up of smartphones and Android et cetera is helping that trend as
well. In addition to that, a lot of effort has gone in to bringing small businesses online,
and that increases the number of advertisers in many international markets. As you get
more advertisers in international markets, it has a very positive impact on our RPMs
in those markets. So we're seeing that effect as well.
>> PAGE: ...for your question on Android and patents and so on. You know, obviously, we
have a number of intellectual property in progress too, not just already issued. And
I must just say, Android's really on a tear, you know. I mentioned there were over 1500--550,000
new Android daily activations previously. And there's over 400 such devices, 39 OEMs,
231 carriers in 123 countries, and over 78 open handset alliance partners. And that velocity
is only increasing. And, of course, despite the efforts of some of our competitors, there
hasn't been any slowdown in any of those things. And, you know, partners and developers are
continuing to expand the Android ecosystem. And essentially, of course, we're really committed
to Android and continued to support that platform and ecosystem and do it in a cost-effective
manner. >> Thanks, Larry. Let's go to the next question.
And thanks, Spencer, for your question. >> And we'll take our next question from Mark
Mahaney with Citi. >> MAHANEY: Two questions, Larry. Could you
talk about what you have maybe put in to improve the velocity of decision-making? And as you
step back and think about the management improvements you could see over the next year or two, how
significant do you think--how much better--how much more efficiently do you think Google
could be run than what we've seen maybe over the last two or three years? And then Susan,
real quickly, social search signals, how important do you think they are now? How key are they,
you know--is that--how much of that is Google+'s strategy for trying to, you know, make the
core search results more relevant? Thanks. >> PAGE: [INDISTINCT] Thanks. This is Larry.
Sorry about that. I'm super excited about the changes we've made. And I think, you know,
as companies scale, we always change how we're running the company over time. So I think,
you know, we have much more of a product focused structure now, which I'm very excited about
and talked about it. And I think that, you know, maintaining and improving our velocity
and execution is a really noble goal for us. And it requires always a lot of work in companies.
And I think, you know, that's super important direction for us, and I'm really excited about
it. >> PICHETTE: Susan, on social?
>> WOJCICKI: Yes. So I think the first thing I would say about social is that we're very
early right now. And really our focus with Google+ will be to focus on making sure that
we have a wonderful consumer and user experience. From a targeting perspective, there are a
number of signals that we use right now. Obviously, keyword on Search, contextual, interspaced
advertising, demographics, so social--and social signals overtime can be an--can be
an important part of that. But it would be one of multiple ways that we actually do targeting.
When we did rollout Google+, we do have pluses on all the ads just as we do on search results.
So if a user does click on it and someone on their circle has actually does a query
and triggers that, then there will be social annotations, which will be useful information
for the user to see that their friend has +1-ed that ad.
>> Thank you, Susan. Thank you, Larry. >> Thanks, Mark, for your question. We'll
go to the next question, Jamie. >> And we'll go next to Ben Schachter with
Macquarie. >> SCHACHTER: Hey, guys. Congratulations on
the execution and the launch of Google+. Larry, at a high-level, what, if any, are some of
the key differences on how you think about managing specifically the economic model of
the company today versus when Eric was CEO? And specifically any changes to target margins,
revenue growth targets, et cetera? And then separately, on Mobile Search specifically,
it's clearly been successful in terms of search share. But when we're trying to figure out
the overall impact to net revenue in kind of balancing out some of the positives like
incremental searches and share gains and higher click-through rates, but also having the headwinds
of TAC payments to partners and lower CPCs, how should we think about the overall net
impact of Mobile to the business? Thanks. >> PICHETTE: So why don't I--why don't I take
the second part of that question, and then Larry can talk about the economic model versus
in the context of what you said. But for Mobile search, it's--you have to go back and focus
on what we focused on. Build, you know, businesses that are going to be billion-dollar businesses
and that actually contribute significant operating dollar margins. I mean, these are businesses
that scale to a humongous scale when they're--when, you know--as they grow. So for us, that is
the focus that we have. And the second piece in the specifics of Mobile is, we really see
Mobile a bit like Search was in 2001, 2002, 2003. All these formats are so new that, you
know, you know that there's so much more room for optimization on top of it. So it is in
fact a bit of a mistake to kind of say, "Okay, today, whatever we have is a good proxy for
what the future will look like." So--and that's why we're excited about it. And that's why
we focus so much on Mobile. Now, for the economic model and how we run the company, maybe Larry,
your thoughts on that? >> PAGE: Absolutely. Thanks for the question.
