Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Maria Shim - Investor Relations Manager

Eric Schmidt - Chief Executive Officer

Patrick Pichette - Chief Financial Officer

Nikesh Arora - President, Global Sales Operations and Business Development

Jonathan Rosenberg - Senior Vice President, Product Management

Analysts

James Mitchell - Goldman Sachs

Mark Mahaney – Citigroup

Benjamin Schachter - Broadpoint Am Tech.

Justin Post – BAS-ML

Doug Anmuth - Barclays Capital

Imran Khan - JP Morgan.

Brian Pitz – UBS

Spencer Wang - Credit Suisse

Scott [Davis] – Morgan Stanley

Sandeep Aggarwal - Collins Stewart

Jeetil Patel - Deutsche Bank Securities

Jason Helfstein – Oppenheimer & Co.

Gene Munster – Piper Jaffray

Mark May - Needham & Company

Youssef Squali – Jefferies & Co.

Marianne Wolk – Susquehanna Financial

Google Inc. (GOOG) Q4 2009 Earnings Call January 21, 2010 4:30 PM ET

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 Maria Shim, Senior Manager of Investor Relations. Please go ahead, Ma’am.

Maria Shim

Good afternoon everyone and welcome to today's fourth quarter and fiscal year 2009 conference call. With us are: Eric Schmidt, Chief Executive Officer; Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President of Product Management and Nikesh Arora, President, Global Sales Operations and Business Development.

Eric, Patrick, Jonathan and Nikesh will provide us with their thoughts on the quarter and full year and then we will take your questions.

This call is being Web cast from our Investor Relations Web site located at Investor.Google.com. Please refer to our Web site for important information, including our earnings press release, issued a few minutes ago, along with slides that accompany today's prepared remarks. A replay of this call will also be available on our Web site in a few hours. Please note that we routinely post important information on our Investor Relations website located at Investor.Google.com and we encourage you to make use of that resource.

As a reminder, we're holding two calls today. On this call we will discuss our strategic overview and Q&A with the usual format, followed by a second call, which is effectively an extended Q&A session with Jonathan and Patrick giving the opportunity for participants to ask more detailed financial and product questions in an efficient and Reg FD-compliant manner. The second call will begin at 3:00 pm Pacific Time and will also be webcast from our Investor Relations Web site.

Now let me quickly cover the safe harbor. Some of the statements we make today may be considered forward-looking, including statements regarding investments in our long-term growth and innovation, expected performance of our business and our expected levels 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 revision to these forward-looking statements in light of new information or future events.

Please refer to our SEC filings, including our annual report on Form 10-K for the year ended December 31, 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 Web site.

Also, please note that certain financial measures we use on this call, such as operating profit and operating margin, are expressed on a non-GAAP basis and have been adjusted to exclude charges relating 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 GAAP to non-GAAP reconciliation can be found in our earnings press release.

With that, I will now turn the call over to Eric.

Eric Schmidt

Thank you. Good afternoon to all and happy New Year. Welcome to our Q4 earnings call. This was a very strong quarter for Google and an extraordinary end to a roller coaster year by any means. 17% year-over-year revenue growth and we performed literally I think well across the board.

We learned a lot in 2009. The strength of our management team, the talent of our employees, the pace of innovation within our product and engineering teams, if you take a look at the investments we made for example in Chrome and Chrome OS that we announced over the summer, the resilience of our business model and advertising dollars are scarce measurement matters even more. We tended to benefit more than we might have expected and that is great. We are optimistic about the future as a result.

The economy continues to grow very rapidly. Specifically we are moving literally eyeballs of advertising online. We continue to benefit from that and our decisions to start ramping up our investments in Q3 which we talked about six months ago was clearly the right one so we will get the benefit of that in 2010.

So we continue to invest heavily for the long-term, investing in design to maintain and increase Google’s pace of innovation. So where are we investing? Well we are obviously going to invest first in people. Engineering, best technical, best researchers and so forth and product sales in key markets across the country in all the ways that we have talked about before.

The second investment is of course the technological innovation which is of course our core value proposition if we follow the 70/2010 which has worked so well for us. 70% in our established businesses; search with an emphasis on search quality as we continue on our quest which will never be fully realized to create the perfect search engine. We added, for example, real-time search in Q4 which has been very successful and more than 550 search quality enhancements in 2009, far more than one per day and it just continues to accelerate.

Search advertising shift online as I talked about lots of growth in our core business as a result of that shift. Display we have talked about before and is now a huge opportunity for Google. 60 quality improvements in our display ads in the last year. YouTube great progress with our [TEPB] and music deals in Q4 which has been discussed already in the press. Enterprise business again very strong. Terrific momentum there as people move to the web based model with products that work very well.

In the 20% area, newer businesses, these are newer businesses that fuel our search business. For example, mobile. Everybody knows about the success of Android, our search traffic increased 5 times in the past two years. The Droid and Nexus One show the power of the Android approach. Great devices, multiple partners, great features, [lost] for use cases. Again, a pretty clear success at this point.

