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Google, Inc (NASDAQ:GOOG)

Q1 2008 Earnings Call

April 17, 2008 4:30 pm ET

Executives

Krista Bessinger - Director of Investor Relations

Eric Schmidt - CEO

George Reyes - CFO

Sergey Brin - Founder and President of Technology

Larry Page - Founder and President of Products

Jonathan Rosenberg - SVP of Product Management

Omid Kordestani - SVP of Global Sales and Operations

Analysts

Ben Schachter - UBS Securities

Justin Post - Merrill Lynch

Doug Anmuth - Lehman Brothers

Mark Mahaney - Citi

James Mitchell - Goldman Sachs

Imran Khan - JP Morgan

Christa Quarles - Thomas Weisel Partners

Brian Pitz - BoA Securities

Ross Sandler - RBC Capital Markets

Heath Terry - Credit Suisse

David Joseph - Morgan Stanley

Mark May - Needham & Company

Operator

Good day and welcome everyone to the Google, Inc conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Krista Bessinger, Director of Investor Relations. Please go ahead, ma’am.

Krista Bessinger

Good afternoon, everyone and welcome to today’s first quarter 2008 earnings conference call. With us are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Operations. Eric, George, Larry, and Sergey will provide their thoughts on the quarter and then Jonathan and Omid will join us for Q&A.

Please note that this call is being webcast from our investor relations website. Our press release issued a few minutes ago is also posted on the website, along with the slides that accompany today’s prepared remarks. A replay of this call will also be available on our investor relations website in a few hours.

Now let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward looking, including statements regarding our investments, seasonality, traffic acquisition costs, increase in the cost of sales, international growth, operating margins, growth in headcount 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 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, 2007 as well as our earnings press release for a more detailed description of the risk factors that may affect our results. Copies can be obtained from the SEC or by visiting the investor relations section of our website.

Also please note that certain financial measures we use on this call such as EPS, net income, operating margin and operating income 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, it’s my pleasure to turn the call over to Eric.

Eric Schmidt

Well thank you very much, Krista, and we’re obviously very pleased with another strong quarter for Google. It’s clear to us that we’re well-positioned for 2008 and beyond, regardless of the business environment that we find ourselves surrounded by.

The Search, Ads and Apps strategy that we articulated last year is beginning to show transformative effects; literally things that people could not do before the products and services that we’ve offered in each of the categories. The business model continues to work very well and we’ve had good, disciplined management of our operating expenses, so thank you very much for the management team. It’s also interesting to note that paid clicks growth is much higher than has been speculated by third parties.

In Search, we continue to invest in quality, particularly internationally. Quality improvements lead to increased traffic and share. Quality here means better algorithms, more content – deeper, if you will -- into the web; a larger index, faster response, all that surfing. But it also implies things like Maps and Earth and geospatial information, it’s all integrated in a way that people can find things and see things that they could never do before.

In Ads, we continue to increase value for advertisers and publishers; again, broader and deeper solutions. Better tools for advertisers, many, many quality improvements in advertising which has the interesting effect, which means that we’re showing fewer but much better ads in each cycle. That’s a key part of the Google success story.

We’re putting more and more flexibility and control in the hands of advertisers so they can decide exactly where their ad should go and measure it in the way using Analytics that they could not do before. It’s also important to note that DoubleClick has been added now to the portfolio and DoubleClick is hugely strategic for us. It allows us to offer a much more comprehensive solution for advertisers and publishers. This has been asked for long time and now we are able to do it.

In the Apps case, we are working to build out a whole new online web experience and we’re beginning to have all of the pieces now in place. For example, the recently announced Salesforce.com partnership allows us to integrate for an enterprise customer with the Salesforce.com products as well as all of the Google application services and sold through their direct sales operation.

By doing these partnerships and by investing heavily in new applications models we think people will spend more and more time online and they will able to do things like sharing documents, sharing calendars, dealing with photos and all those kinds of things in a way that had not been possible before.

This has all been possible because of the many, many talented Googlers and the executive leadership that we’ve seen in the last quarter and I want to thank everybody for that. The Google model really does rely on technology and innovation. The repeatable and scalable business that we have built is really poised for global growth.

So with that, George, do you want to take us through the numbers?

George Reyes

Thanks, Eric and good afternoon, everyone. Before we begin, please note that our consolidated results as reported today include the results of DoubleClick from March 11, the date of the acquisition, through the end of the quarter. The overall effect was immaterial to revenue and only slightly dilutive to operating income, net income and earnings per share.

Turning to our results, we had another strong quarter with gross revenue increasing 42% over Q1 2007 to $5.2 billion. Goggle.com performed very well, up 49% year over year to $3.4 billion, driven by strong traffic growth and to a lesser extent, monetization growth. AdSense revenue grew 25% over Q1 2007, reflecting solid performance across both the Content and Search networks.

Now let’s look at aggregate paid clicks growth. Aggregate paid clicks include clicks related to ads served on Google properties, as well as ads served on our partner sites. Aggregate paid clicks grew approximately 20% over Q1 2007 and approximately 4% over Q4. Paid click growth on Google.com in the U.S. remains healthy and other markets are showing strong growth as well.

Now I’ll discuss our international performance. International revenue increased to $2.65 billion, now accounting for 51% of total revenue. International markets have tremendous potential for growth. As is typical in the first quarter, the UK was strong with revenues of $803 million and 16% sequential growth as the travel and finance verticals rebounded as expected from Q4.

