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Google Q3 2012 Earnings Call

>>>>Jane Penner: Good afternoon everyone
and welcome to today’s third-quarter 2012 earnings conference call. With us are Larry
Page, Chief Executive Officer; Patrick Pichette, Senior Vice President and Chief Financial
Officer; and Nikesh Arora, Senior Vice President and Chief Business Officer. Also as you know we distribute our earnings
release through our Investor Relations website located at investor. So please
refer to our IR website for our earnings releases as well as the supplementary slides that accompany
the call. This call is also being webcast from investor. A replay of the
call will be available on our website later today. Now let me quickly cover the Safe Harbor.
Some of the statements we make today may be considered forward-looking statements, including
statements regarding Google’s future investments, our long-term growth and innovation, expected
performance of our businesses, and our expected level of capital expenditures. These statements
involve a number of risks and uncertainties that could cause actual results to differ
materially. Please note that these forward-looking statements reflect our opinions only as of
the date of this presentation and we undertake no obligation to revise or publicly release
the results of any revisions to these forward-looking statements in light of new information or
future events. Please refer to our SEC filings for a more detailed description of the risk
factors that may affect our results. Please note that certain financial measures
that we use on this call such as operating income and operating margin are expressed
on a non-GAAP basis and have been adjusted to exclude charges related to stock-based
compensation. We have also adjusted our net cash provided by operating activities to remove
capital expenditures, which we refer to as free cash flow. Our GAAP results and reconciliations
of non-GAAP to GAAP measures can be found in our earnings press release. With that I’ll turn the call over to Patrick.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Hello everybody. Why don’t I invite Larry
to give us the first round of commentary and then I’ll go through our financials and then
Nikesh will have some comments before we turn to Q&A. So here you go Larry.>>>>Larry Page, Google Inc – CEO:
Thank you Patrick. Hello everyone. Thanks for joining us. It’s great to be on the call
today and to share our progress since we last spoke six months ago. As you can hear my voice
is still hoarse so I’ll keep my remarks reasonably short. I’m sorry for the scramble earlier
today. As our printers have said, they hit send on the release just a bit early. We had a strong quarter. I’m really happy
with our Business. Revenue was up 45% year on year, and at just 14 years old, we cleared
our first $14 billion revenue quarter. Not bad for a teenager. Today we live in a world of abundance, abundant
information, and abundant computing. Most of us carry at least one device all the time,
every day. In fact, many of us feel naked without our smartphone. [Surprising] mobile
search queries and mobile commerce are growing dramatically across the world. When we use
these devices interchangeably, depending on our situation. I switch between my Nexus phone,
my Nexus 7 tablet, and my new Chrome book that we just announced today many times every
day. All this abundance causes disruption. It also
creates amazing opportunity. Google is super well-placed to take advantage of these disruptive
opportunities. Why? Because our search query volumes have grown this quarter as measured
year over year. And we’re seeing tremendous innovation in advertising, which I believe
will help us monetize mobile queries more effectively than desktop today. Indeed, our
mobile monetization per query is already a significant fraction compared to desktop.
In short, as we transition from one screen to multiscreens, Google has enormous opportunities
to innovate and drive ever-higher monetization, just like Search in 2000. Now we took a big pat on Android’s back in
2005. We believe that aligning standards around an open source operating system would drive
innovation across the industry. Most people thought we were nuts. Today, there are over
0.5 billion Android devices. 0.5 billion. With 1.3 million more being activated every
day. You should all run out to buy the Nexus 7
tablets for $199. It’s gotten rave reviews and recently won Gadget of the Year from T3,
the gadget experts. You’ll love the integration with Google Play, it’s an amazing device. This time last year I announced that our run
rate for mobile advertising hit $2.5 billion. That seemed like a pretty big number even
for Google. But now we have built up additional mobile revenue from users paying for content
and apps in Google Play. Including these new sources grossed up, I can announce that our
new run rate for mobile is now over $8 billion. That’s quite a business. We have so many opportunities today, that
unless we prioritize we spread ourselves too thin. Last month we sunset another 19 products.
We’ve now closed or have combined 60 products and features in the last year, and we put
a ton of energy into ensuring that our remaining products work really well together. Because
as screens multiply it’s more important than ever we converge our services. Users want one consistent, beautiful, and
simple Google experience. Technology should do all the hard work, liberating users to
get on with the important things that matter in their lives, and this screen independence
is at the core of our strategy. Take Chrome in Android for example. We only
launched in February but the experience is already amazing. When you’re using Chrome,
switching devices is truly painless. All your tabs are there, ready to go. Search on your
desktop and the result is right there on your smartphone. You can even click the back button
and it just works. As more users upgrade to Google+, its now over 400 million. Users are
enjoying amazing experiences cross devices like instant photo upload. In the same way, we want to make advertising
super simple for customers. Online advertising is developed in very device specific ways
with separate campaigns for desktop and mobile. This makes arduous work for advertisers and
agencies, and means mobile opportunities often get missed. While we’re working to significantly
simplify the campaign experience, working very hard on that, advertisers should be free
to think about their audience while we do the hard work of dynamically adapting their
campaigns across devices. I’m very excited about this. I talked at the start about the abundance
of information. In the early days of Google you would type in a query, we return 10 blue
links and you move on fairly happily. Today, you expect more. Expect Google to understand
deeply and you expect us to turn your intentions into actions in the blink of an eye. If you
search for Tom Hanks movies, chances are you want movies with Tom Hanks, and thanks to
our Knowledge Graph that’s what we show now. Right from the results page, clean, fast,
and organized. If you’re shopping, say for Ugg boots, we now give you pictures, details
about the different boots, prices and information about the local inventory, again, right from
the results page. Clean, fast, and organized. There’s much more we can do to get you the
right information at just the right time. You might have a really important event in
the city, perhaps a first date. And the traffic is bad. You need to leave early to avoid being
