Here’s the entire text of the Q&A from Google's (ticker: GOOG) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Thank You. Ladies and Gentleman to ask a question at this time simply press “*” “1” on your touch tone telephone. Once again that was “*” “1” for questions or comments that you may at this time. We will take the first question from
Scott Kessler with SMP Equity.
Thank very much. I was wondering if you could talk a little bit about your plans to provide free Wi-Fi access to the city of San Francisco. What is the underlying business rational, do you plan on trying to do similar things in other areas of the country? Thanks a lot.
Yeah, thank you for the question, this is Larry. We are excited about expanding Internet access in general. We think it is really good for our business as people have better access to internet they do more searches and they use our services more and so the San Francisco Wi-Fi is an experiment to see how we can provide some new services and also software as you mentioned localized software and things like that, in an environment where people have really good accesses to the internet. But we have not announced plans to do anywhere else besides San Francisco yet.
The next question comes from Benjamin Schachter from UBS.
Hi guys. Congratulations on the quarter. I am not going to ask about the quarter, I will let it speak for itself for now. But, I want to talk about the big picture and discuss how you guys view alternate moneterization methods to the current pay-per-click model? Statistically what you think about pay-per-crawl, pay-per-action model and how they may work within Google’s framework and do you have a timeframe in mind where you might introduce early tests in these methods and also potentially related to that, could you comment on reports that you have been testing direct feed from some potential classified ads partners and thoughts you might have on the usefulness of Google potentially acting as a classified ad aggregator? Thanks.
Thanks very much, Jonathan do you want to take it?
Hey Ben, I think that was a pretty extensive question I think I will defer to Omid on some of the pay-per-click and pay-per-crawl models because I haven’t been too much involved in that. I think the main way for us is really trying to focus on opportunities for increasing monetization probably the biggest opportunity there. I think you have seen us deal with the site targeting efforts and that‘s really grown substantially in this last quarter and basically what that does is, it lets advertisers choose ways to ad their ads and pay by CPM or impression based model. Omid Kordestani, why don’t you take the pay-per-click component.
As Jonathan said we are trying to really understand how best advertisers want to work with us. So throughout this year we’ve done a lot of work with agencies and sales force to really understand how do we bring this accountability to media and we haven’t really announced any specific products in that area and just focused on finding the best way to bring the same kind of accountability we brought to CPC advertising, no current format but extended beyond that.
We will go next on Martin Pyykkonen Hoefer & Arnett Investment Bank
Yeah, thanks. Question on the AdWord versus AdSense mix. Obviously the more of the AdWord mix improves _____ logic to spend more essentially on R&D and sales and marketing. I am just curious on the mix, to what extent does the mix that you are driving or it’s natural evolution etc., because that will give you some flexibility kind going forward and then secondly the buzz that there is lot about the paid click per search going up to the significantly and I am just wondering in terms of your optimizing and working for advertisers, what you are doing in that space to the extent of how the _____ make for, other stuff in that area?
Yeah, this George, I will take over the mix question. We have been through a couple of cycles on mix, early on it was a Google.com driven business and then we began in 2002 and 2003 to really build up the partner network. And that of course drove TAC up and what we are seeing, now and it was rather perceptive this quarter is a very robust 20% growth in Google.com with relatively modest 7% growth in the partner network. So, we’ve been through cycles on this both rich Goggle.com cycle and somewhat lean Google.com cycles and it all depends at the rate, really the driver is the rate at which the partner network is growing.
This is Jonathan, Just following up on our own monetization efforts. Basically the way to understand the dynamics support driving most of that is you really just look at both ends of the advertising spectrum. And I think what you will see is we are monetizing the business better at the global fortune 1,000 front, where we are coming up the lots of new product functionality that lets us reach customers again with site targeting and a lot of aggressive adds quality improving in work that we have been doing to make the add better targeted and more effective and increase that all the way. And the other end of the spectrum and this is probably a significant component too. If you look at the smaller advertisers in small business space, we are developing lots and lots of ways of making it much easier for them to come on to the network and advertise. So, the growth is coming in terms of the number of the advertisers and the fact that we are giving them both tool at either end to monetize more effectively.