Revenue growth in EMEA was primarily driven by strong performance in the UK, Benelux and the Nordic countries fueled by strong pan-European performance in travel. We also saw solid gains in relatively smaller markets such Ireland, Spain and Italy. Asia and Latin America continue to show impressive growth as well with India, Argentina Australia and Japan being notable performers in the quarter.

Now turning to expenses, traffic acquisition costs were $1.5 billion or 29% of total advertising revenue, down from 30% in Q4. AdSense TAC was $1.3 billion, while TAC related to distribution partners and others who direct traffic to our websites totaled $143 million in the quarter. Other cost of revenue, which included $9 million in stock-based compensation increased $108 million over Q4 to $624 million. The largest driver of the increase was the increase in costs related to our data centers including depreciation, equipment and operations. We continue to anticipate that other cost of sales could increase going forward.

Other than cost of revenue, operating expenses in Q1 totaled $1.5 billion, including approximately $272 million in stock-based compensation. Expenses related to payroll and facilities increased $53 million over Q4 to $809 million.

At the end of the quarter we had a full-time employee base of 19,156 including more than 1,500 heads from DoubleClick. Since the close of the acquisition we’ve conducted a review of our ongoing headcount requirements and approximately 10% of the US DoubleClick workforce was laid off in early April. An additional 15%, approximately, are expected to leave the company in the U.S. in the near to intermediate term, because they are in a transitional role as they move through the system. These headcount reductions apply only to the U.S. and do not include employees associated with the future planned divestitures of the Performics SEM business. To-date there have been no headcount reductions outside the U.S.

On an organic basis, excluding DoubleClick, we added approximately 800 employees in Q1 with the majority of new hires in engineering, followed by sales and marketing. We have implemented and continue to follow a disciplined hiring process in all areas of the organization, but as we’ve indicated in the past, we will continue to invest in our core business both in the US and internationally.

Non-GAAP operating profit, which excludes stock-based compensation, increased to $1.8 billion in Q1, with non-GAAP operating margins of 35.2%, approximately 30 basis points above Q4.

Turning to tax, our effective tax rate for Q1 was 24%, down from 25% in Q4 of ‘07, reflecting the mix of foreign versus domestic earnings.

Finally turning to cash, operating cash flow remained strong at $1.78 billion with CapEx for the quarter at $842 million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments including data center construction, production of servers and networking equipment. We expect to continue to make significant investments in CapEx in future quarters.

Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, remained strong at $938 million, up 50% year over year.

So in summary, we believe our results reflect the strength of our core business across our three primary initiatives -- Search, Ads, and Apps -- with disciplined investments that position us very well to capitalize on the long-term opportunities we see for Google.

Now I’ll turn it over to Sergey.

Sergey Brin

Thanks, George. We are obviously very excited about this past quarter and in listening to the results you’ve heard so far, let me highlight some of the incredible Search improvements we’ve made in the past 90 days.

We have launched almost 100 Search quality improvements just in this quarter, so we’re talking about over more than one per day, including weekends. A lot of these have been international Search quality improvements. You will note just on the more visible things, our new tailored homepages in Asian markets. Japan now has a completely new homepage that is tailored to Japan and our Korean Search now has the universal search results that you’ve seen in some other countries.

Now we’ve also done a much better job selecting local country results and demoting foreign results in those countries. As a result, we’ve actually seen our Search quality measures uptick significantly in several countries.

Also, I just wanted to highlight some of the user interface improvements we’ve been doing. You’ll notice that you can now search within a site directly from the Google Search results. So, you’ll get a top level site in your search results, but if you want to further search within that site there is a box right on the search results page and you can quickly do a query. If you search for something like NASA or a IMDb you’ll see examples of this.

Now I’ve told you in the past year how we have deployed Universal Search and I mentioned a number of times but the work wasn’t done with the initial launch. In fact, over the past year since we launched it we’ve been able to double the number of queries where we show these blended results especially in images, video and books. I’m sure many of you are seeing these all the time. This has really improved our ability to answer questions. We’ve also deployed Universal Search in a number a of countries; we just added 17 countries that support the Maps Universal Search feature.

I wanted to also just highlight to you on the subject of Maps how we’ve been developing there. We’ve deployed Street View in 30 cities now, up 12 from the past quarter. Our new Street View API has got other sites integrating Street View with them.

We are also at the same as we are spending a lot of effort collecting this data ourselves from Apps, we’re including user contributed data. In fact, we now allow users to correct information about local entities and locations on their maps. In fact you can see recent changes as they happen right now if you go to maps.google.com/recentedits.

I also want to quickly highlight that we have been working on difficult queries, the challenging ones and we had a substantial initiative over this past quarter where we were able to make a very large improvement in what we consider the hardest 20% of our queries. That was a big achievement and it really stands out in my mind.

Finally, let me just tell you a little bit of our progress on Mobile, because more and more people are accessing our Search and other services through mobile devices. We’ve now launched a much faster Search experience and it’s now available in Mobile in 40 languages. Our Mobile Search traffic, as a result, and just due to market growth, is growing very rapidly. That’s for Search, but actually across other properties also, we’ve now launched a new version of our YouTube mobile site and mobile users now can access the entire library of videos. If you remember in the past it was a subset because there was little bit of delay in transcoding, but now all the videos are available. We’ve had mobile playbacks increase tremendously.