We also have our 10% long-view investments. Here we are interested in things like commerce and social initiatives which Jonathan will talk some more about. A third component for 2010 will be our positions, the pace of deals in Q4 shows we are at least on a path of one per month. We should expect that to continue. Some big, more small than big probably and designed to build upon our existing business the most obviously being Teracent and Double Click.

We will also bring in new talent. If you look at like the Gizmo5 acquisition again. People with a unique expertise that we can use as part of our platform. So overall very pleased with the performance in Q4. We are back in business full blast and throughout 2009 if you look at it. We are investing heavily. We are excited about continuing to reinvent search which continues to be our core mission.

I think with that why don’t we turn it over to Patrick and he will take us through the numbers. Patrick?

Patrick Pichette

Thank you Eric. Good afternoon everyone. I will go through the financial results quickly and then turn it over to Jonathan and Nikesh for more details on our performance.

We had a very strong finish to 2009. We are very pleased with the Q4 results and that gives us, as Eric said, the confidence have turned our focus to the growth opportunities in 2010 already making already in the back end of 2009 the necessary and significant investments to pursue those opportunities.

So let’s go through the numbers quickly. Our gross revenue grew 17% year-over-year to $6.7 billion. Our business was strong across the board in search, display, apps and mobile. Nikesh will go into more detail on our performance in a few minutes on these matters.

Google website revenue was up 16% year-over-year to $4.4 billion. We saw strong growth on Google.com across the world boosted by a very strong retail season, the economic recovery in many of our major geographies as well as some favorable FX. We also saw some impressive growth in YouTube revenues. Ad sense revenue was up 21% year-over-year to $2 billion driven primarily by solid performance in ad sense for search, strength in ad sense for content and growth in our display initiatives.

Our global aggregate paid click growth remained healthy up 13% year-over-year and 9% quarter-over-quarter. The aggregate cost per click growth was also up 5% year-over-year and 2% quarter-over-quarter. Year-over-year CPC growth was also positively impacted by some of the FX. Remember too this is an aggregate number which includes both Google and Ad sense properties and also includes diverse geographic markets some of which have lower CPCs.

Turning to our geographic performance, revenue from the US was up 11% year-over-year to $3.2 billion. International revenue accounted for 53% of our total revenue or $3.5 billion with about $8 million of benefits from hedging programs this quarter. The U.K. was up 13% year-over-year to $772 million and this despite a weak account in Q4 2009 compared to last year. Finally using fixed year-over-year exchange rates our international revenues would have been roughly $196 million lower.

So let me turn to expenses. Our traffic acquisition costs were $1.7 billion or 27% of total advertising revenue. Our other costs of revenue were $688 million including our stock based compensation of $6 million and finally all other operating costs totaled about $1.8 billion including approximately $270 million in stock based compensation. So on a year-over-year basis our OpEx excluding SBC was higher by $138 million and up $172 quarter-over-quarter. The increase both year-over-year and quarter-over-quarter are primarily due to increases in marketing expense.

As a result our non-GAAP operating profit which excludes the stock based compensation increased to $2.8 billion in Q4 resulting in a non-GAAP operating margin of 41.3%. Our headcount was also slightly up at the end of the quarter approximately 20,000 full time employees and as Eric discussed we plan to continue to aggressively hire through this year particularly in engineering and sales.

Let me turn for a moment to cash management. Our other income and expense was $88 million in Q4. For more details on OI&E please refer to the slides that accompany this call on our Investor Relations website. Our effective tax rate for the quarter was 23%.

Turning to operating cash flow it was also very strong at $2.7 billion. CapEx for the quarter was $221 million again primarily related to our data center operations. We continue to make significant CapEx investments and these continue to be lumpy quarter-to-quarter depending on the timing of when we are able to make these investments. The net of all this is free cash flow quite strong at $2.5 billion for the quarter.

In summary we are very pleased with the strong performance of Q4 across revenue, margins and cash flow. As we enter 2010 we are very excited about the opportunities our core business, display, mobile and apps and so you should expect us to continue to drive real investment in significant ways in the areas we believe have real long-term opportunities for Google and that will accelerate our pace of innovation.

With that, thank you for your time. I will now turn it to Jonathan who despite you will hear quite a rough voice and a bad cold I can assure you he has all his regular expected energy.

Jonathan Rosenberg

Thank you Patrick. I will do my best. Naturally I think that part of our success this past year is the result of a very focused product strategy. At the beginning of 2009 our strategy was basically to double down on our core which was search, ad words and display and of course push on monetizing YouTube. We also wanted to invest in Chrome, Chrome OS and Geo and at the same time we made some very hard decisions to focus our resources. We shut down Lively, Notebook and our audio ads efforts.

