Articles, Blog

Google Q2 2013 Earnings Call

February 8, 2020


>>Operator:
Good day, everyone, and welcome to the Google Inc second-quarter 2013 earnings conference
call. Today’s call is being recorded. At this time I’d like to turn the call over
to Willa Chalmers, Investor Relations Manager. Please, go ahead, ma’am.>>Willa Chalmers, Google Inc – IR Manager:
Thank you, Jamie. Good afternoon, everyone, and welcome to today’s second-quarter 2013
earnings conference call. With us are Larry Page, Chief Executive Officer; Patrick Pichette,
Senior Vice President and Chief Financial Officer; Nikesh Arora, Senior Vice President
and Chief Business Officer. Also, as you know, we distribute our earnings
release through our Investor Relations website located at investor.google.com. Please refer
to our IR website for our earnings releases as well as the supplementary slides that accompany
the call. You can also visit our Google+ Investor Relations page for the latest company news
and updates so please check it out. This call is also being Webcast from investor.google.com.
A replay of the call will be available on our website later today. Let me quickly go over the Safe Harbor. Some
of the statements that we make today may be considered forward-looking, including statements
regarding Google’s future investments, our long-term growth and innovation, the expected
performance of our businesses, and our expected level of capital expenditures. These statements
involve a number of risks and uncertainties that could cause actual results to differ
materially. Please note that these forward-looking statements reflect our opinions only as of
the date of this presentation. And, we undertake no obligation to revise or publicly release
the results of any revision to these forward-looking statements in light of new information or
future events. Please refer to our SEC filings for a more
detailed description of the risk factors that may affect our results. Please note that certain
financial measures that we use on this call, such as operating income and operating margin,
are expressed on a non-GAAP basis and have been adjusted to exclude charges related to
stock-based compensation. We have also adjusted our net cash provided by our operating activities
to remove capital expenditures which we refer to as free cash flow. Our GAAP results and
reconciliations of non-GAAP to GAAP measures can be found in our earnings press release. With that, I will now turn the call over to
Larry.>>Larry Page, Google Inc – CEO:
Hello, everyone, and thanks for joining our call this afternoon. Google had a great quarter,
over $14 billion in revenue, up 19% year on year. Amazing performance for a company that
has yet to celebrate its 15th birthday. We live in a world of abundant computing with
multiple operating systems and increasing numbers of devices. It’s a very different
environment from when Google started. There was essentially one OS and one device category,
the PC. These kind of changes don’t happen that often; once a decade, maybe even less,
actually. But, the shift from laptop to mobiles, from one screen to multiple screens, creates
a tremendous opportunity for Google. With more devices, more information, and more activity
online than ever, the potential to improve people’s lives is immense. Getting you the
right information, just when you need it, creating the tools to make everyone more effective
at home and at work, and helping you share and remember the moments that matter in life. That’s why I’m so excited about the velocity
and execution of our platforms, apps, and devices. First, platforms. With hindsight,
Android and Chrome were no-brainers. At the time, they were big bets. The movement across
these platforms is tremendous as you saw at our annual IO developer conference in May.
I was astounded, we had over 1 million people tuning in live, just to watch our developer
keynotes. We’ve now activated more than 900 million Android devices worldwide and we’re
lining up over 1.5 million devices every day. That’s pretty amazing given that the first
Android phone launched less than five years ago. And, apps usage is increasing fast. Over 50
billion apps have been now downloaded from the Google Play store. And, in fact, we’ve
already paid out more money to Android developers this year than in the whole of 2012. I love the ability to access your stuff and
play anywhere. Take our new music subscription service launched in May. It is an easy fun
way to discover new music with all the songs there, ready to go. You never have to think
about the device you’re using. Chrome, even though only four years old, has over 750 million
users worldwide and growing. The next, apps, Our goal is to design everything
so it’s beautifully simple and hassle free. Users shouldn’t have to need to think about
our technology. It should just work. This quarter we completely revamped our maps UI.