We also just wanted to highlight that we’re pleased with our participation in the recent 700 megahertz spectrum auction; I know we did not come back within any spectrum wins in that but I feel this has been an important experience for us and we are also very pleased with the results that winners will be adopting these great open access concepts that I think will benefit consumers and developers alike.

Anyhow, those are the highlights in Search and Apps and mobile. Now Larry, over to you

Larry Page

Thank you, Sergey. I’m very excited about the quarter as well and I’m going to talk to you a little bit about ads and applications. So, in ads we did a bunch of things in the last quarter. One of the main areas was AdSense where we made improvements for both publishers and advertisers. We launched Google Ad Manager for Publishers, which helps publishers make their entire inventory available on the AdSense network. In testing, publishers greatly increased their revenue with this, so we are really excited about it.

We also launched demographic targeting on social networks which uses gender and age information from over 30 social networks to help advertisers place ads.

Now switching gears to AdWords, one of the things we launched was a tool that gives customer’s better control and more data and those things are the Conversion Optimizer which we first launched in 3Q07. We are now seeing really rapid adoption across our advertiser base. What that Conversion Optimizer does is let the customers bid per customer conversion rather than per click. You can pay basically when someone buys something rather than when someone clicks something.

As you can imagine, that really lets people optimize a lot better and we’re really excited about getting wider and wider adoption of that and it has really been taking off like we had hoped.

In Analytics we’ve added industry benchmarking. Google Analytics, if you don’t know what it is, lets you track visitors to your website and your overall traffic and how you are doing, and so on. Industry benchmarking is a new feature we launched so you can tell how you’re doing against others in your same industry, and that’s been a very popular feature. We find that Analytics’ customers, people who adopt Google Analytics, really just end up increasing their advertising spend with us as they better understand their metrics.

Now let me switch gears and talk about YouTube. YouTube obviously we are very excited about, it keeps growing extremely fast. We are up to about ten hours of video uploaded every minute on YouTube. So you can imagine just the rate of that is incredible.

We have in-video ads, which have great adoption on YouTube and customers are increasing the size of their campaigns. We’ve now launched AdSense for videos, so now these in-video ads can run on sites besides YouTube and they may perform very well; we are seeing much better click-through ads than banner ads and that’s a really big deal and we’re really excited about that.

Now we completed our acquisition of DoubleClick and we’re very, very excited about that. They are a technology and networking partner, a tremendous asset and we’re very excited about what we can do together. We’re working on combining our ad network with DoubleClick display ad management products. Together that really helps publishers and advertisers generate more revenue, and we can put much more richer and diverse content on the Internet. So, I think there are huge opportunities there and we’re very excited about how thing are going so far.

Now in Apps, I will switch gears to Apps, we launched Google sites which is based on the JobSpot Technology we acquired and makes it easy for anyone to create and manage a website. It makes it easy to add an entry as Wiki. We use it for teams, projects, companies, schools and we’re already seeing a lot of interest in that.

We also rolled out Offline Docs using a new browser technology Google Gears where you get offline access to your Google Docs. I think people assume with this cloud applications they’re really great, they are easy to run with, no installation of software they but you wouldn’t be able to run them offline. We have a great new technology Google Gears as I mentioned that lets you run these new web applications even when you are not connected to the Internet. I think that’s a very big deal.

We’re also very excited about our Salesforce.com partnership. Salesforce has integrated our Google Apps products into Salesforce. Now their users have a very seamless, nice access to Google Apps within their Salesforce.com experience. We are very, very excited about that, as they are, as well.

Finally I just want to mention a quick note on our culture. We were really proud to win Fortune’s Best Place to Work Award for two years in a row. This is an amazing honor to have, I don’t think we expected it, but it is a really great thing. We’re also tops on Fast Company’s Most Innovative Companies List. So we work very hard to maintain the best possible environment for our employees and I think that’s part of why you see the results that you do out of Google.

Now I will go to Eric.

Eric Schmidt

Thank you very much, Larry. Why don’t we go ahead and go to your questions and comments. We are very interested in your thoughts on the quarter and any other insights you all might have. Krista, shall we get started?

Krista Bessinger

Yes, operator, we are ready to go ahead and queue-up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Ben Schachter - UBS Securities.

Ben Schachter - UBS Securities

Guys, congratulations on a nice quarter. I was wondering if you could talk about some of the key initiatives at DoubleClick? What are the areas of integration that you think will be most difficult?

Related to that, if you could just give us an update on display and video ads and what types of ads you think are performing better and worse than expected? Finally, any update on the CFO search? Thanks.

Eric Schmidt

Ben, on the CFO search we are very pleased that George has remained and is doing a great job, of course. We have a whole bunch of interesting candidates that we are reasonably close to. We have not made any offers yet and again, it’s an important position for us to fill but we’re very hopeful in the short term.

We also have the benefit of having Omid and Jonathan joining us as usual. Omid, do you want to answer the DoubleClick questions to get started, and Jonathan maybe he can help you?

Omid Kordestani

Sure. We are just going through a very complete analysis of all the products and salesforce and service activities. Fundamentally we are looking at maintaining the customer momentum that DoubleClick has had and benefited from. Looking at, in a simple way, how do we get more of the advertising into their network and more of their publishers benefiting from the advertising systems and infrastructure that we are assembling together now.