late. Or maybe you just landed in a new country and you’re at the airport ATM, trying to figure
out how much cash to withdraw. Google Now, which we launched on Android in June, gives
you all that information and more, automatically, with zero effort required on your part. Still early days. These kind of tips and recommendations
are super powerful. They really save users time and hassle. This is why I’m incredibly
excited about the opportunities ahead. Given our expertise in Search and mobile and our
track record monetizing high usage products. Every day I wake up and I’m delighted that
our opportunities keep growing. And that we’re birthing to our users great products that
are defining the future. It’s a truly exciting time to be at Google. Now we’ll hear from Patrick some details about
our quarter.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Thanks, Larry. Good afternoon everyone and
thank you for joining us. Overall we’re very pleased with the growth
trajectory of our business this quarter, and this in fact despite significant currency
fluctuations in many of our international markets. So for example, if currencies had
remained constant year over year, our consolidated revenue growth would actually have been 6%
higher. On a positive note, our US growth continues
to be strong, and as Larry noted, we had a great quarter on the product front, gaining
traction in a number of critical areas. So, before I dive into the financials I just want
to give you a bit more detail on the new $8 billion annual mobile run rate that Larry
mentioned. The new run rate is different from the one we gave you a year ago and more specifically,
last year it included only our gross revenue from mobile ads, but this year in this new
number we also added the gross revenue from the mobile sales of Google Play content and
finally, it also includes the consumer spending on the Play apps. So with that and now why don’t I just jump
into our financial performance. Our total gross consolidated revenue grew 45% year over
year to $14.1 billion, and that’s also 15% quarter over quarter. Google standalone revenue
grew 19% year over year to $11.5 billion, 5% quarter over quarter. In that, our Google
website revenue was up 15% year over year to $7.7 billion, 2% quarter over quarter,
with strength across most major geographies and verticals. Our Google network grew 21%
year over year to $3.1 billion, and 5% quarter over quarter. And our other revenue grew 73%
year over year to $666 million, 52% quarter over quarter, and this driven by the Nexus
7 sales. Were it not for these currency fluctuations,
Google’s standalone revenue would actually have grown 24% year over year. As Larry mentioned,
Google standalone business continues to perform very well. The dramatic growth in our new
devices is driving mobile queries and clicks. And although it’s early days, some of our
existing ads have better monetization than desktop already today and we’re confident
that this transition opens a whole new space for innovation and new formats and future
monetization. Turning to MMI. Motorola gross revenue was
$2.6 billion. The mobile device division revenue for that period was $1.8 billion, and the
home division revenue was $797 million. But we’re really pleased with Motorola’s progress
in its first 150 days. As indicated in our public filings our team has made a lot of
operational changes. We harmonized and narrowed the product portfolio, it’s been streamlining
of software operations, and we’ve scaled back the markets in which we operate. With that said, we’re just at the beginning
of the Motorola Google story, and we should expect as I mentioned before, results from
this segment to be quite variable for quite a while yet. Remember, that we inherited an
entire product pipeline where hardware business cycles are typically in a 12 to 18 months. At Google our aggregate paid click growth
was very strong again this quarter, up 33% year over year, 6% quarter over quarter. Our
aggregate CPC or cost per click was down 15%, and down 3% quarter over quarter. But once
again, please remember that currency headwinds also had a significant negative impact on
our CPCs in Q3. In fixed FX terms, aggregate CPC would have been down only 8%, almost half
of the 15%, and down only 1% quarter over quarter. Turning to geographic performance of Google’s
standalone business, we continue to see robust performance in the US, the UK, and Japan.
On the other hand, we felt the continued impact of the economic situation in Continental Europe
where we’ve seen pressure in sectors like travel and retail. In our earnings slides,
which you can find on our investor relations website, you’ll see that we’ve broken down
our revenue by US, UK, and rest of world to show the impact of FX and the benefits of
our hedging program. So please refer to those slides for the exact calculations. Revenue from the US was up 23% year over year
to $5.4 billion. The UK was up 16% to $1.2 billion, which includes $6 million of benefit
from our hedging program, and in FX terms in fact the UK grew 20%. The non-US revenue
excluding the UK accounted for 42% of our total revenue or $4.9 billion, up 15% year
over year, but in fixed terms in fact was 26%, and all this includes a $56 million benefit
from our hedging program. Let’s come back now to an aggregate level
for total consolidated business. Our other cost of revenue was $3.6 billion in Q3, excluding
our stock based compensation. Non-GAAP operating expenses totaled $3.9 billion which again
excludes SBC and the restructuring and related charges recorded in our Motorola business,
and our non-GAAP operating profit was therefore $3.8 billion in Q3, resulting in a non-GAAP
operating margin of 27%. For Google standalone, our traffic acquisition
costs were $2.8 billion or 25.5% of total advertising revenue. Our other cost of revenue
was $1.6 billion, and that excludes $103 million of stock based compensation. The increase
year over year in this other cost of revenue was driven by data center costs, equipment
costs, and including costs associated with the sales of the Nexus 7, and finally content
acquisition costs. Non-GAAP operating expenses were $3.2 billion,
excluding again SBC of $585 million, and finally, our non-GAAP operating profit was $4 billion
in Q3, resulting in a non-GAAP operating margin of 34% for Google standalone. Lastly, many
of you have asked for depreciation and amortization expense on PPE for standalone Google, which
was $465 million for this quarter. If we flip to Motorola, our total non-GAAP
operating expenses including cost of revenue totaled $2.7 billion for the quarter. And
keep in mind that intangible amortization expenses attributed to the standalone Google
and Motorola are included in these non-GAAP measures. As a result, the non-GAAP operating
loss at Motorola was $151 million for Q3, resulting in a non-GAAP operating margin of
6% for that segment. Let’s switch over to headcount. For the consolidated
business it decreased by roughly 1,000 in Q3. Standalone Google added about 1,800 people.
Remember that historically, we often see some seasonal effects on the hiring in Q3 as folks
that we hired in the spring and early summer actually start working in September. In total,
the consolidated Company ended up the quarter around 53,500 full-time employees. Our effective tax rate for this quarter was
22% in Q3. The changes from last quarter reflects the mix shift in earnings between domestic
and international subsidiaries and our hedges. But finally, fewer capital gains offsets versus
last quarter. If you allow me to turn to cash management.