The map is the screen, no clutter around the edges. There’s more information about your
surroundings so it’s easier to explore. And, we’ve launched a new, improved navigation
feature with notification about incidents before you leave and updates to save time
if traffic conditions change. Best of all, this new maps experience is now available
on almost all devices you’d be likely to use. It’s the same with Google+. We’ve done a complete
redesign to make use of the entire screen and everything looks consistent, whatever
the device or the platform. In addition, the team massively upgraded the photos experience,
making software design for professionals automatically available to everyone for free. There’s no
need for wrinkles anymore. Take a look on Plus. Many of your photos will
now be marked, enhanced and improved automatically. Finally, we launched a new communication app
called Hangouts. You can talk to the people you care about across all the major platforms.
Video calls from your phone are very cool. Give them a try. I’m excited about the progress we continue
to make with Search. Our Knowledge Graph is now available in 29 languages. And, we’ve
expanded the range of information available. For example, we just added nutrition data.
Ask Google how many calories there are in a glass of white wine and you’ll find out
it’s 123, or an avocado, 234 calories. It’s good to have the facts if you want to keep
healthy. And, we launched Google Now on IOS in April. In the same way, we want to make everything
— we want to make advertising super simple for customers. Online advertising and developed
in very specific, device specific, ways with separate campaigns for desktop and mobile.
This made arduous work for advertisers and agencies and meant mobile opportunities often
got missed. That’s why we launched Enhanced Campaigns. Advertisers have upgraded 6 million
campaigns. That’s almost 75% of all their active campaigns. And, Nikesh will talk in
a little more detail about the positive reaction from clients. This is the biggest ever change
to AdWords and the velocity and execution has been great thanks to the hard work of
all the teams. Finally, devices. There’s so much excitement
around new devices today and the potential for innovation is tremendous. You can now
buy the HTC-1 and the Samsung Galaxy X4 with Google Play editions and enjoy the best of
Google. There’s a ton of momentum around Chromebooks which are growing fast and defying the more
general decline in PC sales. Finally, I know you’re all eagerly anticipating
what Motorola is launching soon. Having been a customer for a while, I’m really excited.
We’re very optimistic about the opportunities in front of Google today. The potential for
technology to make people’s lives better is tremendous. But, to achieve that potential, we need to
stay focused. That’s why we continue to invest the vast majority of our resources and time
in our core products. My job as CEO is also to think about the future and ensure we continue
to bet on new technology that can solve big problems in the world. Project Loon, which
we launched in June, is a great example. Bringing affordable balloon powered Internet access
to remote areas is an idea that Sergey and I have been thinking about for over a decade.
It was great to see that project literally get off the ground and give people a bit more
hope for an improving world. None of this would happen without great people
and we are so lucky that we have them. I’d like to thank all the Googlers and Motorolans
who make everything possible. Keep up that velocity and execution. Now, I’ll hand the call over to Patrick.>>Patrick Pichette, Google Inc – SVP & CFO:
Thank you, Larry and good afternoon, everyone. Thank you for joining us. So, why don’t we
dive in by reviewing the details of our overall business financial performance. So, here we
go. Our gross total consolidated revenue grew
19% year-over-year to $14.1 billion. The overall business was up 1% quarter-over-quarter. Google
standalone gross revenue grew 20% year-over-year to $13.1 billion and was up 1% quarter-over-quarter.
