Google Inc Q1, Q2, Q3, Q4 2008 Earning Calls

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Google Inc. Q3 2008 Earnings Call Transcript

October 16, 2008 | about stocks: GOOG

Google Inc. (GOOG)

Q3 2008 Earnings Call

October 16, 2008 4:30 pm ET

Executives

Krista Bessinger - IR

Eric Schmidt - CEO

Patrick Pichette - CFO

Sergey Brin - Founder & President, Technology

Jonathan Rosenberg - SVP, Product Management

Omid Kordestani - SVP, Global Sales & Operations

Hal Varian - Chief Economist

Analysts

Imran Khan - JPMorgan

Mark Mahaney - Citi

Brian Pitz - Banc of America Securities

Christa Quarles - Thomas Weisel Partners

Ben Schachter - UBS

Doug Anmuth - Barclays Capital

Justin Post - Merrill Lynch

Ross Sandler - RBC Capital Markets

Jeffrey Lindsay - Sanford Bernstein

Youssef Squali - Jefferies

Jeetil Patel - Deutsche Bank

Presentation

Operator

Good day and welcome everyone to the Google Inc. Conference Call. This call is being recorded. At this time I

would like to turn the call over to Ms. Krista Bessinger. Please go ahead, ma'am.

Krista Bessinger

Google Inc. Q3 2008 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/100356-google-inc-q3-2008-earnin ...

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Good afternoon everyone and welcome to today's third quarter 2008 Earnings Call. With us are Eric Schmidt,Chief Executive Off icer, Patrick Pichette, Chief Financial Officer, Sergey Brin, Founder and President ofTechnology, Jonathan Rosenberg, Senior Vice President of Product Management, Omid Kordestani, Senior VicePresident of Global Sales and Operations is joining us from London today, and Hal Varian our Chief Economist.

Eric, Patrick and Sergey will provide us with their thoughts on the quarter and then Jonathan, Omid and Hal will joinus for Q&A. Please note that this call is being webcast from Investor Relations website. Please also refer to ourInvestor Relations website for important earnings related documents including our press release issued a few

minutes ago along with slides that accompany today's prepared remarks. A replay of this call will also be availableon our Investor Relations website in a few hours.

Now let me quickly cover the Safe Harbor. Some of the statements we make today maybe considered forward-looking including statements regarding investments in our core business, traffic acquisition cost, operationalefficiency and cost and our expected level of capital expenditures. These statements involve a number of risksand uncertainties that could cause actual results to differ materially. Please note that these forward-lookingstatements reflect our opinions only as of the date of this presentation. We undertake no obligation to revise orpublicly release the results of any revision to these forward-looking statements in light of new information or futureevents.

Please refer to our SEC filings including our quarterly report on form 10-Q for the quarter ended June 30, 2008,as well as our earnings press release for a more detailed description of the risk factors that may affect our results.

Copies can be obtained from the SEC, or by visiting the Investor Relations section of our website. Also pleasenote that certain financial measures we use on this call such as EPS, net income, operating margin and operatingincome are expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-basedcompensation. We have also adjusted our net cash provided by operating activities, to remove capitalexpenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP reconciliation canbe found in our earnings press release.

With that it is my pleasure to turn the call over to Eric.

Eric Schmidt

Well. Thank you, very much, Krista, and good afternoon everybody. First, let me welcome Patrick, PatrickPichette, who is of course our CFO, who is of f and hit the ground running. He certainly joined us at an interestingtime. Before he goes into the detail, which of course everyone is quite interested in. Let me just talk about someof the highlights.

Thanks to everybody's hard work. Google had a good quarter. Traffic and revenue were both solid and we kepttight control on costs. Year-on-year, for example, search query traffic is growing in almost every vertical. Webelieve that these results ref lect the fact that as marketing budgets are squeezed, targeted, measurable ads arebecoming more valuable to advertisers. As consumer budgets are squeezed, people use the web forcomparison shopping to hunt for bargains online and in stores.

Regarding the economic situation, I think everybody on the call and listening understands that it is pretty clear theeconomic situation today globally is worse than people were predicting just a month ago. So, look at thedifference in the papers. What started off as a financial crisis appears at least according to the consensus aroundthe world, to be affecting the wider economy.

When I talk to other CEOs in Europe and in America, it is clear that the economic situation is so f luid, that we areall in uncharted territory. The question is how should Google respond? Our answer, as always, is looking at thelong-term, and we believe that even more today -- more important today than ever.

Search, which of course is Google's core, is where we are putting a lot of our investment -- better search, betterads, [proof latency]. Our user experience is getting much better. Index size is getting much larger, greaterpersonalization for better results globally for every user, lots and lots of language support, more highly relevantads against as many queries as possible and using more sophisticated tools for advanced bidding andmeasurement and optimization. So that advertisers, who understand that advertising is directly correlated withrevenue, can use those tools to maximize revenue based on the terms that they set and based on the budgets,which is what they care about.

So the opportunities are more than just the search and ads. In Apps, for example, the company is going to cut IT

costs and increase productivity with greater collaboration well. We are there for them. Our enterprise applicationsreally add value there. In display by improving targeting, we deliver better and more relevant ads for users and foradvertisers, agencies and publishers.


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The DoubleClick integration now going very well. David Rosenblatt from DoubleClick is now President of ourdisplay businesses, says it is going great. YouTube is now running 90% ads against 90% of all the contentclaimed by partners using our content ID tool. We are experimenting with different advertising formats now wellannounced in video ads, click-to-buy and pre-roll.

Geo-Mobile another core component and new opportunity for us geographically relevant in location basedadvertising is valuable to users in our view, who are working, developing advertising products that match ads togeographic data. We think that is a big opportunity for us.

So along the way, we are going to stay very close, keep a very close eye on costs. It makes sense giveneverything we read in the papers and we have done that effectively in this quarter. It is the right thing to do andwhat I like about it. Sergey can talk about this a little bit if he likes. Sergey likes to say scarcity builds clarity. I thinkit is a great focusing opportunity for Google as well.

To a very realistic about the macro economic climate, but we are optimistic about Google's future because we areconfident about the enduring value and power of the web. Sergey will talk about this in more, but fundamentallypeople are moving to the internet, they are moving to more targeted advertising, are using information in a smarterway and Google is one of the significant beneficiaries of that.

We fundamentally believe that users will always want information and need to communicate and advertisers willalways value relevant and very measurable advertising, which of course these are Google's core strengths. So,

with that Sergey maybe you would like to sorry Patrick maybe you talk about our financials first and then we willgo over to Sergey.

Patrick Pichette

Thank you, Eric and good afternoon everyone. So, as Eric said a few minutes ago, we had another solid quarterdespite a challenging economic environment. A few numbers: gross revenue was up 31% year-over-year to $5.5billion reflecting healthy growth across the Google - both Google.com and our network. Google.com was up 34%year-over-year to $3.7 billion driven by steady traffic growth and AdSense was up 15% year-over-year to $1.7billion, also reflecting solid growth across both content and search.

Global aggregate paid click growth was also reasonably good goes up 18% year-over-year and 4% quarter-over-quarter, reflecting healthy growth across all major properties. We saw also steady growth in the US withrevenues up 22% year-over-year, to $2.7 billion and up 5% quarter-over-quarter.

International revenue also held up reasonably well, accounting for 51% of our total revenue or $2.8 billion. The UKshowed some sof tness, but up 17% year-over-year to $776 million, but essentially flat quarter-over-quarterincluding the impact of the currency. The rest of EMEA performed better driven by relatively good performance inthe Netherlands and Germany.