Internally we referred to this as the “more wood behind fewer arrows” approach. I think it worked for 2009. As we look back Ad words launched a whole new front end and several new ad formats that I think you can see are delivering results. Android started 2009 with just one device and is now at 20 in 48 countries. I am proudly carrying the gorgeous new Nexus One in my pocket. Double click is not fully integrated and display is ramping nicely. We open sourced a whole new operating system designed for the Internet area with Chrome OS. We also saw a steady stream of small businesses, large enterprises and lots of schools link to the cloud. YouTube is in fact it turns out monetizing well and we are helping lots of our partners who are working with us there make money.

Most importantly search did particularly well in 2009. I think that might be the best example of what we feel we can do when we double down and focus. We launched 550 quality enhancements which Eric mentioned. We produced a much bigger and faster index. We expanded the capabilities of universal search and we added tools like the search options that let you work with your results to get to the best answer.

We also launched music search and real-time search which are pretty amazing. I don’t’ know if any of you are actually in Northern California but we had this 4.1 earthquake a couple of weeks ago and my office shook while I was in it. Two minutes later Google Search was showing me people’s Tweets from all over the bay area talking about the quake that had just occurred and within minutes I was looking at news reports and the USGS data on the same quake. This looks easy but we had to build dozens of new search technologies so we could process the hundreds of millions of real-time changes that occur each day to make it happen.

Eric mentioned in 2010 we are going to be investing so let me take a minute to talk about how we are thinking about making those investments. Of course we are going to pour a lot into search. The key there is always time to result. How fast can we get the user to the best answer for her or him whether that is a webpage, a map, a video, a twitter update or whatever it is. We are also going to work hard on making the ads richer, more diverse and more useful. We have talked about the single perfect ad and we mean that from the perspective of both the advertiser and the user at the same time.

Beyond search and search ads I think we see a few major trends that are transforming the Internet and I think we are in a great position to compete in those areas too. The first is social. When you say social I think people think of social networks but really we believe the entire web is social. So we are going to look at making all of our products more social. We think you are more likely to trust a restaurant or a movie review from a friend of yours than from a stranger. So maybe it should be rated as a higher quality result but only for you.

The Internet is also local and we see more and more of a business’s online presence is as important as its physical one so we are trying to make it easier for businesses to manage that presence and to connect with people who might actually be right around the corner and want to find them. The web has also always been about commerce and now more and more people who buy things offline are starting their shopping process and researching all that stuff online. We want to help those people decide what to get and where to get it whether it is offline or online.

Personalization is also getting more important and we think mobile is a big part of that. More users both for search and other products are accessing us from mobile devices. With all the capabilities these phones that are coming out have like GPS, cameras, we think there is the potential to actually make this mobile web better than the PC web. Finally the shift from enterprise to online will accelerate and now we think organizations are moving to the cloud not because they save money but because it is actually a better way to run the business. They can do things in the cloud they simply can’t do in the old desktop world.

So those are the trends that are guiding our product plans in 2010 and we think it is going to be an exciting year. We will certainly look forward to sharing our progress with you on future calls. With that I guess I will turn it over to Nikesh.

Nikesh Arora

Thank you Jonathan. This is an exciting quarter for us after a challenging year. 2009 started under a cloud of uncertainty but after three quarters of steadily improving performance I am pleased to report that we ended the year with a robust quarter in revenues.

Let me take a quick few minutes to provide details and some examples of how advertisers can and have better leveraged their online marketing to reach their audiences. The first macro trend affecting all of our ad driven businesses with the continued driving adoption of online advertising by larger companies. In these tough economic times we saw bigger companies like Staples, Volvo, UBSoft,[apple labs] etc. turn an increasing proportion of their spend to what is a more measurable ROI of online advertising. They are basically shifting to where their audiences now spend their time.

Looking globally we saw significant uptick in retail advertisers online spending. This is a change driven both by online retailers as well as traditional brick and mortar companies. Our sales teams took advantage of this trend and its strong showing on Black Friday and Cyber Monday which marked the start of the largest e-commerce holiday season in history. It is interesting to note remember search ads are always a better value in December. CPCs go up but CPAs go down because people buy more during that period.

Let me give you a geographic flavor of how our revenues fared out around the world. Within the US the impact of the economic recovery is beginning to show particularly in sectors with a strong ROI focus. On the other side of the Atlantic U.K. companies in verticals that have been traditionally large spenders in offline have also increased their online ad budgets. If you shift to emerging markets we are very happy with our performance. In most of these markets we see very clear effects of underlying economic expansion again as well as the accelerating adoption of both search and online display advertising.

For example, our Q4 growth in Brazil was particularly strong driven by efforts to educate the advertisers and the underpenetrated companies to help them understand the value of online advertising and what that represents in their overall marketing mix.