I think, you know, certainly Eric is a great partner and leader for--of, you know--for
me and for Google for the last 10 years, and continues to play a big part--a big part in
the company. So I don't think there's--like we said before, there's no major changes in
what we're doing. And I'll reiterate maybe a little bit and add a little detail to what
I already said. I think about really in our products in three separate categories. And,
you know, first, through Search and our Ads business, which is the core driver of revenue
for the company. You know, we really invest in that, we work hard on it. Next, we have
businesses that are enjoying, you know, really high consumer success. You know, for example;
YouTube, Android, and Chrome. And we invest in those in order to optimize really their
long-term success. And we have some new businesses on our Google+, Commerce, and Local that we're
really excited about and--on a pretty early stage and, you know, those things we invest
in as well. And, you know, we don't do things that we don't think will generate really big
returns over time. So we were optimizing for our long-term economic success. But we do
have these very different buckets of things that we work on.
>> Thanks for your answer, Larry. Thanks for your question, Ben. Jamie, let's go to the
next question please. >> And we'll go next to Ross Sandler with
RBC. >> SANDLER: Hey, guys. Just two questions.
First, on Google+; and then second, on Google Offers. So on Plus, we haven't seen the real
integration. I know it's only a couple of weeks old; but with Google's kind of core
competencies around Search and other things that you've been very successful at in the
past. So can you talk about, you know, plans on integrating some of Google's core strengths
into Google+ to further, I guess, differentiate the products from other services that are
out there? And then, on Google Offers, can you just talk about your overall strategy
in terms of rolling out offers? You're in four cities today. How fast do you think you're
going to accelerate into these newer cities? And is international territories also on the
roadmap and the near-term for Offers? Thanks. >> PAGE: Thanks for your question. I'll answer
the first part. This is Larry. We are--Google+ actually has a lot of interesting product
integration, you know. The black Google bar that you see is an entry point and notification
point for Plus across, you know, basically all of our properties. And we're really excited
about that. And think it's a big deal. We're just proud to say, there are many things that
you would do with Plus and with +1 that affect what you would see in search results. Like
I mentioned, if you use +1 something, your friends will see it in search. So absolutely,
and I hope it was clear that was our strategy. But we are very focused on improving all of
Google, improving the sharing and identity across all of Google.
>> PICHETTE: Maybe Nikesh can give a comment on the rollout for Google Offers. Here we
go. >> ARORA: Thanks, Patrick. We won't give out
details on how we rollout our Offers strategy. I think Susan said it very well in our overall
strategy, because Offers for us is not just an isolated event. It is a combined, a bit
of a commerce offering, which includes their mobile phone and other things we talked about.
We were very happy with the rollout we've had in the one city where we've been for a
while, which is Portland. And we just rolled out two more cities earlier this week. So
from that perspective, you can expect us to roll out other cities, but we're going to
be testing and looking at the models to see what's working and what's not working because
we want to build the next version of how we rollout an Offers product. So stay tuned.
>> Great. Thanks. Thanks for your question, Ross. Jamie, our next question please?
>> We'll go next to Brian Pitz with UBS. >> PITZ: Great. Thanks. And two quick questions.
As we note the proliferation of the newer, richer ad formats like product image ads that
we're seeing more and more of on your site, can you help us better understand the impact
on paid click growth specifically? And then separately, can you also give us a little
more color on some of the Panda and quality changes you're doing on the network? Any commentary
on how much impact to growth of AdSense that had this quarter and how long should we expect
to see, you know, more than expected impact from continued quality changes? Thanks.
>> PICHETTE: Why don't I let, actually, Susan tackle those questions? Susan?