Asia and Latin America were solid as well, mostly driven by relatively good performance in Brazil and China. Froman advertisers spend perspective, we saw a combination of strong relative performance in many verticalsincluding home appliances, apparels, jobs, but also and not surprisingly some tougher performances in otherssuch as home financing, auto financing, and real estate as everybody can imagine.

Let me turn to expenses now to traffic acquisition costs were $1.5 billion in Q3 or 27.9% of total advertisingrevenue. This is down from $28.4 million in Q2. AdSense TAC was $1.3 billion and Google TAC was $167

million. As we embark on new initiatives, we may see additional pressures on TAC rates going forward.

Other costs of revenue they have increased $4 million over Q2 to $678 million and the largest driver of theincrease was data center related costs and those include depreciation, equipment and operations. All otheroperating expenses totaled $1.63 billion, including approximately $269 million in stocks-based compensation andexpenses related to payroll and facilities increased $49 million over Q2 to $859 million.

On the headcount front, we finished a quarter with approximately 20,000 full-time employees. That isapproximately 500 net new employees added in the quarter and over half of these new net hires are inengineering, and then followed by sales and marketing. We have implemented and continue to follow adisciplined hiring process in all areas of the organization, but as we have indicated in the past, we continue toinvest in our core business, both in the US and internationally.

In consequence of all this management expense the non-GAAP operating profit, which excludes stock-basedcompensation, crossed the $2 billion threshold for the first time in Q3, driving non-GAAP operating profit marginsto 36.5%.

As Eric mentioned a little earlier in his comments, it makes sense on the current economic environment to


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maintain a clear focus on operational eff iciency, and cost containment and we have done so, and we will continueto do so, better positioning Google for healthy long-term growth.

Let me move on to interest income and other, which was $21 million for the quarter. The primary driver for interestincome, and other, are on the positive side, a very strong cash balance, $14.4 billion. The annual interest we earnon that cash is currently in the 2% to 3% range, and we also had a small realized gain on investment of $11 millionin Q3. These benefits are to large extent offset by the impact of our, the rollout of our hedging program in Q3. So,in Q3, our hedging expense and related impacts totaled approximately $80 million.

Please note that we amortize the cost for the time value of our cash-flow hedging programs in other income andexpense on a monthly mark-to-market basis, not a straight line basis. As a result, the amount of amortizedexpense were recognized in any particular quarter is impacted by how much the option moves in or out of themoney, as well as the underlying currency volatility.

So, in particularly volatile periods, like the ones we are experiencing now, this can result in a front-end loading ofexpenses associated with the outstanding hedges, as was in fact the case in Q3. So clearly, currency wasworking against us in this quarter, but on the good news, our hedging programs are in fact working well. So, a bitmore on the hedging program, our FX program should be viewed essentially as an insurance policy. Ourprograms are designated to protect us against future downside risk to revenue and earnings, reported in USdollars.

Our largest currency exposures are the euro, the Canadian dollar and the British pound, and are now hedged andover the coming year. We will rollout incremental hedges to cover much of the remaining exposure. So, how doesthe accounting for all these hedging works? It is FAS 133, which is the standard in US accounting and we useFAS 133 to account for our cash flow hedging programs.

FAS 133 is not a simple standard this by any means. So, it is well worth a time, to take the time to understand thebasics and I encourage you to do so. We walk through some of those basics of FAS 133 in our earnings slidesdeck, which I encourage you to reference. It is posted as Krista mentioned on our Investors Relations site. Forthe impact on Q3 before hedging, the recent strength of the US dollar relative to other currencies had a negativeimpact of $59 million on revenues in Q3.

We were able to recognize as a benefit of approximately $34 million to revenues through the cash flow hedgingthis quarter. So, to understand why our hedging does not offset a 100% of the negative impact of currency onrevenue, it is important to remember three key factors.

First, our cash flow hedges are designed to protect against a downside risk to earnings not revenue. Secondly,our Q3 hedges were made against three major currencies, the Euro, the British pound and the Canadian dollar,but not all currencies. Finally, our pound hedges were put late in the quarter.

So, with that let me return to our financial results. I am pleased to report that operating cash flow remain strong at$2.18 billion for the quarter, CapEx for the quarter was $452 million. We have invested very heavily in our datacenters and are continuing to do so. As in previous quarters, the majority of our CapEx was related to ITinfrastructure including data center construction, production of servers and networking equipment.

Because of economies of scale, however, as well as greater efficiencies in our system infrastructure and in someways Moore's Law, we can actually do a lot more today with less, which is a positive trend for us. That said, we willcertainly continue to make significant investments in CapEx in future periods.

Finally, free cash flow. A non-GAAP measure, we define the free cash flow from operation less CapEx. It remainsstrong at $1.73 billion, up 61% year-over-year. So, in summary, our core business continues to demonstratestrength, despite a challenging economic environment, while we are focused on operational eff iciency, we haveand will continue to make crucial investments that are needed to drive value for our users, our advertisers and ourpartners. Before I hand it off to Sergey, I would like to take a moment to share with you some of my early thoughtson joining Google. So, I thank Eric for the kind words at the front end of the conversation.

First, let me say that I am delighted to be here and to join this company. This is obviously a great team I amjoining, and everything you hear is true. These are super smart people, tremendous integrity, positively ambitiousfor the company and without a doubt our great winning combination. It is a great time to join Google and it is a realpleasure for me.

Yes, the f inancial and economic environment is going through a lot of uncertainty, but with great uncertainty alsocomes tremendous opportunity. I look forward for leveraging my financial and operational background to takeadvantage of the tremendous opportunity in front of us and lead with the team the company into the next phase ofgrowth.


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With that, I would like to thank you for the time and I will turn it over to Sergey for his thoughts on the quarter.Thank you.

Sergey Brin

Thanks, Patrick. I would like to update you this quarter on many different improvements, we made across theboard. Let me start with our infrastructure and I am talking about both the hardware and software infrastructure, thepowers all of our services.

First of all, this quarter we significantly increased the size of our index. To put this in perspective now, every fourhours we index the same amount of information that is equivalent to the entire US Library of Congress. I wouldencourage you, by the way, how can you see this? I encourage you to search for information that might not havethat many references about on the web, whether it is a neighbor or local place, something like that, and just to seehow much more information we have been able to put on the index.

We have also worked a lot on our performance. Particularly, we had a lot of improvements in search, especially ifyou use the Google toolbar, which I encourage you to do. In YouTube and also many of our Apps, especiallyCalendar. Hopefully you will see the improvements as snappier performance, when you come back and use theseservices now.

We have also been working on our overall efficiency from an energy point of view and I should report that our data

centers now use several times less energy than typical facilities that would house and cool the same number ofcomputers that we would have.

Next moving on, Search of course remains core to our business, and now for the second quarter in a row we havelaunched over 100 search improvements during the quarter, so more than one per day. This is obviouslyimproved things for our users all around the world. Very important feature, Google suggests that we have hadavailable in a variety of different interfaces and now is on Google.com is running in ten countries. This actuallyreally helps users and speeds them up much more than you might expect. As you are typing a query, we will fillout what is likely the query that you might want, spelled correctly and it really significantly speeds the overallsearch process.

We also have continue to take our other corpuses that are not just web pages, things such as books and videos,and we continue to blend more and more of those into the first page of results, across all of our domains. Thenumbers of these blended results has increased significantly over the past quarter. I would encourage you to try

searching, for example, for Michael Phelps. You will see video of swimming and whatnot.