The overall goal here is basically bringing more effectiveness, more accountability more measurements that we’ve been asked for to deliver on. This process in fact was exhaustively reviewed yesterday and there is a strategy in place and you’ll hear of their product announcements in the coming months.

From a customer relationship standpoint, on the display side we are very, very active in taking advantage of our properties, especially YouTube and the content network to increase the customer engagements. Just this past quarter, I can just name a few of these names which I think will indicate to you perhaps the nature of how we’re utilizing the salesforce to reach significant types of customers that we haven’t had as advertisers before: Nature Valley, an incredible campaign through YouTube, utilizing everything from the contest platform, brand channel, Contest Gadgets, the content network, FeedBurner so the complete host of our products. Other names like Forex which used CPC placement targeting; Toyota, we actually even had the World Economic Forum at Davos using the YouTube platform; Dunkin’ Donuts, VeriSign. So quite a diversity of advertisers now that we are working with through this integrated relationship across all the properties.

Jonathan Rosenberg

Thanks Omid. Hi Ben, it’s Jonathan. In terms of display and the type of ads that are doing well, if you think about it from a big picture perspective, we really feel we’re in a position to become the world’s largest display ads provider. Over 90% of the daily impressions that we have are eligible for display ads and pretty much all of the publishers accept our new format. The gadget and the rich media creative which are served by third parties are pretty much all being adopted by folks.

I think that the biggest thing that we are seeing that Omid alluded to in terms of the examples is the concept of an advertiser owning a concept across the entire web and finding their whole audience. Another example is Activision. I think they use seven Google products to support the launch of the Tony Hawks Proving Ground Game and Search, AFC, the YouTube homepage and I think the in-video format is working particularly well. The one thing I would also add there is they are creating traction on mobile ads.

Operator

Your next question comes from Justin Post - Merrill Lynch.

Justin Post - Merrill Lynch

Thanks, two quick questions. First could you talk about your display model? Do you really see yourself being able to make really interesting profitability on network sites or do you plan to maybe put some display advertising on your own websites, which appear to be growing quite rapidly?

The second question may be for George, just the other cost of revenue growth is really about 80% if I back out some of the stock-based comp. I am just wondering what’s driving that, and is that YouTube related at all?

Eric Schmidt

Jonathan and Sergey, maybe you want to talk a little bit about display and how we are going to use it in our network in our own sites?

Sergey Brin

This is Sergey. Just real quickly, I mean there are certainly already sites that are Google-owned sites that run display such as YouTube, for example, is a very obviously prominent one. It has a lot of inventory and obviously that’s going beyond traditional display with the in-video kinds of ads that Jonathan mentioned.

I think there are some other Google properties that might be good fits though we haven’t made clear decisions; I mean obviously more visual sites like Orkut there is some potential in Google Images but we don’t have any specific plans to announce today in that respect.

I also think that we are certainly making progress on display in our network also and so I’m pretty optimistic on both fronts.

Jonathan Rosenberg

The only thing I would add to that is now that we have got the DoubleClick acquisition behind us, we will also offer the AdSense sites a media planning tool integrated with Dart for Advertisers by DoubleClick. I think you’ll see that will substantially increase the lift that we are getting there.

Eric Schmidt

George did you want to answer the second question?

George Reyes

The driver that you are alluding to is basically driven by data center related expenses, the associated depreciation that comes with that and bandwidth costs as well as some DoubleClick amortization.

Operator

Your next question comes from Doug Anmuth - Lehman Brothers.

Doug Anmuth - Lehman Brothers

Thank you very much for taking my question. You mentioned 100 quality improvements were implemented during the quarter. Can you talk about the degree to which you’re already getting the price per click benefit and whether that’s up to your expectations thus far?

Also, do you still stand by your previous view that Google really isn’t seeing any impact from the macro situation? Thank you.

Eric Schmidt

On the macro side, we look at this really carefully and we do not see an impact as of this time. We’ve also had the internal conversation of, what would happen if it were to occur? Our conclusion is that we’re well positioned should economics change to continue to do well because our model is so targeted. Targeted advertising does well in pretty much most scenarios, we think.

Sergey or Jonathan, do you want to talk a little bit about the other?

Sergey Brin

Let me just mention, the 100 search quality improvements I mentioned were to the search quality. I wasn’t referring to the advertising quality experience. But we’ve also made improvements there, of course. If you recall the clickable backgrounds that we eliminated recently which while they reduced clicks a little bit increased the quality of clicks, and I think our advertisers certainly appreciate that.

But there are likewise -- I don’t know the exact number -- but there are certainly dozens, if not 100 improvements in advertising quality that we also launched over this quarter. That’s going to benefit advertisers and it’s going to benefit end users who are going to see more relevant, interesting advertising and obviously because those connections can be more fruitful, ultimately that benefits publishers as well.

Jonathan Rosenberg

Are you asking about what the specific ads quality improvements were or are you asking whether or not the scope, the degree to which the scope impacted pricing and RPM, what specifically are you asking about the quality?

Doug Anmuth - Lehman Brothers

Well, obviously, as much as you are willing to share Jon. Honestly I am asking which quality improvements on the advertising side would you say have had the biggest benefits thus far?

Jonathan Rosenberg

Sure.