Our Google website revenues was up 18% year-over-year to $8.9 billion, was in fact up 3% quarter-over-quarter. Our Google Network revenue grew 7% year-over-year
to $3.2 billion, and was down 2% quarter-over-quarter. You’ll remember the advertising policy decisions
we implemented during Q4 and Q1 to ensure that useful and safe user experience continued
to have its negative impact on network revenue. Other revenue grew 138% year-over-year to
$1 billion, roughly flat quarter-over-quarter. Play store digital sales of apps and content
drove the year-on-year and quarter-over-quarter growth. And, it’s worth noting that in Q1
we included some seasonal hardware sales due to overflow from Q4, which skewed the Q2 comp
somewhat. Finally, please note that, without currency you fluctuations, Google standalone
revenue growth would in fact have been 22% year-over-year and 3% quarter-over-quarter. Turning to Motorola Mobility, gross revenue
there was $998 million, just shy of $1 billion. And, it’s clear that we’ve made a lot of progress
at Motorola in the past year. And, we are especially excited about the you future of
our upcoming product lineup. So, stay tuned. At Google, our global aggregate paid click
growth was strong at 22% year-over-year. In fact, up 4% quarter-over-quarter. Our aggregate
cost per click was down 6% year-over-year and down 2% quarter-over-quarter. And, currency
fluctuations in this case had a minimal effect in Q2 CPC growth. And yet, our monetization metrics continue
to be impacted by the usual factors that we’ve discussed many times including geographic
mix, channel mix, property mix, our product policy changes, as well as FX. Turning to
the geographic performance of Google standalone business, we continue to see a steady performance
in the US and Rest of World while the UK was negatively impacted by a warm spring, some
FX in their case, and a tough year-over-year comp. In our earnings slides, which you can find
on our Investor Relations website, you’ll see that we’ve broken down our revenue by
US, UK, and Rest of World to show the impact of FX and the benefit of our hedging program.
So, please refer to those slides for the exact calculation. US revenue was up 18% year-over-year to $5.9
billion. The UK was up 12% year-over-year, to $1.3 billion which included $24 million
of benefits from our hedging program. It is in fact worth noting that in fixed FX terms
the UK grew 15% year-over-year. Non-US revenue, excluding UK, accounted for 45% of the total
revenue, or $5.9 billion. And, it was up 23% year-over-year which includes $11 million
benefits from our hedging program. In fixed FX terms, Rest of World grew a solid 28%. Coming back to an aggregate level for the
total consolidated business, our other cost of revenue was $2.9 billion in Q2, excluding
stock-based compensation and Motorola restructuring. Our non-GAAP operating expenses totaled $4.2
billion, also excluding stock based compensation and Motorola restructuring. And, our non-GAAP
operating profit was $4 billion in Q2, resulting in a non-GAAP operating margin for the consolidated
business of 28%. For standalone Google, our traffic acquisition costs were $3 billion,
or 25% of total advertising revenue. Other cost of revenue was $2.1 billion, again excluding
$110 million of stock-based compensation. Non-GAAP operating expenses were $3.8 billion,
excluding stock-based compensation of $633 million. And, non-GAAP operating profit was
$4.2 billion in Q2, resulting in non-GAAP operating margin of 32% for the standalone
Google segment. Please note that a revaluation of our depreciation
policy as it relates to our real estate portfolio resulted in an additional $121 million in
Google segment depreciation expenses. About 50% of which represented a one-time charge
for assets that are now fully depreciated. With this change in place, depreciation and
amortization expense on property, plant, and equipment for standalone Google was $667 million
for this quarter. At Motorola Mobility, total non-GAAP operating
expenses, included cost of revenue, were $1.2 billion. Keep in mind, intangible amortization
expenses attributed to the standalone Google and Motorola Mobility are in fact included
in these non-GAAP measures. Of the $283 million in intangible amortization expense in the
quarter, $153 million was the result of the acquisition of Motorola, of which $116 million
was allocated to Google and $37 million was allocated to Motorola Mobility. And, as a
result, the non-GAAP operating loss for Motorola Mobility was $218 million in Q2, and a non-GAAP
operating margin for that segment of minus 22%. Headcount for the consolidated business was
down roughly 9,000 people in Q2. Please keep in mind that consolidated count now excludes
Motorola home business. It also reflects the impact of the ongoing mobility restructuring.