This also is very powerful, especially when you look at video, because people think of video as entertainment, butin fact video is a very compelling reference material. It is a really good way to learn something, to reallyunderstand it. Oftentimes you will not actually think to search for video. So, for us to present it in the first page ofresults means people are going to get much higher quality information about what they are looking for than theyotherwise would have.

On the business front of course, advertising remains the vast majority of our revenue. We continued to improveour ad systems. We have updated our quality based bidding system, which helps weed out underperforming adsand gives us the opportunity to run better ads, and generate a better return on investment for advertisers.

We have also made some changes to how we rate landing pages in terms of quality and we really want to make

sure that when our users click on ads, they are taken to useful sites. That way, people are encouraged to click onads in the future.

In fact, on the whole, I should mention that our ads add a significant amount of high quality material to our searchand we believe it they overall increase our overall search quality experience. We have also been working hard ofcourse, on display ads as Eric mentioned with David Rosenblatt now heading that entire operation, now withDoubleClick integrated, and the various properties that we have with potential display inventory. We are reallymoving along and we have made about two dozen improvements to our content network over this past quarter.Just last week, we launched a new category, AdSense for games. Over 200 million people play web-basedgames every week. Our network already reaches almost 10% of them, just at launch. So, we are very excitedabout that.

Speaking of display inventory, I just want to talk a little bit about YouTube. They have been experimenting with a

number of monetization methods. We have now, the click-to-buy feature that you might have seen, where now ifyou watch a YouTube video that is either could be a user uploaded video or uploaded by, for example, a studioand now people can just click-to-buy either CD or a video or other content that is similar to that video and this isobviously a benefit to both end users as well as the publishers and presents a great monetization opportunity.


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I should also mention that we have launched full length videos from CBS within stream ads and that means theycan be pre-roll, mid-roll and post-roll. These full length videos really take you to another level of offeringcompletely different kind of video than one would typically expect on that site.

We have also been investing a lot in geographic and local information and I am sure many or all of you have usedGoogle Maps and Google Earth. They are really big monetization opportunity because they are such a localsearches and there are many local businesses. Now we have been able to expand just a data available there, sowe can provide a better end user experience by launching Map Maker to over 100 additional countries. This is our

product of lets end users create and edit the maps for their own countries and regions and by doing so the usershave already added over 50,000 kilometers of roads and 75,000 business listings.

I should mention that an increasing percentage of our local search queries now deliver user generated mapscontent. We have launched Street View in Japan and Australia, and we saw significant increases in usage there.Of course free tune as now available on BlackBerries, and many Java enabled phones in addition to the otherphones that already had it. It can be pretty handy, you know, when you do a search for now business or store,restaurants something like that, you can just click on the Street View and see what it actually looks like and makesure that is the place you want to go.

As I mentioned before, now with the ability to do that on phones, it is very handy. Now speaking of phones, we ofcourse had a very important announcement this past quarter, which is our new Android operating system andwhich is launching first on the T-Mobile G1. You can get these phones starting next week and at your T-Mobile

store. I have been using mine for a few months now as my primary phone and it is been very helpful. It reallyintegrates the Google services very nicely on the phone, it has really great web browser.

You know, I am able to search and brows through my Gmail just as if I was at my desk top. The G1 is just the firstof a number of phones that will hopefully be running Android. You should take note of all of the partners we havebuilt in the open handset alliance. I would encourage you all to try it out and if it suits your need then please, by allmeans, get an Android phone.

Moving on, we have been busy at work as Eric mentioned on Enterprise. Now we have over 1 million businessesusing Google Apps. In fact, we have launched Google Video for your business as part of our Apps premiereedition.

Now you may think of video like YouTube this basically for your business a last thing that might be needed in abusiness. In fact we have had great demand for it. Internally we use video quite a bit. We have so many internaltalks that we are able to record and then the people, who miss it, can just watch it online. We have had just a greatamount of demand by businesses for this. I think this will be a very compelling feature to our Google Appsproduct.

In addition to businesses, Google Apps are increasingly being adopted by universities. Now over a millionstudents use Google Apps just a couple of years after the launch, and we have had dozens of universities andcolleges deploy Apps since the New Year just started including Indiana University, University of Virginia, GeorgeWashington, and many others.

Now lastly, I wanted to tell you something I am really excited about. I am sure many of you saw, it is a launch ofGoogle Chrome, which is our new web browser. As you know, we created a lot of web services, and an increasingchallenge to us is to have a robust enough platform to be able to run those web services quickly, and reliably.Chrome does both of those things. It has incredibly fast JavaScript engine, which we are really excited about

called V8.

In addition, it has a process model that is much more robust. Now, if you have a problem with one tab in yourbrowser, you can just kill that tab and your browser just keeps running just fine, whereas in the past, number ofbrowsers if you had one tab hang you could hang the entire browser.

We are continuing to improve it and we have opened sourced it entirely. So, not just Google, but the wholecommunity is improving Chrome. We hope that it obviously continues to improve Chrome, but also it raises thebar for all browsers because we want all the web platforms out there more capable so we can more easily deployour services.

All in all, it is been a very busy quarter at Google. We have had so many announcements, launches, so manyimprovements; it is really hard to keep track. I appreciate all of you following it. Thank you and talk to you next

quarter.

Eric Schmidt


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Well, thank you very much, Sergey. You are going to stay for the Q&A for a few minutes, too.

Sergey Brin

No problem.

Eric Schmidt

Thank you Patrick as well. We will have Hal, Jonathan, and Omid join us and maybe we would move to questionsKrista.

Krista Bessinger

Yes, we are ready do queue up for questions, operator.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will take our first question from Imran Khan from JPMorgan.


Hi, thank you very much for taking my question. Question about the economy and what the trend you are seeing. Ithink Eric, you talked about that the economy seems like weakening over the last four weeks or, so that I havebeen hearing the same thing. Can you give us some color like how is your business trend, July, August, versusSeptember? Did you see the business weakening significantly in the month of September or if you can give ussome color regarding what trends you are seeing in October?

The second question is regarding the network revenue. Excluding TAC, it seems like network revenue growth ratedecelerated quite a bit. I just try to understand that better, thank you.

Eric Schmidt

Thanks, Imran. I am going ask Hal to help me here. We see fluctuations and they are more complex than theymay appear; some things go up, some things go down. Obviously, it is going to change as the global financial

crisis moves through. It also varies by country and by region. Hal?

Hal Varian

Yes, I think I can give you a little color on some of the things that are being going on. As you know we do not giveguidance with respect to our internal numbers, but we have a nice tool out there called Search Insights; we cantake the pulse of the consumer. If you look in the last several weeks, there has been this almost obsession withfinancial markets. Huge increases in inquiries on money market, mutual funds, buy gold, 401(k)s, banking crisis,LIBOR, home safes. So right now, I think it is very difficult to really extrapolate from the current period where youhave got this major event going on, really a once in a lifetime event. Let's all hope it it is once in a lifetime. So, it isvery hard to tell what things are going to look like going forward basis.

Eric Schmidt

Jonathan, do you have a view on this?

Jonathan Rosenberg

Just very quickly on the second question which I did not think Hal got to the network deceleration. , Imran, thereare really two things that you want to look at. Some of it is a function of quality efforts, and the other is basically afunction of deal f low in the large partners that we have that are participating. So, those are the two things that youneed to look at. Our landing page quality which Sergey mentioned in his introductory remarks relates to the qualityissues.


Got it. Thank you. Hal, I agree with that and hope it is a one-time event of our lifetime.

Eric Schmidt

Our next question?


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Operator

We will go next to Mark Mahaney from Citi.