We will go next to Jeetil Patel with Deutsche Bank Securities.
Great, thank you very much. Couple of questions, how do you think about kind of extending your abilities to take existing advertising products and other services and bundling them together such as, if potentially a PPC and CPM based product model or may be advertising and other areas that are ancillary to advertising and lead generation? And then secondly, you are half way there, with the performance-based model. How do you think about, eventually looking to shift your advertising product, to may be a percentage of sale basis which is kind of seems like the most efficient model in terms of helping generate transactions for your advertisers? Thank you.
Hi this is Omid again, as we said earlier we’ve really looking at ways to bring this accountability and extend it to the directions you are talking about. And then one example I can give is, the ways that we try to simplify for advertisers to in a bid basically one price and that has to have different kind of pricing models for the network, be it the content sites or the search sites and then we introduced technology called smart pricing, which allows us to kind of value traffic from different sites in different ways and we do that by considering conversion information. So, built into the way the add system is working to the way the network is working today, we are continually looking for ways. Again to make it simple, but bring it as close as possible to our ROI metrics that everyone is interested in.
Our next question will come from Mark Mahaney, Citigroup.
Hi thank you. You started off by talking about some success and I think may be recently with the fortune 500, could you say how you could quantify that, earlier in the year you had a number of your penetration almost the fortune 1,000 was that something particular that happened, I guess some new products but did they really accelerate the penetration and any update on what that level of penetration is? Thanks.
The biggest change that was done in the sales force had to do with verticalization, we actually organized our sales force into a set of vertical teams they call one or two levels higher than they were before. Omid do you want to describe that a little bit?
Sure, one of the major initiatives that I am very proud of our organizations really executing out this year was across the board trying to leverage the best channel to serve our customers, so internally we call it, we like to work with our customers the way they like to work with us, so be it a third party agency or coming to us directly online or working with our direct sales force so. What we’ve done is really made it very smooth for our customers and transition as many accounts to the best channels that our best setup serve them. So, throughout the year as Eric mentioned, we have taken our field organizations and pushed them into an industry focus and have them both call and service accounts with attention to the industry, the metrics in that industry and again leverage all of our channels both within Google and our partners to service our customers the best way possible.
This is Jonathan just following up. I think the really biggest component there is having along with the sales force changes moving into the brand budgets with the big fortune 500 customers and I think this is a big secular trend that’s benefiting Google and other online properties. So, in addition to the new products that we have been launching, we are just seeing consumers spending more time online and there are many examples of, if you look at Paramount Pictures and others who are using multiple Google products with the launch of new movies like Hustle & Flow to spend more online across inventory that they want previously given access to.
Our next question come from Marianne Wolk, Susquehanna Investment Bank.
Thanks, on two quick questions. First of all I was wonder if the smart pricing referred to would benefit Google’s network more than its partners, just trying to understand why you are growing so much faster then your partners. Did the partner’s site have as many as the new _____ links and secondly can you talk about some of the efforts you are making in the enterprise area? Thank you
Sure this is Omid. We believe actually as we look across the network, there are different characters as you are seeing, there are some site have a very commerce focus that do perform better than our own inventories. So, Smart Pricing really is designed to for the most part to take and really put a discount in the areas where we see traffic that is just not converting as well as we expect. And again this is an area where we are focused on improving with additional science and focus on ROI metrics. In terms of the growth and the kind of mix in the quarter it really had to do with the fact that Google is continuing globally to gain shares in search, but a lot of our partners are doing as well. So, it’s as George mentioned the metrics, the shift was more to their own properties, but in general I think across the board both our partner network contributed well and the performance of our products really enhanced the monitorization capability this last quarter. In terms of the enterprise business, we are really again focused on similar to the other parts of our business, serve the customers the way they want to work with us. We had a lot a focus on the government sales with our high end systems and search clusters, but the mini product itself is doing extremely well and a we have a lot of new customers both in the SMB market as well as in the kind of the larger deployments with government and major fortune companies.