Standalone Google added about 1,400 people during the quarter. And, in total, the consolidated
company ended the quarter with around 44,800 full-time employees. Our effective tax rate was 24% in Q2. Like
in Q1, several one-time items, as well as the continued shift of earnings between domestic
and international subsidiaries, impacted our tax rate this quarter. And, also please remember
that in Q1 we also had a significant lower rate in that case due to the 2012 R&D credit
which was obviously not applied to our Q2 rate. Let me now turn to cash management. Other
income and expense was $247 million for the quarter, which reflects realized gains on
investments and interest income, offset by the discontinued — the continued impact of
our FAS 133 expense on our hedging program. For more detail on OI&E, again, please refer
to the slides that accompany this call on our IR website. We continue to be very pleased with our operating
cash flow which is strong this quarter at $4.7 billion. CapEx for the quarter was $1.6
billion. And, this was versus last quarter at $1.2 billion. Want to remind everybody
that the majority of our CapEx spend is related to data center construction, facilities related
purchases, and production equipment. CapEx is just inherently lumpy. And, as I
mentioned last quarter during my remarks, our infrastructure will continue to be a strategic
area of investment. It’s one of the foundations of our future growth. Our free cash flow,
again, very strong, $3.1 billion for the quarter. Larry’s comments make it clear that there
are just enormous growth opportunities ahead of us as a company. It’s in this period of
optimism that we continue to fully fund strategic growth opportunities with the same confidence
and discipline we demonstrated while growing our mobile business, Android, YouTube, Chrome,
just to name a few. With this, I’ll hand it off to Nikesh who
will cover more details of our business performance in the quarter. And, after his remarks we’ll
open up the lines for questions. Nikesh?>>Nikesh Arora, Google Inc – SVP & Chief Business
Officer: Thank you, Patrick. As Patrick mentioned our
businesses had a strong quarter. We had over $13.1 billion in Google standalone gross revenue.
Overall, performance was particularly strong in the auto sector, in Brazil, and, as Patrick
mentioned, growth in the UK was hampered because of the particularly warm spring. Before I talk about trends we’re seeing and
investments we’re making in our business, let me call out the effort of our marketing
team that continues to create great Google moments. In May, they put on our second annual
YouTube Brandcast event in New York for 1,800 advertisers. The event was a great way to
show YouTube’s unique ability to help marketers connect with highly coveted consumers and
ultimately build their brands. At Brandcast, Jeffrey Katzenberg of DreamWorks said YouTube
is a whole new entertainment paradigm, and we think he’s right. Also, as Larry mentioned, the team put on
another successful Google IO developer conference showcasing our incredible momentum across
our platforms to over 6,000 developers in San Francisco with over 1 million people tuning
in from around the world. We continue to be pleased with how our business is evolving,
growing, and diversifying. There are three key areas where we continue
to make investments. First, our transformation into a marketing platform that works across
the connected world Larry described. Second, our systematic move up the marketing funnel
to help clients more and more with brand-building campaigns. Third, our investment in our non-ads
business such as enterprise services, hardware, and digital content through Google Play. First, our investments for our constantly
connected users. Rapid adoption of new devices means that more people are spending more time
online and connected. In fact, new devices and new connectivity means we’re moving to
a world where people are constantly connected with devices with them all the time. As an
example, e-marketers say for the time spent online on mobile devices by US adults grew
273% from 2009 to 2012. From 2011 to 2012 alone, the time spent connected to mobile
devices increased by nearly 0.5 hour a day. This means not only are a lot of new services
and apps available for users, but also a huge opportunity exists for businesses looking
to reach mobile users at the right time and location. That brings in Enhanced Campaigns. As Larry
talked about this, Enhanced Campaigns is a big long-term bet that is designed to help
advertisers more easily reach customers across devices with the right message, all within
one campaign. We already migrated 6 million of active campaigns to Enhanced Campaigns
over the last many months. Our goal is to migrate all of our advertisers and campaigns
by the end of this month. This effort has been executed at breakneck
speed and client reaction has been generally positive. We’re getting back evidence from