The second big trend we are seeing is brand marketers continue to better understand the online display format and incorporate that into their campaigns. With our broad portfolio of products we are pleased with the performance of pretty much all four parts of our display strategy; YouTube, The Google Content Network, Double Click and our Ad Exchange. In YouTube we have had many successful brand advertising campaigns of note.

One that you might have come across was Fox’s integrated media campaign for Avatar which used pretty much all four parts of our display strategy. If you haven’t seen it you can go to the web to YouTube and query Avatar and it will show you the interactive integrated multimedia channel with flash advertising and the movie trailer in Hi Def.

We are also very excited about an event we held with American Express and Sony for World Aids Day where we streamed and hosted live Alicia Keyes benefit concert on YouTube. In the campaign American Express and Sony were able to reach millions of viewers in 167 countries around the world.

Beyond YouTube brand advertisers continue to see the value of our million publishers and our content network and finally the ad exchange which we launched in Q3 continues to show good progress and is increasingly becoming an important part of display consistent with we believe most of the top networks are now signed onto the exchange.

Third, as Jonathan mentioned we continue to see the global trend towards cloud computing speed up as companies grow more and more comfortable with hosted applications and our sales teams are working quickly to capitalize on these opportunities. We had key wins at Jaguar and National Geographic as one of our most comprehensive deals for the City of Los Angeles which moved 30,000 users to Google Apps.

So against these major commercial wins we have signed educational deals with Virginia Tech and Fresno State while both small and medium sized business continue to adopt Google Apps. Finally with the trends that Jonathan mentioned, the penetration of smart phones and other mobile devices our sales teams are continuing to work with advertisers who can reach and target their customers through mobile advertising like never before.

One campaign of specific note was done by Razorfish, an agency partner of ours, who used a targeted mobile campaign to improve conversion rates towards monetary retail clients by approximately 10%. So we continue to see promise in this area.

Now I am going to turn it over to Patrick to set up the question period.

Patrick Pichette

Thank you Nikesh. So everybody will remember in our last call we had set up a question page online to sort out through the questions and answers. Through your feedback and actually having tested that we prefer to actually go back to our more traditional mode. Thanks for actually having tried with us in the spirit of innovation. I will turn it over to Connie to set up the call for questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of James Mitchell - Goldman Sachs.

James Mitchell - Goldman Sachs

It looked like your US revenue accelerated from 4% year-over-year in the third quarter to 11% year-over-year in the fourth quarter which was great while your international growth accelerated from 19% in the third quarter to 21% in the fourth quarter. 21% is still a big number but not as sharp an acceleration. I wonder if the discrepancy was due to any of the following; First, the US having easier comps than international from a year ago? Secondly the monetization improvements you made in the US that you haven’t yet rolled out internationally? Third, the fact that display advertising is benefiting your US business more than your international business at this point?

Nikesh Arora

The US as I mentioned earlier we have been able to see the continued shift of large advertisers which started in Q3 and continued into Q4 and has been reasonably strong. On the international side I am very pleased with the growth we have seen across the world but you have to understand there is a mix issue. There are different parts of the world which grow at different paces and while we continue to see growth in most markets there are some markets where we are seeing growth like Brazil as I mentioned which are causing that growth rate to look different than the US.

Operator

The next question comes from the line of Mark Mahaney – Citigroup.

Mark Mahaney – Citigroup

The sequential growth is actually very similar to what you had in 2007. Is it pretty clear to you that overall search spending trends are kind of back to the normal seasonal patterns or are there still verticals that still seem weak to you, not retail obviously but other areas? Secondly, the materiality of mobile could you talk about any data points of sequential growth in search, what percentage of searches are off mobile devices in any particular markets?

Eric Schmidt

Just in general we won’t comment about the mobile and how it affects our total revenue. In general there is clearly you see through the second half of 2009 a recovery in economic activity worldwide and that clearly has shown up in our results. I will let Nikesh give you more specifics.

Nikesh Arora

From a vertical perspective as I mentioned we have seen very strong send in the retail vertical across the board pretty much around the world. We have also continued to see strength in the technology vertical. As you might expect finance is not as strong as it was in 2007 and we are seeing stabilization in some amount of recovery. In addition to that we continue to make progress with all the other verticals like CPC, health, etc.

Operator

The next question comes from the line of Benjamin Schachter - Broadpoint Am Tech.

Benjamin Schachter - Broadpoint Am Tech

Could you rank the key monetization changes you made in Q4 and how do you think they are going to impact the model going forward? Then on mobile I just wonder if you could have a broader discussion about how you think about the P&L there. Is this something you want to drive revenues? Is this something you just want to push the internet experience forward on mobile? Finally any comment on China and the situation there?

Jonathan Rosenberg

I guess I can just start with the quality question specifically. Q4 tends to be a modest quarter for us quality wise. We had about a dozen launches but the dynamic that we have there is we try to freeze the launches after Thanksgiving so we had stability for our advertisers around the holiday period. So from an overall impact on RPM perspective the quality launches are actually more modest. Some of the apps changes that we made, site links, comparison ads and product extensions certainly started to take effect as did the fact that all of our advertisers are now on Ad Words 3 which we think is allowing them to be much more effective in terms of their bidding efforts.