Doug Anmuth - Lehman Brothers

Are they driving price per click, to the degree to which you expected them too?

Jonathan Rosenberg

Sure, quality improvements intra quarter, so Sergey mentioned there were quite a few. I think they were relatively fewer in terms of impact in the quarter than we typically have. I think that was primarily not due to the number but it was due to the fact that more of them came relatively late in the quarter compared to previous quarters.

I think the biggest ones that we alluded to publicly that Sergey did mention are the landing page quality improvements; we’ve removed a lot of the need for ad pages so there has been substantial improvements there. There also have been some policy changes, the visible and final URL policy matching so that users always know where they end up when they’re clicking on an ad which we think in the long run is very positive. I think we also announced the change in the UK trademarks policy so that we now removed the restrictions on ads on trademark keywords in the UK, which is the way that we had it to-date. These are all things that are great for users.

I think that UK piece isn’t going to go live until Q2 so I am not sure it had much impact in the quarter. But the one other thing that I saw, some folks have noticed was just a very modest test which was our automatic matching beta test and that’s basically trying to extend an advertiser campaign’s reach by finding ads on relevant searches that aren’t triggered by the advertiser’s keyword. But that’s really relatively modest because that’s just an initial test that we just started.

Eric Schmidt

Just to add one more clarification. We often don’t know the exact improvement that we are going to see in the very short term so at least from my perspective, I’m more concerned that the improvements be put in place and that they work well and then of course we’ll get the benefit as the advertiser see those and as the network takes advantage of it. We can take the long view of that.

Operator

Your next question comes from Mark Mahaney - Citi.

Mark Mahaney - Citi

I wanted to ask Sergey about some of the mobile data points. Are there enough data points, do you have enough experience particularly in the international markets now to know what the economics of mobile search could like relative to the PC search? Are the leads being generated off of mobile devices as qualified -- more so or less so? Are advertisers willing to pay more or less for that?

I wanted to ask another question on the paid clicks. 20% year-over-year growth is obviously much better than was feared. There still is a pretty clear level of deceleration in the paid click growth on a year-over-year basis even if you trend line it going back a year-and-a-half. Part of that must be due to your quality initiatives. Do you think about it terms of trying to get to a paid click growth at a certain anniversarying of these paid click quality improvements whereby that growth will remain in the 20% or low double-digit rate at a more sustainable basis because of these quality improvements? Thank you.

Eric Schmidt

Sergey do you want to talk about mobile?

Sergey Brin

On mobile, I don’t how the hard stats in front of me right this very second. I can tell you kind of anecdotally what I’ve seen in the countries and markets where mobile has developed in the sense that devices have high resolution, networks have low latency, the experience works which basically like Japan and a few others that are up and coming, the mobile search and ads work very well.

I don’t have the exact data in front of me right now, as I said, but there is certainly nothing to dissuade me that it would be substantially worse than traditional desktop search.

I think that if you look in the US and Europe which are a little bit behind those but I think are progressing, I think you’ll increasingly a greater volume and a greater quality of mobile usage and consequently advertising conversion ultimately.

Now, you have a significant challenge in mobile in that the screens are much smaller so you just can’t go displaying nearly as much advertising or take as much space. On the other hand, you have much more relevant and timely information like what location the person might be in and so that on balance leaves me quite optimistic.

Eric Schmidt

The short answer to your deceleration question is the answer is no. We look at the problem of paid clicks as one of the components of an overall quality improvement. We know that if we can improve aggregate quality we know that the value of a click, number of clicks and so forth will grow, and will grow at whatever the technology will allow. So if you look, our absolute growth rate has been very, very significant and we’re very, very optimistic that this model of staying focused on quality will give us not only the strongest ad network but a much broader set of solutions for advertisers and it works well.

Operator

Your next question comes from James Mitchell - Goldman Sachs.

James Mitchell - Goldman Sachs

Great, thank you very much for taking the question. One question was with regard to the user response to Universal Search in non-US territories, have you rolled it out? In particular, why do you think Universal Search can help you gain share in those countries where you are not the market leader and where the incumbent lacks comparable functionality?

The other question, I was just looking back over the past few quarters, I believe you stated your business was less seasonally affected in the summer months in 2007 than in prior years. Do you think that something is structurally changing your business to reduce seasonality or do you think that 2007 was erratic in someway?

Eric Schmidt

On the seasonality I’m not sure I agree with that characterization. There are so many variables that have to do with product improvements, product launches, customer deals, renewing and change in TAC rates, all of those kinds of things, it’s very difficult to say that looking at an aggregate number, in particular a change in seasonal growth rate, was a very big deal.

We know there is a seasonality in the business; it’s very difficult for us to know exactly where it is. As you correctly pointed out, Q2 and Q3 are traditionally weaker quarters and my guess is that that will be simply true because the majority of Internet users are still in the Northern Hemisphere which is where people tend to take summer vacations.

Sergey, do you want to talk about Universal Search?

Sergey Brin

On the Universal Search I think Universal Search is a very big win from the point of view of the Search experience. Now in some of these international markets like if you look at Korea in fact the local competitors there do have something that’s very much akin to Universal Search. So in fact I think the people’s expectations there are already to have Universal Search results and so its not necessarily something new we are introducing to them there. I think our ability to rank and bring in these diverse corpuses that we have will surprise people and they will be impressed by how good it is.