We will go next Imran Khan of JP Morgan.
Yes hi, its Imran Khan. One question, can you talk a little bit about what is your motivation for adding a third link and how did that if impacted _____ rate or overall yield in terms of volume or monetization of this quarter? Thanks.
This is Larry. I think that’s a very good question. You think sort of when, we add more advertiser links, we are sort of increasing revenue with the existing qualities or something like that. What we really do though is we actually do more complex things. So, we decide when to show the ads or not, and we can actually increase the quality and revenue. So typically the changes we make we think are going to do that usually craft about our prediction. But, I think you will see us make very many changes like that, we certainly would like to make very many changes like that in the future and we should typically have a pretty long list. It’s hard for me to go on with the specifics without that, but you know generally we try to increase both quality and monetization, we make changes like that.
We will go now the Marry Meeker of Morgan Stanley.
Brian Fitz for Marry Meeker
This is for Brian for Mary. On Yahoo’s call the other day, they mentioned picking up former Google advertiser such as iVillage, can you talk through, what you guys are doing on the AdSense front to aggressively pursue and retain your publishers and separately would you give us any insite into the drivers of revenue per search this quarter or how those factors are trending?
Thanks for your question this is a Sergey. I think that you hit the nail on the head with your former question. You have a lot of question but to answer the former, the primary thing we work very hard for AdSense publishers, is just to make sure they have good monetization as well as good user experience. And I think we are executing very well on that by virtue of developing the ad technologies which are in many ways similar to search technologies. They increase both end user quality in relevance as well as monetization. Now there have been a handful of losses over accounts relatively small ones and I haven’t seen any particular pattern from what I know that iVillage had some specialized functionality they were very interested in sort of and they weren’t looking so much of the core monetization which is what most publishers are interested in.
Brian Keith for Merry Meker
We will go next to Robert Peck with Bear Stearns.
It’s Bob Tank here. My question relates to AOL. I know you can’t comments on any rumors speculation in the market. But I was wondering if you could elaborate a little bit further about some of the other synergies right now you have with your partner, beside from just being partner, whether be engineers working closely together whether it would be IM or VOIP integration and while you touching on that topic you could talk a little bit longer term on what you see as far as what Yahoo and Microsoft are doing with their IM integration and where VOIP and IM ultimately could go as far as cross platform integration?
This is Eric, I feel like you have answered your question in the question. Of course we can’t comment on any rumors. I would tell you that AOL has been our longest and in many way tightest partner for many, many years. We have teams that are covered on a wide variety of activities, they have expanded their base, we set the advertisers together, there are number of areas of technology involving advertising and video and so forth that had been collaborative in nature. And that work continues and we hope it will continue for many, many years. So they are very, very valued partner and we hope it will be forever. With respect to VOIP and Instant Messaging integration it would really require me to speculate on some products that we are building and the structure of the industry and because we don’t do that. It is obvious that Instant Messaging and Voice over IP are going to become very, very significant components of people’s online experience. Google as you know has a product in that area called Google Talk, which we introduced over the quarter, it looks like it’s doing extremely well. It may be helpful to say right at the top, that we don’t do the same thing as everyone else does. And so if you try to predict our product strategy by simply saying, so and so has this and Google will do the same thing. It’s almost always the wrong answer. We look at markets as they exist and we assume that they are pretty well served by the existing players. We try to see new problems in new markets using the technologies others use and then we build. Next question.
We will go next to Christa Quarles, for Thomas Weisel Partners.