I would generally describe the quarter as relatively modest from a quality perspective. Nikesh and others could give you their perspective on Mobile. The main thing I think we are starting to see there is that advertisers are getting better at figuring out what kind of ads work on the mobile devices. The simple addition, for example, of things like including a phone number or an offer is substantially increasing the click through rates and the ROI for the subset of advertisers who are correctly optimizing their mobile campaigns. So we are certainly seeing very strong growth there.

Patrick Pichette

To close on mobile there really is a two-pronged strategy on it which is driving innovation in an ecosystem on one side. So when you think of all of the applications like goggles and all of what you have seen on voice recognition and navigation that is all innovation that basically drives people to the web with these new mobile applications. Obviously the more people spend their time on it then they trigger into search and then monetization. From that perspective I think that is the core engine of the mobile model.

On China I suggest that Eric answer that one.

Eric Schmidt

I think the China stuff has been covered really quite well in the press. Just a review for everybody on the call, we announced a little more than a week ago three reasonably separate facts. One, that there had been a cyber attack on Google probably emanating from China with the origin details unknown. It is still under investigation. We believe we have made the necessarily technical changes to prevent such a future attack.

The second was we discovered perhaps related or perhaps unrelated monitoring of human rights activists which we disclosed in the spirit of people be aware this may be occurring. Then the third was a decision for those reasons and other reasons for Google to no longer be willing to apply the censorship rules in China. This has a bunch of consequences. One of course is that we are in conversations with the Chinese government.

The second is our business in China is today unchanged. We continue to follow their laws. We continue to offer censored results. A reasonably short time from now we will be making some changes there. We have made a strong statement we wish to remain in China. We like the Chinese people. We like our Chinese employees. We like the business opportunities there and we would like to do that on somewhat different terms than we have. But we remain quite committed to being there. I hope that helps.

Operator

The next question comes from the line of Justin Post – BAS-ML

Justin Post – BAS-ML

My question is more on competitive issues in search. It looks like US did accelerate where I would expect to have the biggest impact but are you seeing any share changes internationally related to any of your competitive initiatives? Secondly on the partner environment are you seeing more competitive pressure on signing up partners given some of the initiatives of your competitors out there?

Eric Schmidt

On the competition question I think it is better for us to focus on what we do and not what our competitors are doing. I think our results speak for themselves and I will let you judge how they are doing in a market that is a highly competitive market. The one area where there is probably a pretty big competitive even is whatever happens in China which at this point is obviously unknown and that would clearly make a difference.

Nikesh Arora

We continue to work closely with our partners both on the search and display side. Most of our partnerships are based on very clear ROI and very clear benefits to partners and to us. We haven’t seen any change from our partner experiences from Q3 to Q4.

Patrick Pichette

In fact on the content side the announcement of Vivo, the announcement of Channel 4 and Channel 5 in the U.K. for YouTube has in fact been an increase and we are very pleased about these types of partnerships.

Operator

The next question comes from the line of Doug Anmuth - Barclays Capital.

Doug Anmuth - Barclays Capital

I was wondering if you could comment on the relative outperformance of the network business versus O&O and if there is any particular dynamics in there that make network growth higher? Then secondly can you also comment on the higher marketing costs you saw during the quarter and in particular how much of that is attributable to Android launches and the Droid in particular?

Patrick Pichette

In terms of O&O versus network, nothing really significant to disclose in this quarter. On marketing I think it is fair to say there are two things there; there is a high level and then I will let Nikesh give a couple of comments. At the higher level remember when we said at the end of Q3 we wanted to ramp up our investment in certain areas to accelerate our growth. Marketing is one that you can actually affect in the short-term quite well. Because we have such a scientific approach to it to track it we decided to invest a bit more in Q4. Nikesh can probably give you a couple of examples on that.

Nikesh Arora

For example many of our marketing efforts in Q4 had been targeted towards trying to educate and bring more and more small advertisers into the web where we can clearly measure the ROI and clearly understand what the impact of those is. So that has been one big focus. The other big focus on the consumer side has just been support some more of our more consumer launches that have happened in Q4.

Operator

The next question comes from the line of Imran Khan - JP Morgan.

Imran Khan - JP Morgan.

You talked about search traffic increase to five times on mobile. I am trying to understand that economics. What kind of revenue per search on mobile are you seeing compared to the PC and secondly a couple of more related questions on the cost side. You talked about the spend more on the marketing in Q4. Is it more of a one-time nature? Do you expect that to do down in Q1? Also how much were bonus accruals for Q4 due to exiting your full year plan? Should we think the bonus accrual will go down in Q1?