Mark Mahaney - Citi

Thanks. I wanted to ask two questions please. First has to do with the thoughts on cost, Eric. You talked aboutbeing needing to be more cognizant of cost structure in a deteriorating economic environment, and what is going

to be a severe recession. Does that mean you cut back on just on operating costs, or would there be a pointwhere you would actually delay materially major investment priorities like mobile?

Then a quick question to Sergey. Could you just talk broadly about what in display advertising you think can befixed, or what are the major innovations that could be brought to display advertising that we have not seen before?When you look at that, what do you see that Google could bring to that market? Thank you.

Eric Schmidt

Mark, on the question of investments, Google has shown courage, when we need to. We also intend during thisperiod to show very responsible management of our expenses. Patrick, do you want to talk a little bit about howyou are structuring this?

Patrick Pichette

Sorry, I got off mute. Yes, absolutely. I mean in these uncertain economic environments, and I think that we haveseen it through to Q3 results. I think that the company is very responsible in managing its cost base to make surethat we are adapting to the environment in which we are operating.

So, operational efficiencies and cost containment have been in place for couple of quarters already and theycontinue to do so. So, we are adapting. We are very nimble and very agile in this and we will continue to be.

Regarding the second question that you have asked. Strategic investments are strategic investments and thoseyou separate them from day-to-day operations, and every time we have a great opportunity, we are going to jumpon it and as I said in my comments, the basics of CapEx infrastructures and the fundamental infrastructure for thecompany we are not going to stop. So, that is the balance we are striving.

Eric Schmidt

Sergey, the second part of the question.

Sergey Brin

Yes, on display; I think there are certainly a lot of opportunities in display, and let's just not forget when we first gotstarted with AdWords or the predecessors to AdWords, it took us a number of years for those things to evencatch up to what then was the big dollar numbers of the display advertising and finally to show the incrediblepower for both advertisers and end users of search-based advertising. So I think we could see the same thingwith display where it actually takes actually while to mature with the new model.

One of the things what I think is very valuable for display, even though it might be more brand focused, you stillreally care about targeting and showing the right ads to the right end users at the right times and try to show them

things they might be interested in. You might want to have a return, not be a click necessarily but just be thebranding and having generating awareness. Nonetheless, you really want to reach the right people.

Now another part of that is we have great measurement tools. You know what happens after people might see anad and how might they act differently. We also have access now to a vast variety of inventory ranging from ourAdSense network to a variety of our DoubleClick technologies. This can give you access to more inventory andfinally, our properties such as YouTube and Orkut.

So we still see this as an area that is ripe for development and innovation and we think that we can continue tocreate great tools for display. This includes, by the way, things like not just we are not just talking about bannerads on web pages, includes AdSense for games as I mentioned earlier, it includes feeds, it includes video likeYouTube and other sites. So, it is a big opportunity.

Eric Schmidt

Let's go to our next question.

Operator


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We willtake our next question from Brian Pitz from Banc of America Securities.


Thank you. You announced three changes relatively recently in particular replacing minimum with first page bids Ithink late in Q3. Would you talk about the early impact these changes are having on the auction process? Thanks.

Jonathan Rosenberg

Yes, sure. This is Jonathan. That particular quality-based bidding effort I think was launched around the first weekof September. Basically, the impact that that has is the quality score is calculated real-time on each query. So,what was happening previously was that keywords were inactive and not available based on the quality dynamic.What is happening now is there are keywords that are able to participate in every auction because we arecalculating it real-time. So, it is basically allowing us to get what were previously in active keywords to compete inthe auction more successfully based on the real-time calculation. That is pretty much it.


Any major impact so far that you are seeing as a how long will it take to really work its way through?

Jonathan Rosenberg

As far as the quality announcements that we typically talk about, it is certainly one of the bigger things we did in thequarter and typically these things tend to manifest themselves in terms of their impact reasonably, expeditiouslyafter the launch. So, I think that most of the benefit of the typical quality enhancements is real very quickly.

Eric Schmidt

If you want to remind everybody that we make very we commonly make 10, 20, 30, 40, 50 quality improvementsin a quarter, these are just some of the better known ones. We are constantly tuning based on our quality testingand again globally as well.


Great, thanks.

Eric Schmidt

Our next question?

Operator

We will go next to Christa Quarles from Thomas Weisel Partners.


Hi. My question is really related to the Yahoo! deal. Eric, were you surprised by the vitriol in the response from theadvertisers out there? Clearly there is reality in how this thing functions versus perception. I would be curious howare you approaching the government meddling in your ability to function and operate and how are you respondingas it relates to the Yahoo - Google arrangement?

Eric Schmidt

Well, Christa, thank you. I will let you used the phrase meddling and I am not going to be using that phrase. Whenwe did the deal, we understood that the deal would be both controversial that our competitors would oppose it,and they would oppose it using every tactic that they could and also that there was a proper role for the legalreview process. So, we anticipated were turned out to be roughly four-month delay. Literally to give everybodytime to talk about it. We are hopefully during the end of that period and we are obviously in communications withthe Justice Department and the other groups that are doing it.

With respect to the advertiser reaction, we have seen a balance of reactions. We have seen some largeadvertisers, complain. We have seen other large advertisers say that this is ultimately good for our businesses. Iobviously have a bias on this question and in my view many of the complaints are based on the fact that people

do not understand how the auctions really work and the benef its that auctions provide.

Auctions provide really a clearing price for accurate value and because the prices in our auction are largely set bypeople, who can back-solve to the cost per acquisition. The cost-per-click and the revenue that we get is largely


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tied all together. Hal in fact wrote a blog post yesterday precisely on this issue because there has been so muchconfusion about it. Hal, do you want to comment on that?

Hal Varian

Sure. We have been making a concerted effort to try to educate people more about how our model works. Onething we were bit surprised in is even people, who had been using AdWords did not necessarily understand howand why functions the way it does, so we are really trying across the Board to communicate better with all the

sectors that we serve.

Eric Schmidt

So, next question.

Operator

We will go next to Ben Schachter from UBS.

Ben Schachter - UBS

Congratulations on a nice quarter.

Eric Schmidt

Yes. Thanks Ben.

Ben Schachter - UBS

In order for the display strategy to work, do you think you need to offer more inventory on your own sites or can itbecome meaningful just through better penetration of the AdSense network. Also on Google Checkout in the pastthere have been a lot of discussion around the badges and how they have increased click through rates andconversions. Seems there is less of an emphasis on that product. Does it make sense to potentially work withPayPal on moving forward.

Then one last house keeping one. If you look at depreciation and cost of goods less TAC they seem to be flatquarter-over-quarter, which is never happened before. Any comments on that? Thanks.

Eric Schmidt

So, you asked three questions and so Patrick you will do the third one. Omid can you and thanks Ben for that. Canyou talk a little bit about display and Checkout?

Omid Kordestani

Sure. Ben I am calling from London so please let me know if the voice is not getting through correctly. As far aswe mentioned earlier we put a concerted effort across all the regions in our product teams and brought DaveRosenblatt into the position with his vast experience f rom DoubleClick to help us really pieces all together, andbring a great focus in our execution.

Simply, our objective here is that we want to marry the art of display, which is the engagement it offers with thescience of search advertising relevancy and measurability. We have a lot of inventory, great inventory both acrossour Content Network already and across YouTube and that our goal really is to focus both on the advertisers andpublishers here for advertisers, really scaling the advertising process for media planning, buying, selling, all theway to optimization and for publishers helping with increasing the yield, and that they are experiencing.