OI&E, or other income and expenses was $63 million, which reflects the continued impact
of our FAS 133 expenses of our hedging program, but also fewer capital gains versus last quarter.
For more detail on OI&E again please refer to the slides that accompany this call on
our IR website. Operating cash flow was very strong, $4 billion.
CapEx for the quarter was $872 million versus last quarter’s $774 million. The majority
of our CapEx spend continues to be related to production equipment and facilities related
purchases. All this actually delivers us a free cash flow which was $3.1 billion, which
we were quite pleased. The success of our product really gives us
the confidence to continue to fund the strategic growth areas, areas that Larry talked about
such as Search, YouTube, Android, Chrome, and as always we continue to show our discipline
making the tough calls on products that just don’t live up to our expectations. In Q3 we’ve
seen a number of these decisions including the sunset of our Google TV ads as an example. With that I’ll hand it off to Nikesh, who
will cover more detail on our business performance in the quarter. After his remarks, we’ll open
up the phones for Q&A. Nikesh, here’s to you.>>>>Nikesh Arora, Google Inc – SVP and Chief
Business Officer: Thank you, Patrick. I’d like to reiterate what Patrick said. Our
business had a strong quarter with $11.5 billion in Google standalone gross revenue. I want to talk to you about our focus and
progress on four major trends that are actually helping drive our business growth. First,
the trend Larry already talked about, the rise of the multiscreen consumer. This is
creating huge opportunities for us especially in our Advertising business and focus on video
and mobile. At the moment everybody thinks about the online world as divided into Desktops
and Mobile. Larry shared the amazing $8 billion run rate. We believe in the medium term these screens
will continue to diverge, but our advertising opportunities will converge to allow our marketeers
to run common campaigns across all these screens. Our teams have been putting the same focus
on mobile and video the last few quarters that we brought to Display a few years ago,
and it’s rewarding to see it bear fruit. We’ve intensified training for our sales teams across
the globe, integrated sales tools, so we can really bring our customers’ mobile video,
Search, and Display as a cohesive solution. We’re also educating our advertisers through
initiatives like Go Mobile to ensure they have the right creaters and landing pages
to make mobile truly work for them. However, we feel the progress we have made is just
the very first step in a journey of monetizing many screens Larry talked about. As we develop
advertising that can take advantage of the context in which consumers use this many screens
we expect to continue to see better monetization. As we help marketeers reach consumers closer
to the point of purchase, the opportunities will only get bigger. We’re already seeing glimpses of this. Take
T-Mobile, who use location based mobile ads to drive people nearby into their stores,
and in their words, win the last 10 feet. They achieved a click-through rate of about
13%, in what is a very successful strategy. These rates are three to four times of what
you would see without using some of these context. Our click-to-call ads work because
consumers can respond by contacting an advertiser immediately from the ad, generating approximately
20 million phone calls per month for clients through our various call products of advertising. The second trend which I’m excited about is
it’s not just the context that matters, but also our ability to deliver more precise answers
to consumers, something also that Larry talked about. We’re working very hard on this. Larry
talked about Google Now and Knowledge Graph. It’s exciting to see how that even makes opportunities
for us happen, as Search becomes smarter in the commercial environment. We can do a better
job of connecting marketeers with consumers in the moments that matter. Irrespective of
what device they’re using. For example, we’re pleased that as of yesterday
Google Shopping completed its transition to a fully paid model based on product listing
ads. Now we’re providing product information, pictures, pricing, local inventory information,
over 1 billion products from tens of thousands of merchants in over 100,000 sellers. So the new Google Shopping experience, Adorama,
one of the US’s largest photo retailers and mail order suppliers saw their click-through
rate jump by 176%. Their conversion rate went up by 100% in June as compared to year earlier.
Using the same technology that powers our Knowledge Graph, we’re providing better answers
with Google Shopping in other areas where users want to make a purchase. We’re going
to reduce the number of steps from Search to transaction, making the online experience
even more valuable to consumers and marketeers. The third trend, which I’m excited about is
that we’re actually making real headway amplifying offline ad campaigns with online media. We
have a unique approach that helps advertisers succeed across media. We allow them to use
and leverage the attributes of each media and adapt their campaigns for online success.
YouTube, energized by new professional content and display are the core of this business
helping clients increase awareness, increase capability, and also drive engagement. In addition we also continue to make progress
on our end-to-end technology platform to help advertisers of all sizes succeed with display
advertising. Today, our top partner is the agency world and very large advertisers and
publishers are using a consistent technology stack. The number of impression that’s we’ve
been able to pass through AdX and Invite platforms have doubled over the last year. We’re also working on creating more video
premium inventory with our channel strategy on YouTube. As more and more viewers move
to online video, we expect more and more brands will do the same. Our Brand business is actually
creating quite a buzz in the industry because we have great media and our solutions really
work. For example on YouTube we looked at about
92 different ad campaigns with sales impact. We found that on average spending on YouTube
was approximately 2.4 times more efficient than the equivalent television spend. We have
200 times more video advertisers than the average US television network. Our TrueView format in which advertisers only
pay for ads that users watch has really taken off. We have twice as many advertisers using
TrueView as last year. That’s a very important statistic but like any good brand marketeer
the best way for me to tell you a story is to actually show it. Let’s see what two of our leading brands have
done this quarter. We launched the YouTube Gillette Football Club at Procter and Gamble
in Europe. We’ve created global brand platforms with Gillette that will reinvent the way people
watch football online. The campaigns have generated over 30 million video views. We’re working with Coca-Cola on their Vitamin
Water branding efforts. We’ve partnered to build a strategic music program leveraging
YouTube as a platform to anchor, distribute, and syndicate the video content. It’s particularly
exciting to see that over 100 brands now have over 1 million followers on Google+, including
ESPN, Playstation, Ferrari, H&M, Burberry, [Terido]. Last trend I want to talk about is the trend
of cloud computing and the enterprise. Our enterprise business continues to thrive. We
saw especially great traction in retail and education sectors this quarter with Dillard’s,
Kohl’s, and Office Depot all using Google enterprise products. In education, there are
over 20 million students, faculty, and staff now on Google Apps, including Princeton, Virginia
Tech, and even the Philippines Department of Education, which has over 600,000 users. With the recent launch of Google+ for enterprise
customers, organizations of all sizes, including (inaudible), are starting to use our hangouts
and other tools to work together and get things done from anywhere. In addition to all these
trends our marketing team continues to do an excellent job. We launched a global cross
product initiative to bring the 2012 Olympics to our users worldwide. YouTube streamed games
live to 64 countries. Also YouTube was the official live streaming provider with over
1 million hours of live content for the Democratic and Republican National Conventions. We passed yet another milestone just this
week when YouTube broke its own record to reach more than 8 million concurrent live
streams of Felix Baumgartner’s record breaking leap from space with the Lego Stratus mission.