>> WOJCICKI: Great. Yes, on the richer ad formats, we see a few important opportunities
for us. And what we feel about them is it gives us the opportunity to make those ads
better for the users. And as we can create better experiences for our users, they're
more likely to have the information that a user wants. And so what we'd hope to see is
a click-through increase over time. And hopefully, for the advertiser on the backend, a better
conversion. From--in terms of click growth and what's actually driving the click growth
that we see, it's a number of factors. One of them is always going to be query growth
that we have. Second thing would have to--would be on improvements that we have to our backend
quality models. So the better the quality model is, the more likely we are to actually
match the right advertisement to the right user. And we had a number of good ads, as
I mentioned, you know--not just good, we had great ads quality launches this quarter, and
a number of ad formats that made the ads more readable. And by making them more readable,
the users are more likely to click on them. And that turns into click growth. And then
on the last question that you had, which was Panda. Panda was a change made by the search
team with the goal of improving overall search experience. There was, as we talked about
last time, some negative effects from the AdSense partners. However, Panda does--or
any search quality that we make, does have a change of ranking; which means that there
are different sites that wind up getting traffic. And that--those sites may adjust their monetization
strategy over time. And so, it may just take some time for that to actually balance out.
And also, in terms of the last question, we don't really comment about future changes
that we're going to make, but we are always thinking about the right way to continue to
improve the search results for our users. >> PICHETTE: Yes. Panda is a--and once again
a great example of putting the user first ends up benefiting everybody in the end; the
publishers, the advertisers, and the users. Thanks for your question, Brian. Let's go
to our next question please. >> And we'll go next to Justin Post with Bank
of America Merrill Lynch. >> POST: great. A couple of questions. Larry,
thanks for joining the call. And while we have you, I'm just going to ask you a question
I get all the time. How focused is senior management on the stock either as an employee
retention tool or a measure of management's performance over, say a three to five-year
period? And then--and then secondly, if I could just ask about the local opportunity;
it looks like a lot of launches happening for Google. Do you see it as a different ad
market than your current search ad market? And how might your model be different than
some of the larger players in that market currently? Thank you.
>> PAGE: you know, Justin, thank you very much for your question. This is Larry. I think,
well, you know, we have all those--we have a lot of stuffs to do here at Google; and
unfortunately, one of the things we don't get to decide is our stock price. So you all
are in charge of that. I think we are--and so, we really focus on our long-term success
as a business and the kind of things were mentioned already are absolute, overall profitability
over the long-term and our revenue growth. And so, we tend to focus much more on that,
with a much more long-term view than we do on our stock price.
>> PICHETTE: Susan, views on the difference and the similarities between the local and
our traditional ads market. >> WOJCICKI: You know, Local can be thought
about two different ways. Local can be the large retailers who have many different points
of presence. So, for example, Starbucks or Pizza Hut or any retailer which is a large
holding company or one large retailer, but then has many different local points of presence,
and then there's a separate bucket which are the small, Joe's Coffee Shop example. And
both of them need different things from a product perspective in order to be able to
advertise more broadly. And we are working in both buckets to solve and make them advertisers
on AdWords with solutions that will work for them. The large ones need functionality of
how do I run a campaign in all of these different locations with different keywords, different
pricing. And so we're working to enable location in our AdWords campaigns when you're managing
a large account to make that much easier. The Joe's Coffee Shop example, what we're
working on is enabling signing up for AdWords to be a much easier experience. So we actually
have a product that we released this quarter called Google Boost. And Boost product is
a one-page, 5-minute sign-up for advertisers. It's very easy to sign-up. We haven't marketed
it a lot right now. We--but we have seen good success with advertisers. And we're hoping
to make that more known to our advertisers. >> PICHETTE: The last piece in the puzzle
is obviously, Susan, Mobile, which is completely integrated from an ads perspective and targeting
as well. >> WOJCICKI: Yes. I mean, so that the other
thing too is we would like to make all of our products be accessible from a Mobile perspective.