We have great, great headways already in Q3. We had NBCOlympics.com using DoubleClick serving ads over30 million unique users. In Europe, they use the platform very effectively to increase the number of transactionsand reduce the cost per transaction by 33%. So, this measurability and reach is already very effective across ournetwork and our existing properties. As Sergey mentioned a long-term focus for us to get all the pieces togetherand execute and grow the business.

As far as Checkout goes, I think again, we continue to evaluate what is the best ways to focus and utilize theexisting headway we have made. There is really nothing, really new to announce here other than we are

considering how best to apply the service, going forward. We are open to all kinds of options and we will evaluateit as and we see the results.

Eric Schmidt


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Patrick, do you want to handle the last question?

Patrick Pichette

Yes, I would just like a clarification. You said about D&A specifically or is it OpEx excluding D&A and TAC thatwas a question?

Ben Schachter - UBS

No, I was really looking at the depreciation and looking at the cost of goods less the TAC. If you look at thoseexcluding stock and they are both flat quarter-over-quarter and that has never happened.

Patrick Pichette

Yes, what we have done is in the first part of the year, we had been accelerated some depreciation amortization inthe bunch of equipment now is flow through. That is really the core driver of that.

Ben Schachter - UBS

Thanks.

Eric Schmidt

Okay, thanks. Next question?

Operator

We will go next to Doug Anmuth from Barclays Capital.

Doug Anmuth - Barclays Capital

Thanks for taking my question. First one for Sergey, you made some comments last quarter indicating thecoverage may have dipped too low. Can you talk about what you did with coverage during 3Q and a little bit onyour updated view on that?

A second one for Hal, can you just talk about how advertisers are changing their behavior and strategy in terms of

keyword bidding in this environment, and what is happening with average cost-per-click and what is happening withROIs as well. Thank you.

Hal Varian

Sure. Hi, Doug, I can start briefly on coverage and maybe Sergey can follow-up. I think one of the things that wehave probably done a better job in the last year or so, is we have done a much better job of eliminating the badads than we have introducing functionality that makes it particularly easy to enable, good ads. This is not really adial that we just want to turn. We have a very clear goal, which is to show as many high relevant ads againstqueries as possible and there are lots and lots of queries still out there that we can do better on.

We have a good list of those, particularly complicated long queries, or queries that have very diverse meaning.Queries with modifiers, for example if you look on 'Wee Games', we have ads. However, if you type in 'best WeeGames', we do not. Your plumber is not on AdWords. So, the goal is not really too explicitly we try to figure outhow we get coverage up. The goal is to figure out how we add the bidding functionality, so that advertisers canserve better ads. I f you are actually looking at your components of the RPM equation, which we do not reallybreak out much. Generally you are seeing what we have said in the past, which is the coverage is in the ballpark ofthe historic lows.

Jonathan Rosenberg

With respect to the advertiser behavioral side, people focus on this aggregate cost-per-click measure. As wehave said before, it is misleading, because it is aggregating across the entire world, and it is aggregating acrossAdWords and AdSense So relatively small changes in the mix can show up in that number. We do not really thinkit reflects the actual advertiser behavior, in a very clear way.

Our experience is advertisers are willing to take all the clicks we can give them at the current CPC, and even in

tough times. We think that will continue to be true because nobody wants to turn away a customer. So, we thinkthat is actually a pretty solid number and will continue to be so and thank you.

Sergey Brin


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your prepared remarks and judging by your numbers, especially in the US that would suggest that you are prettywell diversified.

So, can you comment on the current trends in the retail category and then second on the UK?, Google changedits policy on bidding on gambling keywords this morning and it appears that those ads go live tomorrow. So, unlikeprior policy changes this one was delivered with a little advanced notice, agencies got the criteria this morning,and campaigns go live right away. So, any reason for the quick rollout there? Thanks very much.

Eric Schmidt

Thank you. We will have Omid, since he is in London, he will answer the second question. The first question, wehave looked at what we think will happen in the next few quarters. The problem is, there is so much uncertaintynow in the financial markets, in the press, and in potential government action, and so forth.

It is very hard for us to give you a sense of what is going to happen in retail or any category between now and theChristmas season or over the next 12 months or so forth. Hal, you have looked at the various categories, if youwant to can you give some macro comments about categories for us?

Hal Varian

Well, when you look at the US aggregate statistics, we definitely saw weakness in US offline retail the numbersthat are reported by the government. One thing that we think at Google is that when there is a recessionaryenvironment, people are counting their pennies, they are going to be researching their purchases, looking forbargains, and this potentially has something of an upside for Google. We referred to this last time I called it theWal-Mart effect that as people shop more carefully they are going to be researching the things they buy. So asEric said, we do not really know what is going to happen. This is a speculative statement but we think that thiseffect could actually work to Google's benefit potentially.

Eric Schmidt

Omid, do you want to comment on the UK.

Omid Kordestani

Sure. I think to be honest with you, this is one of the benefits we have now of much tighter attention to every

aspect of our international operations. We now have both Nikesh, our Head of EMEA and Tim Armstrong, Head ofAmericas attending our executives meetings, and they are frankly upset of policies and questions that the markethad put on us, and we really are being much more responsive to these things to our sales organization andchange these policies, very quickly to address to the market demands. So, I think you we will definitely work withour agency partners and customers to make the transition as smooth as possible.

Eric Schmidt

Thanks. So our next question?

Operator

We will go next to Jeffrey Lindsay from Sanford Bernstein.


Hello and thanks for taking my question. We just wanted to talk a little bit clarification on the improvement inmargins. Was this due in any way to improved terms on the AdSense deals or was it primarily expense control? I fit was expense control was that really through avoided hiring or was there actually any staff reduction? Thank you.

Patrick Pichette

I can answer on the expense side. Across all categories of expenses, people have been very diligent over thelast 90 days and I can and on the specifics of hiring, I mean, we have continued to hire. We just hire in manyareas. We are continuing to hire because we have a lot of needs and then what we are doing is just doingresponsibly. So there we will continue to hire, that is why you see the net improvement in headcount but it is trulybroadly across all categories of expenses that we are focusing let it be AdSense, it covers it.

Eric Schmidt

I am not aware of changes that would on the ad or ad partnership side that would result in margin change.Omid?


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Omid Kordestani

No.

Eric Schmidt

Okay. The next question?

Operator

We will take our next question from Youssef Squali from Jefferies.


Hi, thank you very much. Two quick ones; f irst on CapEx, if I look at CapEx this quarter, so $450 million was thelowest we have seen since Q1 of 2006. Are we at a point, well, basically the bulk of the infrastructure is alreadybuilt and now any incremental is all that much smaller. Is CapEx starting to normalize?

Second, a question for Sergey. You talked earlier about GeoLocal with product like Maps and Earth is bigmonetization opportunity, so we have talked about them for a long time and they remain opportunities. One of theissues there has been this direct access to the advertisers to the local merchant. Have you are we any are wecloser to cracking the code on that?

Eric Schmidt

Patrick, do you want to give a sense of CapEx?

Patrick Pichette

Yes, with pleasure. I mean essentially, CapEx is a lumpy business in many instances. So think of data centersgoing up and down I mean one quarter you have it, one quarter you do not, so we are going to continue to investin CapEx, we are going to continue to invest heavily in CapEx, so we have no plans of slowing down. What yousee here is just a nature of that lumpiness. We are obviously getting better at it, so with efficiencies every extraunit of capacity is cheaper for us, so we are going to benefit back.


Were there any costs pushed out into CapEx into Q4?

Patrick Pichette

No, none.


Okay.

Eric Schmidt

Sergey and maybe Jonathan you want to have a look about the GeoLocal ad opportunities?