So with that as an update, I’m going to hand you back to Patrick.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Thank you, Nikesh. Jennifer, if you’d like
to tell us the rules, we’ll just get on to the Q&A, please.================================================================================
Questions and Answers ——————————————————————————–
>>>>Operator: (Operator Instructions) Ross Sandler, Deutsche Bank.>>>>Ross Sandler, Deutsche Bank – Analyst:
Nikesh, one quick question on revenue and Patrick, one on expenses. The international
rest of world organic growth was 26%, pretty strong, but down from 29% last quarter. Was
there any incremental weakness that you saw or was this just mostly from a tougher comp? And then Patrick, your sales and marketing
expense was up 18% from last quarter. That’s a bit higher than the typical increase in
3Q. Can you talk about what’s driving up those investments? Thanks, guys.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Okay. I’ll start. Nikesh and I are pointing
at each other. On the marketing expense, listen, I think what you see is the impact of the
support for the Nexus 7 that we launched in Q3. Otherwise, everything was pretty much
in line with what we would expect. We just got such a great review of the Nexus 7, we
wanted to support it in the market. That’s the biggest delta you’ll see in that number.
In terms of the market, I’ll hand it over to Nikesh for his commentary.>>>>Nikesh Arora, Google Inc – SVP and Chief
Business Officer: I think it’s fair to say that our revenue
growth internationally has been pretty strong. You are seeing some pockets of difference
in performance, partly because of seasonal reasons and partly because the continuing
economic effects you’re seeing in Europe. Our business is doing better than the economy
in most markets in Europe, but it does get impacted a little bit with some of the fluctuations
you see there. From our perspective there’s not any cause for concern.>>>>Ross Sandler, Deutsche Bank – Analyst:Thanks,
Scott Devitt, Morgan Stanley.>>>>Scott Devitt, Morgan Stanley – Analyst:
Was wondering, could you talk a little more about the strategy behind the decision to
monetize product listing ads? And then more broadly about the retail strategy for the
Company? And then secondly, Google website revenue net of distribution tax slowed to
13% from 20% last quarter. I was wondering if possibly you could, Patrick, normalize
that for currency to get a better understanding of FX-neutral for website growth? Thank you.>>>>Larry Page, Google Inc – CEO:
Scott, this is Larry. I’ll take the question about the strategy and product listings. I
think we’re just really excited about providing a better experience for our customers, and
when they search for something I mentioned Ugg boots on the call, when you search for
that, I think you should get a well-organized set of product information, ways to buy it
and really have a great experience there. And we see our ability to do that on the ads
or monetized product listing side is really helping us provide a better user experience
and provide a better advertiser experience. So I’m very excited about that. I think we’re
still in the early stages of that. We just launched that yesterday really and we still
got a ways to go. So I’ll let Nikesh or Patrick take the next question.>>>>Patrick Pichette, Google Inc – SVP and
CFO: On your question relative to our Google site
[intact], I’m not — could you just repeat your question? I’m not sure I understood what
you meant.>>>>Scott Devitt, Morgan Stanley – Analyst:
I’m trying to understand better you suggested the 600 basis point effect from currency.
Was just wondering if there’s a better way to understand the way that currency affected
the Google site revenue, if I should think of that any differently than the overall currency.>>>>Patrick Pichette, Google Inc – SVP and
CFO: I see. So no, I mean, we have — our network
is slightly skewed to the US versus our Google site. So you’ll have some mix effect there
because our network is slightly skewed to the US. But overall I think it still gives
you a good sense of proportion as to what is going on in the market. That’s the way
I would kind of think about it from a model point of view.>>>>Larry Page, Google Inc – CEO:
Let me just add also on the first part of the question, I think we’re really trying
to provide answers to people, and so as a strategy for the Company, really are looking
at very detailed information and giving you the exact right answer. That’s what we’re
doing with knowledge cards and in Search and we want to do the same thing also with our
advertising, make sure that we get you as a user the right answer, and I think that’s
a very exciting sort of new strategy for us.>>>>Scott Devitt, Morgan Stanley – Analyst: Thank you.>>>>Operator: Mark Mahaney, Citi.>>>>Mark Mahaney, Citigroup – Analyst:
Two questions, please. Mobile searches are really strong. What’s happening with desktop
searches? At some point it’s probably reasonable to assume that they flat line. Have we already
reached that? On the expense side if we just look at core
Google, it looks like margins are coming down. But if you did roughly $200 million maybe
in Nexus revenue. If you really sold those devices at cost, then margins are actually
better than they’ve been in two years. Which is the more accurate interpretation? Thanks.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Let me start with the margin. Then I’ll answer
your first question. On the margins you actually have a couple of effects this quarter. One
of them is clearly as you said the cost of the Nexus that will flow into our other cost
of revenue. But also, it’s the first time that you have the full quarter effect of the
amortization of intangibles from the Motorola transaction. So that is also another big kind
of lever that actually kicked in. It should be noted just for the financial
community that the amortization of intangibles for Motorola flows to both the Google segment
and the Motorola segment in different proportions. So again, it’s pretty tough, as I promised
you that we’d have a lot of kind of noise in the data, I think that that’s a good set
of indication. For the first one, why don’t I let Larry give a few comments on the issue
of mobile.>>>>Larry Page, Google Inc – CEO:
I guess I feel like you’re asking the wrong question a little bit. I think we’re really
starting to live in a new reality, one where the kind of ubiquity of the screens helps
users really move from intent to action much faster and more seamlessly. I think this will
create a huge new universe of opportunities for advertisers where they can focus on platform
— focusing on platform-specific queries won’t make as much sense because advertisers will
be dynamically adapting across a whole bunch of different devices to reach the right audiences
at the right time. That’s kind of how we’re thinking about it.