In other markets you are right, I think that these additional corpuses and our ability to blend is a substantial distinction and I think we are going to benefit from that in fact and obviously we have lots of international or foreign language videos and images and so forth and we have a certain number of books as well in there. I think we are going to benefit from all that hard work that we’ve put in those corpuses.

Jonathan Rosenberg

This is Jonathan adding one narrow point and one broad point on your question about seasonality. Narrowly within each quarter, there are things that make one year significantly different from another; this year you had Easter falling actual in Q1 whereas in previous years it has fallen in Q2. On the other hand offsetting that this year you had a leap year which in this year was actually on a Friday although since it added one more day in the quarter, the net results of leap year was giving us one more Monday in the quarter. When you think about that, that actually equates to something in the ballpark of about 1%.

The broader question in terms of the business moving forward with respect to seasonality is highly dependent on market share. In many markets if you look historically we were gaining share and in some cases in previous years that’s significantly masked seasonality. In markets where we have very, very high share then the business starts become, it starts to look more seasonal in nature than it has in the past.

Operator

Your next question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Larry, you talked about a monetization improvement for social networking, how you are doing more demographic targeting. Could you please give us some color like what kind of progress you made monetizing social networking compared to Q4?

The second question is regarding how you’re improving the search quality in the international market. Can you give us some sense in terms of the frequency of search in your lesser developed countries like Continental Europe compared to more developed like US and UK, the frequency of search volume per person? Thank you.

Larry Page

On social networking monetization, I think its been an area where we have really applied a lot of new technologies and then some of the demographic targeting and so on, which has been very successful. I think the challenge and the opportunity there is there is a huge amount of inventory. We have obviously MySpace, Orkut, Inner Network and a number of other social networks. There is a lot of usage of those. So there is a tremendous amount of inventory and so part of it is just getting that advertiser ecosystem built up and people targeting that inventory and doing it in a way that makes sense for those advertisers.

So I think we’ve made a lot of improvements and I’m optimistic that there are improvements to be made. That’s balanced against tremendous inventory levels in those areas which it takes some time for advertisers to really realize they are there and start targeting effectively.

Sergey Brin

This is Sergey. I don’t think we consider Continental Europe less developed. I do think that in the advertising space, we have seen that they are sort of coming up on the ramps that the US and UK might have been a year or two ago. So that obviously gives us great opportunity for growth advertising-wise.

But in terms of basic Internet usage and searches per user, while once again I don’t have the data in front of me, what we’ve seen is it typically just depends on broadband penetration and quality of broadband and the more people have access to great networks and computers to use them the more searches and overall internet usage they will do. That’s why you see this skew during the week, that Monday to Friday we do tend to get a lot more usage than on weekends. Obviously part of that’s because people are relaxing off the Internet on weekends, but part of it also is that typically often people at home don’t have as good connectivity and Internet access as they do at the office.

Operator

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

Christa Quarles - Thomas Weisel Partners

You mentioned in the UK that travel and finance has rebounded, I was just wondering if you could discuss travel, finance and hopefully retail more broadly across the US and some of your other geographies in terms of strength or any relative weakness?

The second question is should Yahoo! choose to outsource part of Search to you, I was wondering if you can discuss philosophically what the benefit would be to Google’s own property in the sense that you have a broader, deeper ad network, broader advertising if you will, coming to the site?

Eric Schmidt

On the Yahoo! question we are very excited to be participating in this test, at the beginning of the second week on the test. I don’t think it’s really appropriate to speculate beyond that but its nice to be working with Yahoo! and we like them very much. Omid, do you want to answer the UK question, or Jonathan?

Omid Kordestani

We will both probably take this on. I mean in general what we are seeing is that these verticals really behave by region as you are indicating, and they are the factors that determine for example in each geography we have talked about this in the past, renewal rates for finance or travel reservations that get done in UK drive those verticals.

I think, in general we saw in Q1 a bit of a slowdown in retail, some postponement of budgets but we haven’t seen anything that kind of significantly indicates to us that one vertical or another is at risk here. We are just going deeper into these accounts, and in some cases when the budgets are delayed its made up by other online categories.

Jonathan Rosenberg

I think if you think about what economists would typically theorize in a macroeconomic climate that was slowing they look at sectors like some of the ones you’ve mentioned – automotive, luxury goods, we also track travel and finance -- and you look for the ones that are more sensitive to macro-economic conditions, and look to see what’s going on with them.

What we tend to see is that clicks in some of those sensitive areas do grow a little less rapidly than our overall growth so the share of their total queries is actually down but on an absolute basis, they are all showing healthy growth in ad revenue.

In the UK, for example, people are clicking on travel and local ads at a higher rate than they do in the US. In finance, although certain components of finance are down, foreclosures are up and even more mortgages do pretty well, if you think about foreclosures, every foreclosure at some point becomes a home sale and a mortgage to somebody.

So generally what we are seeing is absolute growth even in those areas that are otherwise adversely impacted by macroeconomic conditions.

Christa Quarles - Thomas Weisel Partners

You’re basically indicating that you tend to see price improvements in these areas as the conversions continue?

Jonathan Rosenberg

It varies.

Eric Schmidt

I think the best way to say it is that it’s possible that prices grow up in that situation simply because of the great value of targeted advertising.

Operator

Your next question comes from Brian Pitz - BoA Securities.