Sergey Brin

Yes, let me talk about it. Certainly GeoLocal has been a substantial source of investments on the part of ourcompany and you are absolutely right. I think it is a really big monetization opportunity but it is going to have apretty long bootstrap time because there are so many small businesses and you have to get them all in the loop.

Technology is evolving quickly with respect to things shifting to mobile phones and some of them will have GPSnow, some of them do not, some have cell ID different device and things. I do think that this is an investment thatwe are going to have to keep investing in for some time till we get really big payoff .

I should mention we already have fairly substantial revenues from geo local, so it is not the case but somehow thisis I mean this is a good chunk of our business and I expect that when we do finally bootstrap lots and lots of local

advertisers. When there is some settling of the best user experiences for doing this both on mobile devices aswell as on the desktops, I think you will see a substantial ramp there.

Jonathan Rosenberg


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Eric, do you want me to add anything. Yes? This is Jonathan. The biggest thing I would reinforce from Sergey'scomments is, this is an area where we are winning. Maps is the most popular mapping site in the world. We havegot all sorts of data now for over 160 countries. We are also doing some very exciting things in terms of rampingour ability to get data for areas where there are not very good maps, where we are harnessing the power of usersto enter information in.

On the local side, what we are doing really goes beyond the traditional Yellow Page types of activities and I meanwe are taking all the information that a business would want or a user to see; reviews, hours of operations, photos,

web results, and we are embedding all of those on to these maps which have a great deal of traffic. So, if you justrun a query, steakhouse in Chicago or something like that and when you click on the map and select a particularlisting, you can now do things like click on Street View and actually see the restaurant. So we are very pleasedwith the traffic that is being driven.

One other thing I would actually suggest you try one of the coolest maps applications I saw. Go to swisstrains.chto see the precision of Swiss trains in real-time and you will actually get a visceral sense of what it is going to belike for people when all of this stuff works on their browsers and works in mobile devices.

Eric Schmidt

Lets go ahead and Krista I think we this is we are sure of running out of time, maybe this should be our lastquestion.

KristaBessingerYes, this is our last question. Please.

Operator

Our last question comes from Jeetil Patel from Deutsche Bank.


Great, thank you. Just one last question; on your AdSense syndication network, can you talk about the rollout ofthe quality score initiative? Is it still at first half '09 rollout or perhaps a little longer and have you learned anythingaround the testing that you are doing there or still tweaking that? Thanks.

Eric Schmidt

So, again, you are using the word quality score. Could you just be precisely define what you mean?


The scoring index you are looking at for your syndication network, so rating each partner out there; just curioushow that how that initiative or program that you are looking at launching is progressing?

Eric Schmidt

It is actually in the process of being launched. A number of partners already working with it and the plan is to get itdone in early next year. Yes, so and obviously we spent a lot of time with them to make sure that their sites are

done properly, our system responds properly to their query traffic and so forth.


Got it. How often will the scoring system change? Will it be real-time or will it take a month at a time or quarter at atime?

Eric Schmidt

We tend to be very dynamic because these systems have feedback in them. So, as they learn, they get better atjudging, what is a higher quality click and as they learn they get better and better and that is why such a nicemodel.

Sergey Brin

This is Sergey. Probably I think we have had this system in place for AdSense for Content for a long, long time.Now it is the extension of that into AdSense for search. These are obviously some of our larger customers thathave significant implementations and we are taking our time to roll it out in a way that is have sensible for both us


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and them. This is something that we have been doing for a long time within AdSense for Content, now that will beapplied more broadly.

Eric Schmidt

So, why don't we go ahead and just f inish up? I want to thank everybody for spending time. Everybody is verybusy with all the things going on around the world. Thank you for our panelists and our call in today. From myperspective, there is an awful lot of stuff going on in the world, there is an awful lot of actions that we hope will be

taken correctly by governments around the world, by the bankers and by the institutions that are there to makesure our systems run well.

We have a duty and responsibility to run Google well. We take a long term view. We have the opportunity beforeus and we have the time and the patience to build a great future which is what we hope will happen for everybody.So thank you very much.

Operator

This concludes today's conference. We thank you for your participation. You may now disconnect.

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Google, Inc. Q2 2008 Earnings Call Transcript

July 17, 2008 | about stocks: GOOG

Google, Inc (GOOG)

Q2 2008 Earnings Call

July 17, 2008 4:30 pm ET

Executives

Krista Bessinger - Director of Investor Relations

Eric Schmidt - CEO

George Reyes - CFO

Sergey Brin - Founder and President of Technology

Jonathan Rosenberg - SVP of Product Management

Omid Kordestani - SVP of Global Sales and Operations

Hal Varian - Chief Economist

Analysts

Imran Khan - JP Morgan


James Mitchell - Goldman Sachs

Justin Post - Merrill Lynch


Douglas Anmuth - Lehman Brothers

Ben Schachter - UBS

Mark Mahaney - Citi


David Joseph - Morgan Stanley


Presentation

Operator

Welcome, everyone to the Google Inc. conference call. This call is being recorded. At this time, I would like to

turn the call over to Ms. Krista Bessinger, Director of Investor Relations. Please go ahead, maam.

Krista Bessinger

Google, Inc. Q2 2008 Earnings Call Transcript - Seeking Alpha http://seekingalpha.com/article/85608-google-inc-q2-2008-earning...

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display as a big opportunity. And big opportunity, by the way, because the strategy of offering value to advertisersand publishers is one that we can offer very much worldwide.

Putting our team together, of course, we've really now delivered on this global organization that everybody hereknows about, and it is beginning to bear fruit. [Angalore] for example, developed some great new ad tools thatwere delivered last quarter; [Zurich] created our new Insight feature on YouTube which lets anyone who uploadsvideos see traffic information. [Hifa] developed another great new YouTube feature called Imitations.

My point here is not to highlight the hundreds and hundreds of ones that happen all the time, every quarter, but tosay it really is a global company. So we now have more than 30 products that support more than 30 languages, upfrom five products and 30 languages just a year ago. So people want to use Google in their own language and weare delivering on that.

Just to f inish up my hopefully short comments, we are very, very happy to have Patrick Pichette on board as ournew CFO with 20 years experience in financial operations and management in the telco industry. I've talked tohim; he is coming up to speed. He is going to be a tremendous contributor at Google for many years to come. Iam very, very excited about that.

I want to make sure that we thank once again George Reyes, my friend and colleague for more than 20 years.George stayed on board even more than a year after he announced his intent to retire. This shows you the kind ofperson that he is, to try to help Google and to help all of us meet our objectives. He has made a tremendous

contribution to Google, which we have highlighted before. We are going to miss him, and we are very muchlooking forward to working with Patrick.

In our order today we are going to have George, who I have just highlighted, if I can boast about him some morewithout making him too embarrassed; and then we will have him followed by Hal Varian. Larry is out this week. Halis our Chief Economist and there have been so many questions about Yahoo!/Google economics and so forth.Hal is the perfect person to talk about how does the auction really work and what does the global environmentmean for Google?

George, do you want to take it away?

George Reyes

We had another strong quarter, with gross revenue increasing 39% over Q2 of 2007 to $5.4 billion. Google.com

performed well, up 42% year over year to $3.5 billion, driven by strong traffic growth and to a lesser extent,monetization.

AdSense revenue grew 22% over Q2 of 2007 but was down slightly on a sequential basis, reflecting a continuedfocus on delivering high quality traffic to our advertisers and typical Q2 seasonality.