I alluded to changes that we’ll make to our ad system, to improve the advertiser experience
and the user experience around that. And I also think that we’re just seeing tremendous
growth in Android, which really obviously we have tremendous ability to influence and
to improve the user experience, to add location, to notify you of things, as I mentioned around
different kinds of noncommercial experiences. We can notify you of commercial experiences
as well. So I think that’s a really big and great opportunity for us. And I also said that monetization on mobile
queries right now is a significant fraction of desktop. So we’re kind of living the best
of both worlds. We’re able to move our existing ads and our existing monetization over to
mobile, and we’re also able to really innovate using Android and our strength of having ads
on other mobile platforms and really move advertisers and consumers into a new world.
So I think we’re uniquely positioned to get through that transition and to really profit
from it. So I’m just incredibly excited about that.>>>>Mark Mahaney, Citigroup – Analyst:
Thanks for the correction, Larry.>>>>Operator: Carlos Kirjner, Sanford Bernstein.>>>>Carlos Kirjner, Sanford C. Bernstein
& Co. – Analyst: Two questions. If you run a website with proprietary
high-quality content today and had to choose a protocol to add metadata about this content,
why wouldn’t the clear choice be the Open Graph protocol instead of RDF or one of its
variables? And if that happens then the semantic web arises on the back of Open Graph. Doesn’t
it place Google at a fundamental disadvantage to achieve the vision that Larry laid out
at the beginning of the call? The second question is what do you think is
the future of vertical search and why is that there are sites that specialize in certain
verticals such as travel and local that seem to do a better job than Google today? Is this
going to change over time? What happens with vertical search? Thank you.>>>>Larry Page, Google Inc – CEO:
Carlos, I’ll take those questions. I think if you — I’m not an expert on the protocols
you’re talking about. I think in general, we made a huge investment in Knowledge Graph
and really understanding in detail about everything. And that’s a major effort for us. We would
obviously love to have other people help us with that. I think it’s been a little bit
of a challenge in the past to get all the labeling aligned and all those things, so
I think we have a big part to play in that. We’re absolutely very excited about that and
I think we’re going to do a lot of work in that area. I think we’re doing well in that
space. Vertical searches, you asked about. I think
our goal has always been to get you to the right place. But we also to do that, we need
to really understand in detail your contacts, what you need, what’s really going on with
that information. If it’s airline tickets, what are the flights between, what do they
cost, products. Someone selling, we need to know how much they cost, again what the shipping
is, and so on. So I think any place we can get that information accurately, we can present
it to our users, we’re very happy to do so. In general, we found that we’ve needed to
really build more of that experience in order to provide a really high quality experience
to our users but again, we’re always hoping also to working with partners.>>>>Carlos Kirjner, Sanford C. Bernstein
& Co. – Analyst: Thank you.>>>>Operator: Ben Schachter, Macquarie.>>>>Ben Schachter, Macquarie Research – Analyst:
One question for Larry and then a couple of housekeeping points on the Apple relationship
for Patrick. Larry there’s a lot of talk about internet use on mobile devices. But switching
gears a little, I was wondering if you could talk about the potential for internet access
on television screens and how Google might benefit from that. And then Patrick, just two quick housekeeping
questions on Apple. One is 100% of the TAC that you pay Apple recognized in the
TAC line. And then on the iOS 6, there’s a seemingly small change in the default search
bar where it now says the word Search whereas it used to say Google. How does, if at all,
that change the economic relationship between Apple and Google? Thanks.>>>>Larry Page, Google Inc – CEO:
Okay. So Ben, thanks for the question. Obviously we’re excited about television, television
screens, displays and we have been for a while. We’ve had Google TV, as a product for quite
some time. I use it. I love it. I think it’s great to have a real browser available on
your television and easily access YouTube and all those kind of things. YouTube is integrated
on many, many devices, from DVD players and so on to game consoles and things like that.
So we obviously are working hard to get distribution for YouTube, for Chrome, for the internet
as a whole on television screens as well as our own products and we’re very excited about
that. I think we’re obviously still in the early stages of that, it’s not that everybody
has a great user experience. And we’ll work hard to make that happen.>>>>Patrick Pichette, Google Inc – SVP and
CFO: On the — sorry, just want to talk about the
TAC line. Just to say that, yes, I mean, obviously all the TAC that we pay to Apple is just another
partner for distribution. So it all is tied to our — the TAC line that we have for
On your question of the default, all it is — nothing changed. We’re a great partner
with Apple. We’re a great partner with many of them. In doing so when you do a search
we have — the fact that they’ve changed from Google to Search is still kind of ran by our
engines, so I hope that clarifies the point, Ben.>>>>Ben Schachter, Macquarie Research – Analyst:
Thanks.>>>>Operator: Anthony DiClemente, Barclays.>>>>Anthony DiClemente, Barclays Capital
– Analyst: Sorry to harp on the CPC question but you
mentioned them being down 8% ex-FX. Can you just, Patrick, talk a little about the other
drivers. I think everybody assumes that the bulk of the down 8% is mobile but I know there
are other factors driving that down 8%. So if you could just kind of give us order of
magnitude, emerging markets and so forth if possible. Secondly on allocation of your sizable free
cash flow and on your cash balance, Patrick, in the past you’ve talked about reviewing
and considering capital returns at the Board level and at the same time you’ve talked about
your cash balance being a strategic asset for Google. Just wondering if you could give
us an update on yours, on Larry’s, the Board’s thinking on allocation of capital and use
of your cash balance. Thanks for the questions.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Yes, listen, on the CPC trends, nothing has
changed from the last few quarters. In fact, I think people have a tendency just to harp
and assuming that it’s automatically mobile. If you look through our results just to kind
of point to a few areas, if you look at our mix between our Google properties and our
network, our network grew quite a bit again this quarter, and that would drive a lot of
TAC as well. Again, that’s the reason why I kind of want to educate and remind everybody
that just all of these mix effects, whether it be mobile versus tablet versus desktop
but also emerging market versus developed markets and also our versus network.