Brian Pitz - BoA Securities

Can you talk about how much of your international growth is really due to the sunsetting of European best practice funding?

Separately, would you provide any updates on China and perhaps discuss any new initiatives that Kai-Fu Lee and team may be working on over there? Thanks.

Eric Schmidt

Sorry, could you repeat the second question?

Brian Pitz - BoA Securities

Sure, just updates on China and the team Kai-Fu Lee, things that they’re working on over there, some new initiatives we may not have heard about?

Eric Schmidt

On the China side, things are going well. Why don’t we move to our next question?

Operator

Your next question comes from Ross Sandler - RBC Capital Markets.

Ross Sandler - RBC Capital Markets

Great, thanks for taking my question guys. Looking at the US growth rate of 30% approximately in the first quarter, if you had to characterize your small, medium-sized self sign-up advertisers versus your large agency or direct enterprise-sized advertisers, which segment was growing faster in the quarter relative to that 30%? Thanks.

Eric Schmidt

Again, I’m sorry we had a phone problem here. Could you just repeat the substance of the question again?

Ross Sandler - RBC Capital Markets

Sure. The growth rate in the U.S. is 30 % year over year. If you had to characterize which area was growing faster between the small to medium-sized self-signup advertisers on your platform versus the larger agency or direct enterprise type clients, which was the faster growing segment in the quarter?

Omid Kordestani

I don’t have the actual breakdown in front of me right now. What I will say is we are doing very interesting collaboration between both of our channels; in fact, in some regions we have three with some resellers involved. One of the things we tend to do is just try to put our relationships with the customers into the right channels. So in many cases where we find that we can in a very effective way service our clients through our online organization we do that and that organization in fact has top-tier clients now that are even some brand names that are well-served by our organization.

What we’re trying to do with the direct sales organization is really focus on those higher-end calls into the C-level if you will, to the CMO level where also we are presenting the full suite of products and integrated campaigns between YouTube. In the US obviously we’re also experimenting with a lot of the new initiatives from TV, radio, advertising, and so perhaps on a follow-up call we can get you more specific stats on the different geographies and the ratios between those two channels.

But, there is a lot of movement of customers that we do again to optimize the relationship with the customers.

Jonathan Rosenberg

Just trying to add little more to color to Omid. We definitely tend to see that it is the larger customers that are the bigger drivers of growth, whether or not on a relative basis in the previous year they were bigger drivers I think is unclear. But we have released a lot of tools like Analytics and the Conversion Optimizer and those are the type of things that tend to get adopted disproportionately by the larger, more sophisticated advertisers and we do see that as advertisers adopt those tools it substantially fuels growth. So there certainly is significant growth with the larger advertisers.

Operator

Your next question comes from Heath Terry - Credit Suisse.

Heath Terry - Credit Suisse

You mentioned that you are seeing much better click-throughs on the overlay ads versus your normal banner ad. By our measure, we’re only seeing running overlay ads running on content where you have clear relationships like the NBA and Universal Music. What are the barriers to running ads on a broader spectrum of YouTube’s inventory, particularly the user generated content that you’ve got?

Omid Kordestani

What we’re really focused on right now is working with YouTube management channel team to really actually go from the, if you will the plumbing, and work all the way up with the customer’s advertiser fee; there is a lot of integration work going on. YouTube was already a large DoubleClick customer and we are trying to basically streamline how the integration of DoubleClick and YouTube can be improved and how we can take advantage of our ad networks so that more of these advertisers could be represented.

How do we work with the owners of content, user-generated or otherwise, to actually find the right match-up with the right advertiser so if we basically have a much better targeting of ads and also promotion of the right types of content.

So it’s a very comprehensive plan that we have put in place. We have a 2008 plan that has a very specific milestones again all the way from the systems and infrastructure that we need to provide that integration all the way to the different types of ads.

I think it’s very early to make any kind of a judgment about which ads are working well and which ones are that we’re really trying to have these integrated campaigns, try it out with the salesforce and our customers and do a lot of learning and settle in to a product roadmap.

Eric Schmidt

Thank you. Let’s have a couple more questions. It looks like we missed a question so maybe we could get that caller to call back in as well. Operator, let’s go ahead, next question.

Operator

Your next question comes from David Joseph - Morgan Stanley.

David Joseph - Morgan Stanley

As you integrate DoubleClick into AdSense should we expect that to be a growth driver in addition to contextual ads or is it possible that it actually starts to cannibalize contextual advertising?

Also, how is Google Ad Manager going to coexist with the DoubleClick Technology or ad serving technology?

Also, should we assume that obviously DoubleClick is running AdSense revenue from here on out? Thank you.

Omid Kordestani

In terms of the DoubleClick products, we really are optimistic that where we are headed to is where our Head of Sales in the US, Tim Armstrong, calls the CMO dashboard. What our hope is that by basically providing the integration across the board here we end up having in a simple way again a lot of DoubleClick access more towards advertisers and having the DoubleClick advertisers have access to the AdSense network.

That’s our goal and so we’re really hoping that all of this will be incremental and that ultimately we get to a point where the CMOs can have a very effective way to measure the effectiveness of the advertisers and do the right allocation of their ad budgets across the board here.

Eric Schmidt

Jon, did you want to add anything to that?