First I was wondering if as you looked at free Wi-fi mobile services, is it your vision that in three years from now you still be monetizing all of that primarily through advertising or do you see yourself incorporating another revenue line? And in the second question will be just a comment on your views on Thin Client computing, obviously you started on a relationship with Sun, you have a history with Sun, I am just wondering should we see cheap devices out there at some point, and just your thoughts on that? Thanks.
For the first part of that, Jonathan?
I am sorry the second part was Thin Client, the first part was?
The idea that either would you always be monetizing through advertising?
Well there are so many products that we have today that we monetize in ways other than advertising and _____ Google the enterprise product. But, right now it is the engine that is really driving our current economic prosperity, is this big sea change that we’ve seen from transitioning offline dollars to online. And if you look at the relative opportunity there, I think what you are going to see is that there is going to be significant more money transitioning into the be pay-per-click model that we’ve evolved and you are going to see other types of efforts along with the brand advertising increasingly growing. I also think you are going to see other platforms that would be able to apply the add network to and we’ve have been doing some experimenting in some of those areas with print and magazines and I think you‘ll see some continued growth there. But, the main focus is absolutely going to be this sea change in advertising.
So the second part of the question was really about Thin Client models and again when you are using a term that means a lot of things to different people, we prefer to think about it in terms of what does the end user actually want? The end user basically wants to see the same kind of information on any device anywhere all the time. So, if you call that Thin Client and that’s what we mean, and if you mean something else by Thin Client then that’s not what we mean. And the technology has moved to the point where it’s possible to have a unified online experience that spans your mobile phone, your personal computer, all the new devices that are coming out of the next few years and Google intends to be the primary mechanism for access and search of all that information. As we highlighted earlier we have done a large number of interesting deals with mobile operators already as a part of that initial thrust. With respect to Sun, Sun has turned out to be a very valuable partner with respect to toolbar distribution and potential distribution of our other open source technologies and that’s an important component of brining in user services to all these new devices, and to really give choices to which platform they want to use.
We will go next Anthony Noto, Goldman Sachs.
Thank You very much you. Eric, you guys have done a excellent job with leveraging the search productivity, recycle elements and taking this information driving better click to use coverage and PPC as well as leveraging site targeted at advertising and I was wondering if you could comment on how those factors compare in the United States versus international on a relative basis. Is international 30% of what are doing in United States is at parity, then someone mentioned, going after other platforms, I was wondering can site targeting be done in IPTV with branded advertising to the television platform? Thank you.
Hi Anthony, this is Omid. In terms of internationally again we don’t break down specific numbers but, what I can say is that, one as Eric noted last quarter we have been extremely busy building our capabilities and what we are seeing is that this model is truly working. Very similarly across the globe, the transition to media is happening, the interest in one of the spectrum of advertiser from local advertisers to a large advertisement company is happening. In China for example we have recently signed four resellers doing a great job of, bringing us new customers. And frankly in areas where people probably some of these customers don’t even have PC’s these advertisers are being setup by these resellers to purchase packages of clicks in effect. So I think the metrics really will have to do with the maturity of the market, so UK is obviously our strongest market, overseas for us, we are doing really well in Japan but in terms of specific update, we are not breaking those down at this point. And second question I think, I would like Eric to address it.
The main thing that you really want to look at, we tend to have a cycle as you look at the each of these countries and obviously this was led primarily in the US and you see in particular some on the Western European Countries are little bit behind in terms of just maturity of the online market. If you look internationally across the world, I think the main issue in terms of predicting the dynamics in the countries broadly is the scope of commerce. And so you see some countries where there isn’t as much user behavior and interest in engaging in commerce online or they don’t have the shipping infrastructure to allow the transaction for goods and services to be consummated online. And so I think there are some areas there where some of the international areas in kind of much more nascent stages of online commerce where you don’t see the monetization.
Will come from Safar Rashtchy with Piper Jaffrey.