Patrick Pichette

Let me start with bonus and then we will go back to the other question of marketing. On bonus here is what everybody has to remember. Last year you will remember there was a lot of questions about that. When we start the year we reset the plan and as we progress through the year if we vary the plan whether positive or negative then we have to make additional accruals but in the beginning of the year we just don’t know that. So in 2010, next quarter you can expect we will reset our plan and therefore we will go back to the base number.

For this year, 2009 specifically, we had actually by Q3 figured out we had a different trajectory than the base plan and what we did as a consequence is actually did a combination of cash between Q3 and Q4 to make sure we were properly provisioned for the bonus at year-end. That is why you haven’t seen like at the end of Q4 of last year a big blip for that reason. We will increase it but just in proportion to the second half of the year. So that is the key on bonus.

On marketing I think the issue from a financial perspective clearly we don’t give any perspective view on marketing. I think the most important thing is that we are really pleased with the experiments we are running right now in the marketing. Again, I will circle back to Nikesh to see if he wants to give more precision on it.

Nikesh Arora

I am just going to echo what Patrick had said. We are going to look at the campaigns we have in place and we are going to look at the products we have in place and based on the ROI of those campaigns we are going to ratchet our spending up or not in the following quarters.

Jonathan Rosenberg

I am not going to give specifics on mobile RPMS versus desktop RPMs but I think the main thing we can say is the new formats, the targeting tools and the reporting we are giving the mobile advertisers is making the huge difference. I mentioned Click to Call putting phone numbers in the mobile ads making a difference. Try something like auto insurance on your phone and you will see that the Progressive ad on the phone actually shows the phone number while on the PC it doesn’t. Nikesh gave the Razorfish example in his opening remarks and we are also letting the advertisers target high end devices, specific devices or specific carriers and we have also launched the reporting with analytics to the mobile phones. We are starting to see much improved monetization in general across mobile.

Operator

The next question comes from the line of Brian Pitz – UBS.

Brian Pitz – UBS

Over the past couple of quarters you have rolled out several new ad formats such as site link and video ads on the Google.com site. Could you discuss the adoption of these formats among advertisers and any commentary on if these formats have potentially lowered page clicks and increased CPCs on the site?

Nikesh Arora

The ad formats we launched in Q4 have been very successful. The advertisers have taken them up very effectively. We have actually used our direct sales force across the US as well as across many parts of Europe and work with some of our larger advertisers to include site links to their mobile format. I will pass the CPC question back to Patrick.

Patrick Pichette

We won’t comment about the specifics on each one of them but it is very clear when you have product listing ads that have either new cost for action pricing models as that includes images and pricing within them or even the comparison ad that we now kind of started introducing, all of these obviously provide more information to the user and therefore more value. From that perspective it has been a real positive.

Jonathan Rosenberg

For people that are confused, the easiest way for them to see what we are talking about is just try typing something like Sears into Google and you will see the example of what Nikesh was referring to in ad site links. It is intuitively easy to how they lead to higher user engagement. You will see the electronics and tools section, the deal of the day and you can see how much of a better experience that is both for the advertiser and for the user.

Operator

The next question comes from the line of Spencer Wang - Credit Suisse.

Spencer Wang - Credit Suisse

My question is regarding YouTube monetization. I know you have talked about being happy with the monetization at YouTube. I was wondering if you could just give us perhaps some updated metrics on how much of YouTube is being monetized. In previous calls you said that it was triple year-over-year. Any update on that would be great.

Eric Schmidt

We are not going to give any specific metrics on YouTube. What I can say is the big shift we are continuing to see on YouTube is that it has gone from being a nice to have to an essential part of the media mix of any display campaign that our advertisers are planning. That is a big shift from our perspective and we continue to see people and you can look at YouTube and it is very easy to see, you can see that our own big ad there and the watch page ads are on there and we have been able to expand that across the world in many markets where we have YouTube in place.

Patrick Pichette

Just to close, when people think of key insights on YouTube the homepage was nearly sold out in Q4 and that was a great testimony of the power of YouTube and we are now running ads in 20 countries worldwide so again to give you a sense of perspective of how successful YouTube has been.

Operator

The next question comes from the line of Scott [Davis] – Morgan Stanley.

Scott [Davis] – Morgan Stanley

There was data in the quarter that suggested that large branded retailers grew online sales at that roughly 15% quarter and the smaller retailers experienced slower growth. Given your broad visibility into ad spending and particularly the long tail in smaller advertisers I am wondering if you can just comment on ad spending trends by advertiser size?

Nikesh Arora

As I alluded to this earlier our largest advertisers continue to increase their online spending and operating search and online display in their marketing mix. So the retail has been particularly strong during the holiday season. Most of the large retailers have created very robust websites and they are able to target a very, very large host of keywords and have to some degree automated this stuff. We continue to work with some of our smaller advertisers and bring them into the fray. It is purely a mix issue and a seasonal issue where we have seen the larger advertisers outperform the smaller ones.