Jonathan Rosenberg

I think the only obvious thing to add is that adding more display creates more competition among advertisers; we’ll have more premium inventory from publishers and those things will certainly be added to fuel each other. We certainly don’t think [inaudible] ads are going to result in any kind of cannibalization.

There is plenty of reasons to believe that they are positive dynamics and its unclear that there are any negative ones.

Operator

Your next question comes from Brian Pitz - BOA Securities.

Eric Schmidt

Thanks, Brian. It appears as though we didn’t hear your question because there was a phone problem so I apologize. Maybe you could ask your question again, and we will restart up.

Brian Pitz - BoA Securities

Sure, no problem. I’m just wondering how much of your international growth was due to the sunsetting of the European best practices funding that you guys had talked about before.

Separately, you mentioned 90% of impressions are eligible for display. Can you talk about the effective CPM difference between display and formats versus text links on your network? Thanks.

Eric Schmidt

On the first question, Omid, do you want to talk about -- could you repeat your China question for me?

Brian Pitz - BoA Securities

Just an update on China. We just wanted to get a sense for any new initiatives the company was working on over in China, there have been some articles out.

Eric Schmidt

Let me give you a sense on the China situation. We are seeing market share growth and good revenue growth as we have learned to operate in that environment. Although the advertising business is nascent in China, the fact of the matter is that the Chinese Internet is so large that even on a small basis the numbers add up to quite significant with good growth rate. We believe that China will continue to be a good market for us. As we hopefully gain share we have significant new products for the Chinese, Knowledge Chinese, Users Chinese Language, Chinese Search and that’s our core growth, so the message there is good.

Omid, do you want to talk about the international?

Omid Kordestani

Yeah on the ETS really it was something we announced a while back and our goal really is to have a very successful relationship with agencies across the world. We just felt that the previous program and actually the goal of the program is really to reward the way we engage properly together in servicing advertisers and also going after these new initiatives.

The real performance in Europe comes from the great work that the European team is doing and really understanding the dynamics of the business, putting the right customers in the right channels in each region really understanding the dynamics of each industry vertical that we are selling into and paying attention to the seasonality effects and where to put the resources and servicing and selling clients.

On the CPM and CPC question really our goal there is simply to allow again the advertisers to pay the way they wish between the display products and the text products. Ultimately the goal here is to focus on conversions for them so how they can best measure and achieve their campaign objectives.

Eric Schmidt

Jonathan do you want to talk about display?

Jonathan Rosenberg

The question specifically related to content and display and the dynamics in terms of how they interact and how that works and how that’s going?

Brian Pitz - BoA Securities

It was more along the lines of just the effect of CPM difference between display formats and text links on the network.

Jonathan Rosenberg

I mean basically what we are doing is we are trying to come up with a way to manage the auction so that you can have the display ads competing with the text ads and multiple text ads basically in the auction have to compete in such a manner that they trump the value of the display ads. So typically three text ads versus one display ad unit. We’re still basically working through that. So that’s basically how it works, I am not quite sure what else you were asking.

Eric Schmidt

Why don’t we go ahead and get our last question. Thank you very much, Brian.

Brian Pitz - BoA Securities

Thank you.

Operator

Your next question comes from Mark May - Needham & Company.

Mark May - Needham & Company

My question is focused on the US revenues which grew $29 million sequentially. If one could make an estimate of DoubleClick’s contribution, one might conclude that the US revenues were flat to maybe up, marginally, sequentially. Eric I think earlier you said you’re not really seeing a meaningful impact on the business from the macroeconomic environment. I think it was also mentioned that the majority of these search quality improvements occurred outside the US.

So the question is, is the sequential growth that you put up this quarter which is far lower than what it has been in the past, is that more a reflection of where we are in the search cycle, search out cycle in the US or given that it’s not really macroeconomic… that would be great.

Eric Schmidt

Well we know what it’s not. We know that it is not macroeconomic. It can have as much to do with the timing of deals, partner activity, the timing of product rollouts and the maturity as you pointed out of the US market; also the rate at which both search quality improvements play out within the quarter as well as advertising quality, because again they don’t necessarily implement exactly linearly in the quarter across every geography.

Jonathan, do you want to add any perspective to that?

Jonathan Rosenberg

I think the only obvious thing to look at is you have to be very careful when you look at the annualized year-over-year comparisons to try to isolate the impact in a quarter. The biggest thing that you would separate out there from the US relative to international, is that in the base quarter that you are comparing to which would be this quarter of last year we added a lot of really big partners in Q1 of last year to AdSense and so relative to that year this year we didn’t have that many incremental partners to add so I think that’s everything else being constant otherwise leading you to see what appears to be a relative reduction in the US.

But it’s primarily a factor of that. There is also the AdSense for domains cleanup, which we talked about earlier.

Eric Schmidt

And my guess is that the two that Jonathan described are the primary cause and we have to go back and really match it all to be sure.

Let’s finish up by saying first thank you very much for everybody spending -- your time is valuable, spending more than an hour listening to us and talking about Google.

I also wanted to take a minute to thank Omid for something, I don’t Omid if you remember but right after I started here I told you to go get on an airplane and go build some international operations. You flew to London and the rest is history. This is the quarter where we are now 51% international revenue. I don’t think that percentage is going to go down; the world is a very big place. Congratulations to our international sales teams, the international leadership for making Google a truly global company.

Thank you all.

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