Good afternoon and congratulations on another awesome quarter. I want to dig in a little bit I know you answered this question but some of the questions that were asked but, I would like to know if I could dig into the discrepancy which I believe is the biggest you’ve had so far in the growth of Google network as compared to your partners, I think Omid was talking about of maybe eluding to potentially a market share gain that might have helped, could you talk a little bit about more about is this stage of product introduction that you tested on Google network that we could see some of this in the coming quarters, come up within your partners, is there a more permanent shift of traffic or other things at play here?
Hi Safa this is Omid. Let others add any comments that they seem fit here. I think we are actually observing the search very very closely and what we are finding is the major partnership in this space are long term contracts that we have already established and so there is not kind of significant big partnerships that we could establish in the near term and so the search network is pretty stable for us. We still see that there is tremendous opportunity in the content network and we are busy servicing that both with our field organizations and our online services. I think it’s just a nature of how the traffics are evolving, partners are spending, on ways to marketing to bring traffic to the sites and in certain quarters we see that having an effect on the traffic of the network, we see them changing the formats of ads versus the amount of ad they show, the amount of search they show. So, again. I think the trends are continuing and we are doing really very well with our search properties and growing the share and the partners are stable with us with a long term contracts and we are focusing in the new areas like content targeting and site targeting to hopefully expand opportunities for everyone.
Yeah Hi Safar thank you, a good question. On the market share front we do a lot internal studies and I know some of you guys do as well and basically from what we can tell, looks like we are holding or gaining market share really in virtually all markets. So, I think the general trends that read about in the external studies that you’ve seen are accurate.
We will go next to Heath Terry with Credit Suisse First Boston.
Great. I was wondering if you could talk just a little bit about gmail, as we continue to go through the Beta period here, can you just talk about some of the trends that you are seeing whether it’s in signup’s, whether its in click-through and monetization there. How does monetization with gmail compare to what you see with your broader search business and how would you have us think about the opportunity within mail for Google down the road?
We are very excited about gmail, but at this stage we are looking at it as still a platform off of which to built rather than a sort of big revenue driver in itself. The kinds of services that we are able to launch off of that is for example Google Talk that was mentioned earlier but, also many others that we are testing, we think that it’s a very interesting area, at the end we think that there is a lot of new innovation to be had, just with email. But, also with the related communications area, I am just dealing with people’s important information, which I feel in most of our cases we have just a huge amount of information that’s important to us that’s in our email. So, we still view this as a platform for us to build off of and to experiment off of.
Ladies and gentleman, due to the time constraints we will take a final question from Paul Keung at CIBC World Market.
Very impressive revenue growth, I was wondering how much of the growth this quarter came from new products site, like Google SMS, or SSAD or some new initiatives like site targeting when you compare with more traditional monetization products. Would it be fair to say that your expected accelerated sequential growth, which is nearly did not expect to be entirely due to these product initiatives?
When we look at the quarter, we see improvements in monetization across the board. The growth occurs by virtue of the focus on quality, building up a network, extending our partners, adding more advertisers, it really expands all of the categories that you described. So, it is not a single product that we introduced that somehow causes it to happen. It is a discipline around new product invasion that really touches across the entire portfolio of the company.
So, with that it looks like we are out of time and I want to end by saying I really appreciate people taking the time to be on the call, to listen and to study what we are doing, things are obviously going very well here. What you are seeing is you are seeing I think the consequence the systematization of a business, which really is about results and advertisers results, results are around information, metrics driven model for end users and for advertisers that has really scaled. What is great about this business is that it can be extended very, very broadly. The underlying principles that we’ve talked about, the principles of innovation, of how we manage our engineering teams and the focus around technology, creativity, the culture that has been built, in my opinion will deliver these kinds of results, this kind of opportunity for many years to come. This is a very, very, very big space that we are in and that’s why it’s exciting to be part of Google. Thank you all, so very much for spending time with us.
Once again ladies and gentleman that concludes today’s call. Thank you for your participation. You make disconnect.
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