Operator

The next question comes from the line of Sandeep Aggarwal - Collins Stewart.

Sandeep Aggarwal - Collins Stewart

Can you please rank your non-core search businesses in term of the growth potential? i.e. display, YouTube, mobile and ads? Then also any color you can add on your partnership/competitive dynamics with Google and Apple?

Eric Schmidt

It depends on whether you are looking at absolute growth or percentage growth. Obviously the smaller ones are going to grow faster than the larger ones. We have said for a pretty long time the next huge business for us is display and we put in place a series of acquisitions and a series of products. We have integrated them and we are seeing the benefit. I think one of the stories that has not really come out yet is how successful Google is at display. I think you will see that especially in 2010.

So if I were to talk about absolute numbers that are not search I would say that is probably your number one. Obviously the smaller ones will grow faster on a relative basis. There the most obvious one in terms of growth rate would be mobile and a lot of that depends on the competitive dynamics of the industry, how successful the new AFMA product from us is, the AdMob acquisition if that comes through. We have a lot of evidence that people are moving to these data friendly mobile devices very, very, very quickly. Our search traffic growth rate is quite a bit faster than on PCs. We expect that to continue. So for lots of reasons 2010 will be a year of significant mobile revenue growth for the whole industry. I am sure we will be able to play a major part of that.

With respect to Apple it is probably better to say that Apple, I as a former board member have a special spot for Apple in my heart but I will tell you Apple is a very well run company. They have a lot of very good stuff coming. We have a couple of very good partnerships with them and we also compete with them in a couple of areas. My guess is that is a pretty stable situation for awhile.

Operator

The next question comes from the line of Jeetil Patel - Deutsche Bank Securities.

Jeetil Patel - Deutsche Bank Securities

Taking a step back you have a $23 billion business built around advertising and it seems like it has some sensitivity to the macroeconomic environment these days. Broadly as you look forward and the broader ecosystem of consumers and business partners you work with are there newer, more unique ways of adding value to the broader ecosystem in terms of new revenue, models or business models that are kind of worthwhile exploring as you look ahead and to try to break away from the sensitivity of the ad business that seems to be tied to macro. Second, on mobile your strategy seems to be a little bit perplexing in you have a partnership strategy with your handset OEMs and then Nexus One.

Is that a comparison of network and O&O? Is that how we should think about the evolution of that strategy or are you just trying to push the smart phone category and be obviously the interface brand that consumers use to access information through those devices?

Eric Schmidt

On your question about the macro we said last year and reiterate we are not immune to global economic trends. I think the evidence would say we fared better than most companies in a global economic downturn and the hopeful global recovery that is clearly underway at this point. We have seen that for six months or maybe longer. I am not so worried about our reliance on ads which is sort of the premise of your question. From our perspective our goal as a business is to solve the advertisers and the other business problems which is ultimately about selling products, marketing and so forth.

We are in various conversations about trying to do alternative ways to distribute additional content. We are trying to come up with new ways of using GPS data so an advertiser gets position in place, we have a lot of initiatives in this category. The ones where we probably have the biggest impact or not impact as much as those are exciting, will probably be in the display area because in aggregate size our display business will give people an opportunity to reach people with visual stories and reach them with narratives which they couldn’t do with search text.

So it is probably the case that the combination of local advertising, all of the things we are doing in display plus some of these new and more speculative things are likely to drive a lot of new ways of solving a business problems. We also haven’t talked much about this but we have quite a healthy enterprise business that is going to grow we think quite rapidly over the next few years as people move from the older legacy PC centric traditional operating system model to the new web-based application model. The trend there is clear. Everyone is moving there and we are going to be one of the leaders there.

Patrick Pichette

Do you want to comment on the issue of mobile and the question about the perplexity of our business model?

Eric Schmidt

The second part of your question is on Nexus One and that model. There has been a lot of confusion about that. It is probably easiest to understand it the following way: What the Nexus One is really about is a new way of buying a phone. The Nexus One is simply the first of a series of examples where you can essentially purchase a phone online from one or multiple manufacturers order it and have it just work. We think that is a natural evolution of a particular model. It does not exclude the other models and I think it is comparable with the retail model and seems to be quite successful.

So far our partners have understood that message and they have been okay with it and the Nexus One itself of course is a magnificent product.

Operator

The next question comes from the line of Jason Helfstein – Oppenheimer & Co.

Jason Helfstein – Oppenheimer & Co.

Do you think Bing is having an impact on cost per click? Then, do you expect the tax rate to rise in 2010 with the improvement in US revenues?

Patrick Pichette

Let me answer the second one first and we can come back to the first one. On the issue of taxation obviously we don’t give any kind of guidance forward. We continue to monitor very closely all the issues related to those tax bills and the legislation. Obviously we are like most American companies that have a large international presence we continue to believe it would be a disadvantage to having some of the proposals that are on the table. We are going to continue to participate in the process very actively and make our voice heard. We can’t speculate as to the outcomes of these things.