clients seeing improved performance using Enhanced Campaigns. For example, Pizza Hut
saw their mobile ROI increase by 20%. They found that their mobile click-through rate
has increased by more than 60% while their cost per order on smartphones has dropped
by 17%. We believe Enhanced Campaigns does set up
our clients and our business really well for the long-term. And, the move towards a constantly
connected world goes far beyond just direct response and transactional marketing. People
are spending time watching videos, playing games, consuming news, all this creates great
new opportunities for brand marketers to engage users. In fact, powered by our TrueView format,
YouTube’s mobile revenue in June of this year was 3 times what it was at the beginning of
the year. To help advertisers reach viewers across more screens, we’ve opened up our TrueView
formats to all of our AdMob network across 1,000s of apps. Turning our attention to brand marketers,
this is a very important area for us where we continue to invest broadly. It’s important
because the largest global marketers from CPG companies to film studios all conduct
large major brand advertising campaigns. Of course, that represents significant budgets
that have historically been spent on TV. A great example of this was seen at the Cannes
Lions Festival, the Dove Real Beauty Sketches campaign that appeared on YouTube won the
Titanium Grand Prix award which is considered the festival’s highest honor. We worked with Burberry to launch Burberry
Kisses which allows users to send a message to loved ones sealed with a digital imprint
of their real kiss. This campaign runs on YouTube and our display network across desktop,
tablet, and mobile. And, last month we began to integrate our recent acquisition, Wildfire,
into the double click platform so that brands can now manage the broader customer journey
across search, display, mobile, social, rich media, and video. Again, all within one platform. Finally, I want to talk a little bit about
our investment in emerging non-ad businesses. We made a bunch of bets that are beginning
to show promise. We’re seeing acceleration in new businesses such as hardware, digital
content, and enterprise. First, hardware. We continue to see great
momentum across Chromebooks and mobile devices such as our Nexus program. Around the world,
Chromebooks are now in more than 6,600 brick and mortar stores, including Walmart and Staples.
That’s about a 3 time increase this quarter. As Larry said, we’ve also added two new devices
to the Google Play store for Samsung and HTC. On the digital apps and content front, through
Google Play we continue to see tremendous amount of growth in this area. People from
over 190 countries now download apps from Google Play every day. More than 50 billion
apps have been downloaded so far. In the last year, Google Play digital content, like music
and movies, have launched in 21 new countries, including India, Mexico, Russia, with 8 more
European countries launching Google Play books this week. Publishers like Penguin, Random
House, Time Inc, movie studios like Disney and NBC Universal, and app developers like
King and Square Enix are creating carefree experiences for our users. We’ve also collaborated
with all the major record labels to launch a new music subscription service that users
seem to be enjoying — really enjoying a lot. Lastly, on the enterprise front, that’s another
great revenue stream for Google. It comprises productivity apps like and Docs and Gmail
as well as our Cloud infrastructure. Now more than 50% of the Fortune 500 companies use
a paid enterprise product from Google and over 5 million businesses use our productivity
apps. This means we have close, long-term relationships with our enterprise customers. New customers this quarter include some of
our world’s leading businesses like Federal Express, which has built their store locater
in Google maps, Snapchat which runs their application on Google’s Cloud infrastructure,
and LinkedIn is using Google Search Appliance. New Google Apps customers include Pearson,
Keller Williams Realty and the city of Boston. HP is now Google Apps reseller, combining
Google software with HP hardware for an initiative to help small businesses call SMB IT in a
Box. To conclude, across our entire business we’re
investing with enthusiasm and have tremendous opportunities. We strongly believe that we’re
making the right moves for our users and clients and we’re extremely optimistic about the future. With that, let me hand back to Patrick.>>Patrick Pichette, Google Inc – SVP & CFO:
Thank you, Nikesh. Jamie, if you want to give us the instructions, please, to get going
on the Q&A, please, I would appreciate it.>>Operator:
Thank you. (Operator Instructions) Ross Sandler, Deutsche Bank.>>Ross Sandler, Deutsche Bank – Analyst:
Great. Thanks, guys. Nikesh, I just had one high level question on Enhanced Campaigns and the transition.