We haven’t even talked about the changes in our ads quality which actually can change
quite a bit as well. So I think that that matters a lot. And I think that it’s really
important that we understand that all these mix effects are actually playing — are at
play there in the CPC. So rather than — that’s why we don’t give
— if we start giving out all the breakdown, it’s just endless. For us the real issue for
us is what really matters is they’re going down but on the flip side of that, given all
these mix issues, what we really see is our paid clicks going up at a pretty healthy rate,
at 33% again this quarter, which actually gives you a sense of people are engaged, people
are using our products, it’s really about this transformation to multi-devices. The
fact that there’s a little bit less CPC is not a concern compared to all the upside that
we see on the other side. On the issue of our cash and capital balance,
I think you get the same answer. Maybe Larry wants to kind of chime in if he wishes to.
We just review this on a constant basis. We ask ourselves the question, is there real
options for us actually to use the cash from a strategic perspective, and we’ve come to
the conclusion that it is a real strategic asset for us right now with the ability to
pounce. We think it’s prudent to actually manage our capital structure the way it is
as we speak.>>>>Larry Page, Google Inc – CEO:
Nothing to announce at this time.>>>>Ben Schachter, Macquarie Research – Analyst: Thank you very much.>>>>Operator: Heather Bellini, Goldman Sachs.>>>>Heather Bellini, Goldman Sachs – Analyst:
I have two for Patrick and then one for Larry. Patrick, I’ll start out with yours first.
Can you give us an idea of the run rate that you’re talking about, the $8 billion for mobile,
can you give us and idea of what that is on a kind of same store sales basis. You gave
us the $2.5 billion run rate last year. What is the mobile advertising piece? I think that’s
something people are really interested in, so ex the stuff from Google Play. The follow-up question I had for you was what’s
the margin profile on the Google Play content revenue that you’re recognizing? And then
the question for Larry is I guess in listening to Mark Mahaney’s question I was wondering
in this new reality you mentioned in response to his question, how does Google Fiber play
into this vision to have your content and search capabilities go across multiple screens?
Thank you.>>>>Larry Page, Google Inc – CEO:
We’ll let Patrick take the first part.>>>>Patrick Pichette, Google Inc – SVP and
CFO: On the $8 billion, so let me give you just
a bit more information on it. But clearly we don’t break down each of the categories.
We just wanted to kind of give you a sense of proportion. A point that’s important is
of the three categories I gave you, ads continues to be the bulk of it, the vast majority of
it. And then on the case of the Google Play, it’s important to note from a modeling perspective
that the — everything that’s content, that is whether a book, a movie, content is actually
booked on our books on a gross basis. Everything that is tied to apps is booked on a net basis.
But it’s still a huge kind of number in all cases. So without giving you — I just wanted
to give you that so that you don’t start thinking that there is actually $8 billion that is
booked to revenue in our results that you see, but in fact two of the three are there.
The third one is done on a net basis just because of our accounting rules. So and the
vast majority is still ads.>>>>Heather Bellini, Goldman Sachs – Analyst:
Can you just give us a sense of the margin profile on the non-ad piece?>>>>Patrick Pichette, Google Inc – SVP and
CFO: We don’t provide that. We don’t give any details
of that. Clearly, it is a different profile because it’s content. So we have partnerships
that we deal with.>>>>Heather Bellini, Goldman Sachs – Analyst:
Great.>>>>Patrick Pichette, Google Inc – SVP and
CFO: On the case of — why don’t I turn it over to Larry to talk about Google Fiber and
role of TV.>>>>Larry Page, Google Inc – CEO:
Heather, it’s a great question. I think on the Google Fiber I think we’re in the early
stages. Just rolling it out in one city or two cities that are one city. And we’re really
excited about it. I’m excited about the user experience there. In fact, I think I’m about
to get one soon for my house to try out. You control it with a Nexus 7 tablet, actually.
That’s the remote for it. I think it will be an amazing experience from a user standpoint,
one that can really drive that industry forward. So we’re quite excited about that. Like I
said, we’re in the early stages, obviously of rolling that out.>>>>Patrick Pichette, Google Inc – SVP and
CFO: It’s worth just to close on that, it’s worth kind of noting also that we are pushing
for the next chapter of the internet in the US with Google Fiber. People — there’s such
a demand for higher speed access at reasonable prices. I think that we’ve got a great mouse
trap with Google Fiber and we hope it excites everybody and promote the environment that
will actually give us that kind of connectivity in the US and elsewhere as well.>>>>Heather Bellini, Goldman Sachs – Analyst:
Thank you.>>>>Operator: Douglas Anmuth, JPMorgan.>>>>Douglas Anmuth, JPMorgan – Analyst:
Just wanted to ask two questions. First, just following up on Scott’s earlier question,
we saw deceleration in Google properties, then an acceleration on network sites. Hoping
you could talk about it a little bit beyond the US and international mix, is there anything
else that you would attribute those dynamics to? And then secondly you’ve talked a lot about
multiple screens and the ubiquity of devices. How concerned are you that in a mobile world
behavior is different and we’re living in more of an apps-based environment and Google
might not be that starting point for people on mobile devices? Thanks.>>>>Larry Page, Google Inc – CEO:
Thanks. That’s a great question, Doug. I’ll take the second one first. I think a lot’s
been made of that. I don’t think that’s really true. Kind of apps versus Search. We obviously
have a great position in apps. We have the Android Play Store, which has a huge number
of apps. And I think that those experiences are great experiences and there’s some things
that are better than them about the web, there are some things that are better than the web
other than apps. I think over time, if we do our jobs right, you’ll have the same capabilities
in both places. You’ll have searchability in apps. You’ll be able to more easily go
to apps the same way you would go to web pages and so on. I think those differences will
merge or be reduced in ways over time. I think we obviously have a strong position
in both. So I’m not so worried about that. I think that there’s obviously innovation
that goes on in mobile and we talked a little bit about all the different contacts to location
you can have on mobile, the fact that you’re always carrying a device with you and those
things are very powerful. You want all that when you’re on desktop as well or on the web.