In terms of Bing, Jonathan do you want to give a comment on it?

Jonathan Rosenberg

We generally don’t comment on competitors. We think our CPCs are not generally impacted by what other search engines do. Our CPCs are set by competition among advertisers and we have a very competitive auction market.

Patrick Pichette

That is the essence of the point. People choose.

Operator

The next question comes from the line of Gene Munster – Piper Jaffray.

Gene Munster – Piper Jaffray

Can you talk a little bit about the impact of Nexus One in the model specifically to margins going forward?

Patrick Pichette

In its most simplistic form we don’t track percentage margins as part of our business model. What we are looking for is opportunities to innovate, to shift product we think really are disruptive and then changing them to the benefit of users and the Nexus One is a great example of that in setting the bar as to what a great mobile handset should look like and it will have its own margin. That is how we are focused on building the business.

Operator

The next question comes from the line of Mark May - Needham & Company.

Mark May - Needham & Company

We have been hearing from a number of ad sense partners that Google’s TAC rate is trending towards Google’s favor. Is the fourth quarter TAC decline a reflection of a declining trend in TAC or is it just seasonal? The second question is I think investors have a good sense of the assets and such that Google brings to bear in the online display space but doesn’t have a good sense of the size of Google’s display business and the trend in market share there. The question is how big in fact is Google in display today?

Patrick Pichette

Let me start with the TAC issues. We have a lot of great partnerships with so many of our ad sense partners and other partners. The fact that it has been trending down has to do simply with mix issues and it is not really tied to seasonality. There is nothing of a big surprise there in our mind and we continue to have great partnerships with all of our partners on ad sense and others.

In the case of display, I think that the two facts we shared already on the last webcast are worth mentioning is the industry itself is a $17 billion industry so it is a big pie and if you just take the TV advertising industry which is $170 billion industry that is all ad buyers that are shifting over time to the internet or digital content. That is also going to make its, some of it is going to make its way progressively to display.

So there is no doubt it is a huge pie to go after. From our side we clearly don’t comment on the specifics of our market share or our revenue dollars but I think you should take from the tonality of Eric’s comments that this is really a good focus for us because it has a lot of runway. I will leave it at that if you don’t mind.

Operator

The next question comes from the line of Youssef Squali – Jefferies & Co.

Youssef Squali – Jefferies & Co.

On mobile we have seen some third party data the iPhone may account for as much as 50% of overall mobile traffic. First, is that kind of similar to what you are hearing or what you have seen? Related to that you said earlier or mentioned that you see the Apple relationship as stable. Are we inferring from that you think the upcoming renegotiations of that deal and potential of it moving to a competitor likely to move in your favor? On the display side can you give us a sense of the percentage of search advertisers that are buying display from you today and is the major push back from those that don’t?

Eric Schmidt

We are not going to speculate on the market share of Apple mobile products. That is for Apple to discuss with you. As far as I can tell our business structures with Apple are quite stable. I am not going to speculate on any deals of any kind, rumored, true, not true, you name it we are not going to talk about it. On the display question?

Nikesh Arora

On the display side there is a reasonable number of our search advertisers who also buy display. It actually depends on their campaign objectives. If their campaign objectives are direct response oriented and favor search as well as certain parts of the display which would give them a higher conversion rate and a higher clicks rate as it relates to their advertising. The more brand focused they tend to only display in their campaigns. That category clearly they have many choices including YouTube as far as where they spend their premium brand dollars.

Operator

The next question comes from the line of Marianne Wolk – Susquehanna Financial.

Marianne Wolk – Susquehanna Financial

Given how attractive you are making the new display products to advertisers and the big push with your sales force, have you seen any of your advertisers shift budget from search into the newer display offering? As a follow-up how do we think about what is going on in the content network? Where are you in transforming that from basically contextual advertising to display?

Eric Schmidt

On the question of shifting my experience with advertisers is they don’t shift an ad. The reason is that the decisions they make are sort of standalone. In other words they will simply maximize the amount of search advertising they do to maximize their revenue. A display decision is a decision they make which is both a revenue and also strategic decision around their branding and so forth. That is growing as we can offer, if you will, the science that Google applies to the display business. That is our differentiator. We do it better than anybody else and that is why we continue to win all those deals.

Patrick Pichette

We are going to close on this for now. I want to thank everyone for taking the time to listen to our call today. As you can tell we are very excited about moving the business forward in 2010. I want to take a moment to thank also all of the Googler’s who have been listening to this call for their hard work. 2009 was a roller coaster year, very strong performance and really the achievement of everybody on the team. On behalf of the management team thank you to all. Thank you for listening. Jonathan and I will talk to you in half an hour.

Operator

This concludes today’s conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Google Inc. Q4 2009 Earnings Call Transcript
This Transcript
All Transcripts