Now lets take a look at aggregate paid clicks. Aggregate paid clicks include clicks related to ads served onGoogle properties, as well as ads served on our partner sites. Aggregate paid clicks grew approximately 19%over Q2 of 2007 and were down slightly on a sequential basis, again reflecting a continued focus on deliveringhigh quality traffic to our advertisers and typical Q2 seasonality.

Now Ill discuss our international performance. International revenue accounted for 52% of revenue, or $2.8billion. The UK was solid with revenues of $774 million, up 29% year over year but down 4% sequentially,

reflecting typical Q2 seasonality and negligible FX impact.

Revenue growth in EMEA was strong, primarily driven by strong performance in Benelux, Ireland and parts ofWestern Continental Europe including Germany, France, Spain and Italy, fueled by relatively strong performancein automotive and consumer packaged goods. Asia and Latin America continue to show impressive growth aswell with Japan, Argentina, Australia, Brazil and China being notably strong in Q2.

Now turning to expenses, traffic acquisition costs were $1.5 billion, or 28.4% of total advertising revenue, downfrom 29.2% in Q1. AdSense TAC was $1.3 billion, while TAC related to distribution partners and others whodirect traffic to our websites totaled $154 million in the quarter. As we grow our AdSense Partner Network andembark on new initiatives, we may see additional pressure on TAC rates going forward.

Other cost of revenue, which includes $9 million in stock-based compensation, increased $49 million over Q1 to$674 million. The largest driver of the increase was the increase in costs related to our data centers, including

depreciation, equipment and operations. We continue to anticipate that other cost of sales could increase goingforward.

Other than cost of revenue, operating expenses totaled $1.64 billion, including approximately $264 million in


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stock-based compensation. Expenses related to payroll and facilities increased $1 million over Q1 to $810million.

At the end of the quarter, we had a full-time employee base of 19,604. We added 448 net new employees in Q2with roughly half the new non-DoubleClick hires coming on board in engineering, followed by sales and marketing.We have implemented and continue to follow a discipline hiring process in all areas of our organization. But as wehave indicated in the past, we will continue to invest in our core business both in the U.S. and internationally.Remember also that we usually see an uptick in starts over the summer, coinciding with the end of the academic

year.

Turning to non-GAAP operating profit which excludes stock-based compensation, it increased to $1.9 billion inQ2, with non-GAAP operating margins of 34.5%. Note that interest income and other in Q2 was $58 million, down$109 million from Q1. To be clear, this was not a writedown nor was this due to any losses. Instead it wasprimarily due to lower yields on our cash balance; lower average cash balances as a result of cash used in thefirst quarter to acquired DoubleClick; lower net realized gains on the sale of our marketable securities; and anincrease in expenses as a result of more activity under our foreign exchange hedging programs.

Finally, turning to cash, operating cash flow remained strong at $1.77 billion, with CapEx for the quarter of $698million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments, includingdata center construction, production of servers and networking equipment. We expect to continue to makesignificant investments in CapEx in future quarters. Free cash flow, a non-GAAP measure which we define as

cash flow from operations less CapEx, remained strong at $1.7 billion, up 63% year over year.

In summary, we believe our core business continues to demonstrate strength while we make key investments topursue long-term growth opportunities.

At this point I want to take a moment to thank Eric, Larry, Sergey and the rest of the management team for havinghad the privilege of working with all of them. This is an opportunity that I will never forget.

Let me turn it over to Hal.

Hal Varian

Thanks, George. Eric asked me to comment on the state of the economic environment and how thats impactingGoogle.

When we look across sectors of the United States we see that on a year-on-year basis, the query growth hasbeen positive in every sector we track, even including those sectors that are generally economically sensitivesuch as automotive, real estate and travel. We also see that year-on-year revenue growth is positive in everymajor sector expect for real estate, and even that one is only down by a small amount.

When we look at the sub-sectors, we see some interesting patterns. The weaker components are just the onesyou would expect to see based on the macroeconomic climate: auto financing, home financing and real estateagencies. These are the sorts of queries you would expect to see when auto or real estate transactions havealready taken place, and we see, as we all know, fewer transactions are taking place in those sectors.

It is interesting to note that year-over-year automotive ad spend is up, even though the growth in auto f inancing isdown. I interpret this as saying that auto advertisers are willing to spend on clicks, but the weakness is on the

consumer side. However, I should emphasis this behavior is not universal. Spending seems to be holding uppretty well in other consumer durable categories such as home appliances and home furnishings.

When we turn to Europe, we see a similar pattern. In the UK we had across-the-board year-to-year growth in bothrevenue and queries, with the sole expectation being real estate. Continental Europe grew in both queries andrevenue in every major vertical.

So to summarize, when we look across verticals we see that consumers are being cautious in their onlinespending patterns just as they are in their offline spending. Despite the weakness in the economy, advertisingrevenue seems to be holding up remarkably well in most sectors. I think this illustrates the point that we havemade several times. During periods of s low economic growth, the last thing an advertiser wants to cut is itsspending on search-based advertising.

So with that, let me pass the mic to Sergey, who is going to talk about what he will be doing in products.

Sergey Brin

Hello, everyone. It is really exciting for me to update you over the past quarter. We have had a lot of substantial


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improvements, new launches. Let me just start with search. We have substantially increased the size of our index,and in particular, actually the index of documents that we refresh every few minutes has also grown tremendously.So now, our users get much fresher and faster results, across a greater range of sources.

We have -- just all told, to give you a sense for this -- launched over 100 search quality improvements this quarter,so roughly one a day. Some of the highlights:

Again, we have increased coverage in universal search, which means you get your web pages mixed in with video

and images, news, books, all of those things we are able to show more and more. That improves our searchresults and it pays us a double dividend for all of the work we have been doing on corpuses such as book search.

We also just added blog results at the bottom of the page in the past quarter, and our blending of Maps results wehave put into 130 more countries than we had in the past.

We have also been running more one box; for example those of you in Europe might have enjoyed our Euro 2008one box in June during the soccer tournament.

Let me just take a step away from just the basic search. Many of you, I know, use iGoogle and in fact we know thatbecause we have had such tremendous growth, especially internationally. More than 60% of iGoogle users arenow outside of the U.S.

We had some very important developments, in particular with themes this quarter. You might have seen ouriGoogle artist campaign where 68 artists across 22 countries created new themes for the product. Thisencouraged hundreds of thousands of people to sign up for iGoogle, and of course the good thing is so many ofthem changed their themes to these artist themes. I have personally set my iGoogle page now to go do a rotationacross the top themes, and that is really fun. Everyday I get a new feel and they are aesthetically pretty excitingand varied.

If you are listening to me right now you probably speak English pretty well, though of course if you are reading atranscript that has been translated using Google Translate then you might not. It is very important to be able tohave access to information in languages that you dont speak, especially if you are a non-English speaker. I mean,the amount of information thats out there that can be useful to you thats not necessarily in your native language ishuge.

To this end, we have been of course working on Google Translate. It now covers over 20 languages. Weve

added 10 just in this past quarter alone and now we let you translate from any one of those languages to any otherof those languages. Weve been able to improve the performance and have tremendous growth in usage as well.

Weve also been working on our cross language search so we dont necessarily just search literally in thelanguage that you search; we are able to produce translated results in other languages now, more automatically.You can expect us to continue to expand that work.

In ads I should highlight a notable development. Our AdSense Network now allows third parties to host and serveads, and this has been important to many advertisers. Just as one example, Lenovo is now advertising with usbecause we can support this kind of third-party ad serving.

Now advertisers find out more about where they should be advertising because weve launch the Google AdPlanner. That lets you see what kind of sites a particular audience that is interested in whatever the advertisers

are advertising, which sites do they visit? What are the breakdowns of demographics? I t lets you do verycomplicated statistical analysis and I encourage you all to try it out, even if you are not an advertiser, it is pretty funto be able to play with that data.