Click-to-Call would be an example. Click-to-Call is really nice so that if someone, for example,
is local, walking down the street, they can actually call. But it's also really nice from
the small retailer perspective, because they can understand that they're getting a call
and they're getting a lead; which for them would be much more tangible than actually
a click to their page. So we're investing very heavily in that in terms of Click-to-Call
technology and the good tracking for the local advertisers.
>> Thank you. And thanks Justin for your questions. Let's go to our next question please.
>> And we'll go next to Jeetil Patel with Deutsche Bank Securities.
>> PATEL: Great. Thanks. Two questions. I guess, first of all, you've got obviously
quite a few products that--and applications that have had success over the years, you
know, kind of that are out there obviously; Search, Gmail, Chrome, you know, Android,
et cetera. I guess as you think about the next generation of consumer relationship and
stickiness, how do you think about like integrating a lot of these core assets together in terms
of, you know, building a consumer relationship which kind of--kind of move seamlessly from
all these different solutions and, you know, formats out there as well as devices? And
then second, maybe around Google+, obviously it's only been two weeks now. But maybe can
you talk about the overall trend in terms of 10 million users? How does that compare
against maybe the early days of how Android or Chrome or maybe even search or mail ramped?
You know, you know, what kind of trajectory or what kind of--what kind of trend schedule
does it look like right now if you were to pinpoint it against another product in the--in
the business? >> PAGE: Thanks very much for the questions.
Those are good questions. We are on, you know--on the integration point and, you know, we obviously
have a lot of different products that do different things for different people. And we know one
effort that I mentioned, I've been really excited about is this visual redesign. And
I also mentioned the bar that goes across, the black bar that goes across with Google+
that gives you a notification on sharing and so on. We're definitely working hard to integrate
our products better to make the user experience simpler, you know, intuitive and beautiful
and consistent. And I'm really excited about our progress just in one quarter on that.
And I think you'll, you know--we're certainly working hard on that. And expect to continue
to over time. On the--on the Plus growth question, we've, you know--we've been very, very excited
about the growth we've seen and the engagement we've seen with the, you know--over a billion
items, you know, shared and received in a single day. And I think that, you know, for
us, you know, there's a lot of barriers to use Plus right now. One thing, you have to
be invited and so on. And it's still in the field trial. So I think given all that, we're
just extremely excited about that. But, you know, it's very early days. It's been less
than two weeks since we released that into field trial.
>> Thanks for those insights, Larry. Thanks for your question. Jamie, let's go to the
next question please. >> And we'll go next to Jason Maynard with
Wells Fargo. >> MAYNARD: Hey, good afternoon, guys. I have
a couple questions. First, on Local. You've got a lot of interesting services and capabilities.
But they're still fairly disparate, and in some instances there's some overlapping features.
I'm just curious, from an end-user perspective, how are you thinking about bringing together
your various local commerce products? And then maybe to follow up on the--on the Google+
question. Since it is so early, what are your longer-term goals for Plus? I mean, measured
by their users or number of items shared. How are you thinking about this over say,
a two-year timeframe? Thank you. >> PAGE: Maybe I'll take the first question--second
question first, on the Plus, how would we think about success of it. I think we are
really, you know--obviously, like I said, we want people to make products that, you
know, everybody uses twice a day, like their toothbrush. And we'd certainly think about
Plus that way, and also just generally having really great sharing experience and identity
experience across Google and all of its products. And so, that's kind of how we think about
the success there. I think it's pretty straightforward. On the first question, local integration.
Patrick, do you want to take that? >> PICHETTE: Let me say just that what's been
really cool about Local for us, in addition to what Susan has mentioned a few minutes
ago is, you have to think of it as we are in fact assembling all the pieces of the puzzle.
Local is actually a quite complex experience. But when you have Maps, you have Mobile, you
have Wallet, you have all the ads serving, you basically have the pieces of the puzzle
to succeed. And it's not as much what was yesterday's tools that we had, and how do
we evolve only yesterday's tools. It's about taking those pieces of the puzzle and really
creating true innovative services. And that's how we have to think about Local. And that's
why it's not obvious. But if you look at the arsenal we're building, it's actually quite
formidable. So that's why we're excited about it. Thanks, Jason, for your question. Let's
go to the next question. >> And we'll go next to Doug Anmuth with JPMorgan.