You want that same information. And so we want a seamless experience that goes across
both mobile and desktop and TV or whatever screens you have. And that’s what we’re building.
I think that we’re going to see tremendous growth in these things. The other point I’d make is that there’s a
small — relatively small number of people right now that have Chrome on their mobile
devices, and I find Chrome on my mobile device is like the same as having a desktop computer
a year ago or something. It’s an amazing experience. You can buy things. It remembers your credit
card numbers. It’s a very, very easy, great experience. That’s rolled out to a relatively
small number of people but it will be increasing quickly. So I guess just seeing all those
trends I think it’s a tremendous opportunity for us and I don’t think people are really
thinking about it correctly now. So Patrick, do you want to cover the detailed question?>>>>Patrick Pichette, Google Inc – SVP and
CFO: With pleasure. Look, just to reiterate, that
our Google website revenue was up and with strength across most geographies and most
verticals. Obviously you’ve heard Nikesh talk about we can’t control the economy in the
short term. If there’s a country that is slowing down a little bit then we clearly see it in
the results as well because Google is actually a pretty good predictor of the present as
our economist, Hal Varian, kind of reminds us. Then on the Google network, I think we’re
just really pleased with — it’s skewed slightly more to the US but really pleased with the
performance overall with all of our networks, that’s been performing well. So nothing additional
to kind of highlight apart from just good, general trends.>>>>Douglas Anmuth, JPMorgan – Analyst:
Thank you.>>>>Operator: Richard Kramer, Arete.>>>>Richard Kramer, Arete Research – Analyst:
I’ve got some — one question for each of you, if I may. For Larry, if you could just
expand a little bit more on YouTube and maybe provide not only some metrics but really your
maybe three to five year vision of its role in video distribution between Google TV and
the Fiber project and some of the other options? For Nikesh, could you talk a little about
emerging markets and where Android really is the dominant and only scale mobile computing
platform? And what might drive that to show faster international growth? Is it adding
salesforce or purchasing power or something else? And then maybe Patrick, could you help us
understand a little bit the FX headwind on the top line, how it might have been expressed
moving down the P&L especially in sort of net profit terms? Thanks very much.>>>>Larry Page, Google Inc – CEO: Richard,
that’s a great question on YouTube. I’ve had and mentioned Google TV for a while. I think
recently YouTube transitioned for me maybe a year ago to being really something that
could keep me entertained for hours on the TV. It can play back lots of really high quality,
highly exciting things. They’re now kind of tailored for me. I have my channels. And so
on. And I think we have tremendously increasing YouTube usage, continues to grow like crazy,
and we’ve had increasing monetization as well, which causes people to put more content on
it and to monetize it worldwide, in the blink of an eye you can put something up. The recent
video with the horse dancing, Gangnam Style. I’ve been watching, it has 400 million views
now. Sorry, 500 million now. I’m out-of-date. That kind of thing to really just flip a switch,
turn it on, get a worldwide distribution and sort of almost without doing any work, if
you’re a provider of this content is an amazing thing and I think that’s how we see the future.
We’re just going to continue to grow that. YouTube’s going to be available everywhere
on your mobile, on your TV, on your desktop, whatever, wherever you want. It’s going to
keep track of the kinds of things you’re interested in and really provide you an amazing experience
and provide a great experience for the advertisers. TrueView is exploding which gives us high
quality ads from an end user standpoint. Because they can skip them if they want so it encourages
ads that are actually entertaining, not annoying and that’s been working. We’re making money
with that and it’s growing like crazy as well. I couldn’t be more excited about all that.>>>>Nikesh Arora, Google Inc – SVP and Chief
Business Officer: Thanks, Richard. As far as the emerging markets
and Android, I think we’re very excited about the fact that Android is becoming a very successful
platform in many markets outside the US, not just the US. I think in terms of what drives
— I’m not sure if your question is about faster growth of Android or faster growth
of monetization on Android platforms. I think on both of them we’re seeing the adoption
in various markets where OEMs are producing Android devices on the bleeding edge and doing
a phenomenal job of working with operators in those markets and distributing them. We
think that will continue because Android is providing to be a great platform for innovation
for all the OEMs. In addition to that, as more and more people
use mobile devices, I think we’ve talked a lot in this call about how as mobile devices
are being used we’re seeing increasing query growth and we’re seeing our various new ad
formats and ads where we bring context into account, it’s actually helping us monetize.
I think both those trends are going in the right direction, hopefully that provides more
opportunity for us.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Let me close on FX. So Richard, just two points.
One is, it’s been interesting in Q3 the US dollar has really weakened versus a whole
host of currencies, so typically you have one currency that goes down, another one is
more stable. We’ve really seen it across the board, it just happens with the macroeconomic
trends, something you can’t predict so it’s been across the board. And without giving
you the details of how it flows to margin, it is fair to say and we’ve already talked
in the past that our operating expenses are skewed to the US. Mountain View is the headquarter
and so from that perspective it has some effect as well. I think you can navigate through
this. It was definitely a significant impact for this quarter.>>>>Richard Kramer, Arete Research – Analyst:
Okay. Thanks.>>>>Operator: Justin Post, Merrill Lynch.>>>>Justin Post, BofA Merrill Lynch – Analyst:
On a high level, I just want to know, searches on mobile the same quality in your estimate
as PC, meaning are you still getting good, high CPC travel and e-commerce searches on
mobile? Second, maybe you could talk a little about the roll out of Google product search,
seeing those ads definitely in core search results and could that have an impact in Q4? And then maybe some detail on the hedging
program. This is one of your worst year-over-year hedging — I’m sorry, one of your worst year-over-year
FX impacts, down $500 million, and yet you get a $62 million benefit and I think you
disclosed the cost was $124 million. Is there something you can do to kind of improve that,
the ratios there, and not spend so much and get a better benefit when FX is this negative?