Let me just jump a little bit onto YouTube. Probably most of you have had a chance to try to watch some YouTubevideos, and in fact, our data suggest that more and more of you are. We now have 13 hours of video uploadedevery single minute, so as you can imagine, it would take quite a many lifetimes to watch all the YouTube videos.It also gives you the opportunity, of course, to watch video on very specific topics that may be of interest to you.

We've also been experimenting on YouTube with a variety of advertising formats and we have had some greatsuccesses. Lionsgate marked the opening of the film The Forbidden Kingdom, for example, and it had over 4million video views on YouTube just from that promotion. So that was very exciting for us and for Lionsgate.

I should mention that mobile search has been growing quite a bit, and of course you may have heard about our

partnership that we've launched in this past quarter with NTT DoCoMo in Japan. Japan is a very strong market formobile search because of the devices, because of the culture it is just a really tremendous environment. Peopledo many, many mobile searches. We have a robust advertising market there for mobile search. We are certainlyoptimistic that many of these advances which may initiate in Japan will carry over to the rest of the world as the


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devices and culture catch up.

I want to also mention that our mobile search experience, which we have now rolled out to more countries and wehave made substantially faster, is also causing a lot of growth in that segment for us.

One of things that I am most excited to tell you about today is our progress with Apps. I should mention first of allthat our enterprise business with respect to Apps has been growing very rapidly. There are now more than half amillion businesses that are using Google Apps for their day-to-day productivity, and that is just a tremendous

number.

Just to give you color on what some of these businesses include, in this past quarter Valeo, one of the worldsleading automotive suppliers now has 32,000 users using Google Apps, including of course Gmail, Calendar,Docs and so forth.

The Government of Washington D.C. has 38,000 users on Google Apps. General Electric has adopted thesecurity side of the Apps products which was formerly Postini, and thats running on over 300,000 users. Just tocall out a few other highlights, the Telegraph Media Group and Sanmina both also adopted Google Apps.

So, its been a very exciting quarter for that. Starting from these half a million businesses, including some of theseincredibly successful businesses, we really expect this to be an important area for growth and development.

I just want to tell you, we dont view Google Apps and what not as we dont want to create a closed environment ora walled garden. We really want to encourage more and more cloud computing and we want to see more andmore companies out there successful in deploying cloud solutions.

One of the things we launched in this past quarter is the Google Apps Engine which basically means thatdevelopers can easily write an application and deploy it on our scaled infrastructure rather than having to try to puttogether all of their own computers, data centers, networking, all of that stuff. We handled all of that for thedevelopers.

We have a rapidly growing base. Just a few fun examples: we had a nine-year-old boy who contacted us with abunch of questions, and then he has been able to develop his app on the Google Apps Engine. He said that hehas been able to do it now because previously he was spending all of his allowance on hosting, and he could nolonger afford that.

Other, more commercial ventures include PixVerse, a chat application that switched to Google Apps Engine afterwe launched it, and it was subsequently purchased by the social network Hi5. As well as for those of you who areinto poking, BuddyPoke, a very popular open social app which is running on Orkut and MySpace has also beendeveloped on the Google Apps Engine.

We expect that we're going to have a lot of uptake of our various developer products and APIs, including theGoogle Apps Engine, and ultimately we think that the cloud is just a really great place to deploy Apps because ofthe simplicity for end users to access them, the ease of updating and maintaining them; it is really a greatenvironment. We obviously live it everyday and we believe it really helps people be more effective and productivewith their day-to-day lives.

Anyway, all told, a great quarter, lots and lots of progress and it has been a pleasure to talk to you about it.

Eric Schmidt

Thank you very much, Sergey. Why dont we go straight to everybodys questions? So are we ready? Lets hearthe first question.

Question-and-Answer Session

Operator

(Operator Instructions) Well take our f irst question from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

First, if I look at that UK growth rate, it seems like on a year-over-year basis the growth rate decelerated 10 points.

I was trying to better understand, is it because of the law of large numbers, or are you seeing any specificweakness thats dragging the growth down there?

My second question is related to the mobile search. Sergey, you talked about the mobile search opportunity. Doyou think that the mobile search will expand the search volume? What kind of impact do you expect on your


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than where we were a quarter ago? Can you give some color on that?

On the YouTube acquisition, I am just wondering where you are at with some press comments out recently.Where you are at on that versus your deal model at this point?

Eric Schmidt

Im going to have Hal actually talk a little bit about the nature of the environment, because I think all of us have

anecdotal evidence but in fact Google has continued to do well. There is obviously evidence of a slowdown in theU.S. and Europe; you read it in the paper every day. We continue to believe that we are very, very well-positionedin such a slowdown and especially if it gets worse.

The reason is theres a flight to quality and in particular a flight to measurability. So our economics are more drivenby, for example, if people stop searching for something we might not be able to do ads against it. Maybe Hal canarticulate that a little bit better than I can.

On the YouTube side, we are enormously happy with YouTube. YouTube is a cultural and end user success thatis far, far greater than we ever expected. On the revenue side, we are working on revenue scenarios and newrevenue products. I personally do not believe that the perfect ad product for YouTube has been invented yet.Weve just brought out some little in-video ads which look very good.

Hal, maybe you want to talk about the economics and maybe Omid, you can talk a little bit about YouTube sales?

Hal Varian

Sure. On the consumer side I already mentioned that some durables like consumer appliances and furnishingswere holding up pretty well. In fact, if you look at apparel and shopping people are still spending money online in apretty strong way.

I think part of what is happening is that as times get a little uncertain price-sensitive consumers are going to shopmore carefully to try to make every dollar count. That means they are going to be doing research online and theyare going to be doing shopping online. So I think we have a little bit of the Wal-Mart Effect going on that as timesget tough, people are going to watch their dollars. In many cases that means doing more shopping online.

Omid Kordestani

I wanted to add to Erics comments about YouTube. I think we are spending a lot of time internally onunderstanding how to streamline and integrate DoubleClick, improve the sales process as well as just purecustomer activity. We are having great success.

Again, as usual, Id like to highlight some of our advertising names from Lenovo, Foot Locker, Lionsgate, Oreo,Kraft Foods, Ikea, and Lipton Tea. I mean these are the kinds of advertisers that we really did not have access orthe proper types of advertising opportunities for before, as much as we do now.

The Foot Locker example is a particularly good one as the media they use on Google was extremely broad fromYouTube search, the content network, within the content network, also access to MySpace, Gadget ads, print adsand audio ads. So you can just see the way that our salesforce and our product teams are working with a broaderset of advertisers, a broader set of offerings and a very much integrated platform approach.

Search has taken a long time for us to develop and it still takes a lot of time for us and a lot of hard work. Wereputting a lot of energy on getting the right approach on YouTube and display advertising.

Operator

Your next question comes from Christa Quarles - Thomas Weisel Partners.


A couple of questions on DoubleClick. First I was wondering if you could outline how much it contributed in thequarter?

Second, if you could indicate if youre seeing any macroeconomic impact there. Obviously you made somecomments about search specifically, but I was wondering if you could highlight it for DoubleClick?

Third, some comments about how you are changing the buying process around display and where you see theinnovations coming in display over the next year or two?


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Eric Schmidt

We are not going to break out DoubleClick. Basically its early and so far were very pleased with it. It looks like itwas a very, very sharp decision on our part to go ahead and get the integration, the

Documents

Google Inc Q1, Q2, Q3, Q4 2008 Earning Calls