>> ANMUTH: Thanks for taking the question. I want to ask two things. First, Patrick,
can you give us some color on the mix of headcount additions? And in particular, if you look
at R&D, it looks like it was flat sequentially, but yet you added more than 2,000 people during
the quarter. So I'm hoping you can provide some color there. And then secondly, can you
give us some context just in terms of how you think about the Display business and whether
you need more O and O inventory. Thanks. >> PICHETTE: Okay. Well, I'll answer the first
one, and then I'll let Susan answer the second. On headcount, you know, again, as we said
on the--on the call, you know, roughly, you know, we have IT for 450 so roughly about
2,000 for the quarter, and Larry comment on that. And we--there's still a huge amount
of engineers in that. It just happens that R&D is actually in every line item. So you'll
find in us but you'll find in many other areas of our P&L. And so, you should not worry.
I mean, we have a complete focus to make sure that we actually have, you know, a majority
of our hiring that is focused on Engineering, which is really the core of the business.
And then, we continue to kind of--and, you know--then, you have the mix of sales and
then, you know, just general overhead. But it's really engineering and sales that have
been the focus with in that sequence. For Display, I'll let Susan talk about it.
>> PAGE: I'll just add too on the headcount question. None of the focus there has changed
substantially from our--from our past. Excuse me.
>> WOJCICKI: On Display, our biggest O and O property is obviously YouTube. And given
the numbers that we saw, we've seen tremendous growth there and a huge opportunity to monetize
video as more users come online, and more content lines are being uploaded on YouTube.
But the strategy, and our Display strategy overall is not--is dependent not just on O
and O; it's also--has many other components. The first is being to be a platform to enable
advertisers and publishers to much more easily buy and sell Display advertising. And then
second, to enable all of the sites out there, of which there are of course many, many, you
know, millions, hundreds of millions of them to--for them to be able to monetize and sell
display advertising; and for us to be able to help them as part of that process and via
our network, where we have a lot of different targeting techniques to try to serve the right
ad to those users. So really, our strategy is part O and O with our sites like YouTube,
but then also to continue to build a great network and platform products so that advertisers
and publishers across the industry can serve Display advertising.
>> Thank you. Thanks for your question. Let's go to the next question.
>> And we'll go next to Anthony DiClemente with Barclay's Capital.
>> DICLEMENTE: Hi. Thank you. I have one for Patrick and one for Larry. Patrick, if we
just isolate the 6% sequential growth in cost-per-click versus last quarter, why don't you just help
us understand the driver of that acceleration. And moving forward, should we expect that
to continue or moderate given that as Mobile queries start to take up more of the query
mix? And then, question for Larry. It would appear that, in social media, that switching
costs for users are high; perhaps years of photos on a social network platform. And as
you look at Google+ and the growth there, what are the most compelling offsets to those
switching costs you think? Or do you perhaps see a future where the folks can simultaneously
be a part of multiple social networking platforms? >> PICHETTE: Thanks for the question. So why
don't I let Susan actually give you a bit of color on our CPC and evolution, and then
Larry will take on the latter, the social one. Susan?
>> WOJCICKI: The drivers of CPC, there are few of them. One of them in this quarter was
FX, certainly. But we've been really focused on our ads quality improvements, and how do
we continue to obviously make our ads better for our users and for our advertisers. And
in doing so, we've actually--we've done a lot of optimization of our ads that appear
above the search results like site links, some of the ad changes in the formats that
we made this quarter. And a lot of the ads that appear above the top search results tend
to be higher CPC because they're the first three ads. So as we continue to optimize and
really drive a lot of increased click-through and visibility for the ads that appear above
the search results, you will see--since those tend to be higher CPC because they're at the
top of the results, you will see some of that increasing.
>> PICHETTE: Larry, on sell-through and switching costs?