Thanks.>>>>Larry Page, Google Inc – CEO:
Justin, thanks for that question. I don’t know the details of particular queries on
mobile versus desktop. But I can tell you I think like for example in travel, we bought
ITA Software for a sizable amount, because we thought it was important to provide a better
experience there. When you type cities and you want an airline ticket, you know you actually
need that detailed information. And so I think I’m not worried about any of that to the extent
we provide a great and amazing user experience for people, who when they’re looking for all
types of different kinds of information, as long as we’re providing, again, that very
detailed, very organized set of results for people, I think that translates across all
of your screens just fine. Nikesh or Patrick, do you want to — ?>>>>Patrick Pichette, Google Inc – SVP and
CFO: I can jump in onto the FX issue if you don’t
mind. I think it’s interesting your question, Justin, but let remind ourselves of a couple
points. Because I think our FX program has actually delivered amazing value to shareholders.
One is we don’t hedge revenue. We hedge profits. And we hedge a number of kind of major currencies
like the euro, the pound, Canadian dollar, a few others, which is the core of our program.
So not only that, but actually our hedge program is set and designed for long terms kind of
18 months as a risk reduction strategy and doesn’t necessarily correlate in any way,
shape or form for a three month time frame in our financial results. And it’s really
also built to make sure because you’ve got a cost benefit ratio there of making sure
that it’s set for big dislocations. So if it’s a small variance in the short term, you’re
not going to get as much benefit as a big dislocation. For all these reasons, and then what I mentioned
a bit earlier which is we’ve seen actually FX across a whole slew of currencies this
quarter, which the smaller currencies just added up and we don’t hedge for them today,
that’s what kind of ended up in the puzzle. We are constantly looking at our forecast
and if it makes sense we’ll actually throw in new currencies going forward. That’s been
the story on FX. I wouldn’t read in any way, shape or form that it hasn’t performed well,
it’s performed very well. Why don’t I turn it back over to Nikesh for the last question.>>>>Nikesh Arora, Google Inc – SVP and Chief
Business Officer: In terms of the product listing ads as we
talked about we’re really excited that we actually went on a full rollout for product
listing ads. As we said, we have a billion products that are in there. As we have all
searched, as Larry has talked about getting more precise information, we believe that
users when they search, they come exploring on the web, when they have a better idea of
what they’re trying to buy, they start expressing intent about being more precise of what they
ask for. We believe being able to show product listing ads gets us closer to intent, because
when somebody types Nikon D800, then we know they’re looking to buy or looking to get more
information about a specific product. The fact that we can show them reviews, pictures,
and pricing information gets us closer to action. We believe in the medium term that’s
going to create more monetization and a better monetization for us as opposed to having just
10 blue links or ads which send them to other websites. I think that’s going to have a good
impact in the medium term. I don’t think I’m going to comment on whether that has an impact
on Q4 or not.>>>>Operator:
Brian Pitz, Jefferies.>>>>Brian Pitz, Jefferies & Co. – Analyst:
Larry, bigger picture question on your mobile comments. Would you give us a rough sense
of how long it could take to close the bulk of the gap between desktop and mobile monetization?
Is this a matter of quarters or years that we’ll see that come together? And then maybe
just — you made a quick comment on travel weakness. Last quarter I think you said travel
was strong across the board and then you came back today and said it sounds like that was
a weaker category, just any more color on the weakness in travel. Thanks.>>>>Larry Page, Google Inc – CEO:
Thanks, Brian, for the question. We have kind of a policy on not talking about the future,
so I think it’s been generally a good policy. I tend to be very impatient and I think I’ll
kind of reiterate what I said. I think that we’re positioned well, very, very well, and
uniquely well because we have already a very significant fraction of monetization on mobile,
and that’s a great start and we’re working on changes on how we do things. We’ve been
investing in the space for a long, long time. Our mobile monetization is not zero. It’s
a very significant number as we tried to [hand toss] with the $8 billion number. And I think that we’ve got a good base there
and I don’t think that things we need to do are that huge to get us in a very good spot
and I think we have opportunity to be higher monetization than where we are now with some
innovation which we’re good at doing. Like I said, I’m very impatient and I think that
the other point I make I guess that I hadn’t made already. I think that advertising — advertisers,
our ad system requires they spend some effort to deal with mobile in general. I think advertisers,
mobile until very recently has been a relatively small percentage of advertising spend for
most advertisers. I think that’s starting to be no longer the case and that’s happening
relatively quickly. And I think advertisers will also react to that and you’ll see them
invest more effort in targeting those users running ads for them and so on which will
obviously benefit our monetization there. So I think we have a lot of trends working
for us. So I am not worried about this in terms of our business at all. I think it’s
more of an opportunity for us because we’re better positioned than most other companies.
I guess it’s your all’s job to estimate short-term impact but like I said I’m quite impatient.>>>>Patrick Pichette, Google Inc – SVP and
CFO: If I could close on just travel. Obviously
there’s a couple of factors in there. One of them is clearly there is seasonality in
travel, so obviously that’s always an impact quarter over quarter. And then as we read
the same news you read about Europe or other parts of the world that are in different economic
situations, you will notice that if you kind of track Google trends and you go in and mine
into the data you’ll see that some sectors are performing better, others are not. As
I mentioned in my commentary at the very beginning, travel and retail has been somewhat weak in
Europe, just given their situation, so no real surprises there, Brian. Thank you for
your question. Just before we close, I just want to take
10 seconds on behalf of Nikesh, Larry, and myself, thank again the amazing work of our
Googlers, all of our employees, all of our partners. What an amazing last 90 days it’s
been both at Motorola and Google. I’ll let Larry close with the last words before we
turn it over to Jennifer to close the call.>>>>Larry Page, Google Inc – CEO:
I want to thank all of you all for spending so much time with us and following us and
doing your analysis. With that, I’ll close the call.>>>>Patrick Pichette, Google Inc – SVP and
CFO: Jennifer, we’ll let you close the call.>>>>Operator: Thank you. That does conclude
today’s presentation. Thank you for your participation.

Robin Kshlerin