>> PAGE: You know, so, I think, you know, we have been really excited about Google+
really improving the overall social experience and making it more like how you would share
in real-life. And that's really a different product than is out there now. And we're getting
just rave reviews for that. People really like being able to share with more discrete
groups in an easy way, intuitive way. And there's a lot of magic built into the product
that causes that. And as, you know, you asked about the photos, we actually have a really
great photo experience on the Android. Like if you take a picture on Android and you have
the Google+ client which you would have if you're using it, it uploads your photos automatically.
And it's super easy to share them and post them to your friends or your family or whatever.
And it's a really, really great experience. So, you know, there's legacy in, you know,
Google, as a company and believes in users owning their own data and being able to easily
move it out of Google. And some of our competitors don't believe in that. But we think that users
will eventually move to services that are in their best interest and that work really
well for them. >> PICHETTE: Thank you for your question.
It's already 2:30, so why don't we take, Jamie, one last question and then we'll have to close
the call unfortunately. >> Thank you, sir. We'll take our final question
from Jim Friedland with Cowen and Company. >> FRIEDLAND: Thanks. I wanted to ask the
question on--or follow-up on where you guys said that you're a little ahead of where you
expected to be on hiring. Should we think about the hiring and particularly in R&D sort
of coming in waves where you hire a bunch of people, get them integrated, maybe it sort
of slows down and pick up--picks up again? And then the second question and just on the
P&L, other cost surviving users of percentage of [INDISTINCT] TAC seem to be a little high.
Is that coming from increased Data Center depreciation or is it may be coming from YouTube
and content related costs? Thanks. >> PICHETTE: I'll answer the first one, and
then--the latter one, and then I'll let Larry talk about hiring in general. The P&L, yes,
it is a combination of factors this quarter. So in that cost is also included headcount.
And so, headcount is actually increased. Power is increased because of seasonality. It's
summer now, so our power is a little higher. And we've also had kind of catch up on expenses
on some of the equipment. So there's been a bit of a--if you think between Q1 and Q2,
there's been a bit of a cleanup in some of the areas of equipment that have actually
in, you know, slightly deflated Q1 and inflated Q2 as we finish the cleanup, so that was a
bit of a catch up there. So I wouldn't read the data point between Q1 and Q2 as I don't
create a graph with that, with the line. But that's--it's bit--it's a bit of everything,
including a bit of cleanup and some of the equipment accounts. For the issue of hiring,
I'll let Larry actually talk about general where we stand right now.
>> PAGE: Yes. That's a great question. You know, I think just a couple of factors that
affected that. And I think, you know, we know--you know we implemented compensation changes in
Q1 and we increased our employee compensation. And they've had even more positive effect
on hiring and retention than when we expected. So that's been a super successful change.
And I think, in general, there's this more excited people who want to work at Google
and who want to stay working at Google than we expected. And so, that's--had some impact
on those numbers. But, you know, there's--of course, there's a limit on how many we can--and
how fast we can productively hire. And I--and I said this in my remark, I think, you know,
kind of my judgments were at the edge of that piece being reasonable or just adding a lot
of people. And, you know, I'd say that we're always looking for good people, and we're
always, you know--the exact rate is going to depend on success and where and--where
we really want to invest in the company. We, you know--we have a really strong management
team. I said that's working together fabulously, and we can absorb those hires and put them
to use well. But like I said, you know, we're definitely--we're surprised that the success
of our previous changes around compensation as well.
>> Great. Thank you. >> PICHETTE: Thank you very much for your
question, James. With that, I just want to thank Larry for joining us today; and Nikesh
and Susan for the comments as well as the Q&A. I want to thank, once again as I always
do, all the Googlers out there, our fantastic Googlers that have made this quarter possible
and all of the innovation. Especially, you know, I think it's worth mentioning, our Google+
team that has done a phenomenal job in this launch. So two thumbs up. So on behalf of
all of us here, congratulations and many thanks to all of our gang at Google. With that, I'll
let you, Jamie, close the call. And thank you, everybody, for participating today.
>> Thank you, sir. That does conclude today's conference. We do appreciate everyone's participation.