Could you give us a little bit more color about the ROIs that most of your customers
are seeing? You mentioned a few comments, but are they
going up? And, do you see a significant opportunity in providing conversion tracking across different
screens? What do you think will happen with Search budgets if and when you can solve that
problem? Thanks.>>Nikesh Arora:
Thank you for the question. I think it’s fair to say that over the last nine months we’ve
had to do a super herculean task to take millions and millions of campaigns, as Larry mentioned,
6 million campaigns, where we’ve had to work with our advertising partners to go ahead
and convert them towards Enhanced Campaigns. And, we’ve had some amazing insights, both
working with the advertisers and as well as our teams, as many advertisers have discovered
that they were not addressing the mobile opportunity appropriately, they discovered new inventory,
they discovered better ROI, and better conversion. Of course, we anticipate that conversion analytics
will work across every screen and be able to be made available to all of our advertisers.
We believe that as we get more and more — as we get better, in terms of being able to provide
more targeting and more comprehensive ad solutions for mobility and across all screens, that
the ROI should continue to improve. So, I’m very optimistic in the longer term
because we believe mobility provides more context to advertisers in terms of where the
users are or where they’ve been. Which allow for more accurate advertising and advertising
which is almost as good as information for them. As that begins to happen, we think the
advertising ROI continues to increase. And, hopefully, that means good things for Search
budgets.>>Patrick Pichette:
Thank you, Ross, for your question. Jamie, let’s go to the next question.>>Operator:
Ben Schachter, Macquarie.>>Ben Schachter, Macquarie Research – Analyst:
One question for Larry and one for Patrick. Larry, when you think about hardware, are
there other hardware categories beyond just phones and tablets where you believe Google
can potentially build meaningful businesses? And then, Patrick, in Q1 we didn’t really
see the usual uptick in expenses that you see annually. But then, now we do see it in Q2. It sounds
like some of that was the accounting issue around depreciation. Can you help us understand
what happened there more? Thanks.>>Larry Page:
Thanks, Ben, for the question. I think we’ve been an early innovator in smartphones and
we’ve been really excited about starting Android when no one really thought it was going to
be interesting. And, I think it’s always a mistake to assume that technology will be
static. So, I think certainly over the long term, we’re going to have new kinds of devices
and ways of interacting with computing and the Internet. We’re obviously excited about Google Glass
and new ways of interacting with hardware and new types of hardware. With any technological
change you probably overestimate the short-term and underestimate the long-term. So, I think
our — we’re really excited about making those investments and making sure we’re positioned
to the future. That’s why I love using Glass because I feel like every time I’m using Glass
I’m living that future, that’s really, really exciting to me.>>Patrick Pichette:
Why don’t I jump on the next question. So, on the issue of expenses, look, our expenses
in Q2 were completely in line with the objectives we had set for ourselves. In general, we continue
to exercise financial discipline and monitor our product profitability. But, it’s on that
basis that we recognize the significant opportunities that are ahead of us. And, with the view to the long-term, we continue
to invest significantly and intelligently to fuel these opportunities. The fundamental
issue is, as I said a number of times on previous calls, if you want to hire X amount of people,
you have a target for the quarter or for the year. They come in sometimes a bit over, sometimes
a bit under. But, the real question is are you still on the right trajectory for the
long-term you’re shooting for. That’s really the issue between Q1 and Q2, Ben. Thank you
for your question. Why don’t we go to the next question, Jamie?>>Operator:
Mark Mahaney, RBC Capital Markets.>>Mark Mahaney, RBC Capital Markets – Analyst:
Great. Two questions, please. First, on CPC, Patrick, you mentioned a couple of factors
behind the deflation there. I don’t think you ticked off mobile. I don’t know if there’s
any particular reason why you didn’t or maybe I missed it. In terms of the employee adds, maybe a question
for Larry, as you think about where you’ve been able to get employees, the ease or the
difficulty with which you’ve been able to hire the employees you wanted to hire, can
you comment how that has changed if at all over the last year or two? Thank you.>>Patrick Pichette:
Why don’t I jump in on the first one. Clearly, mobile has some effect in it, and we’ve talked
about that in the past. It’s one of the many factors that are at work. I just gave the
list, and the property mix, obviously, and the channel mix includes a bunch of mobile
shifts as well in there. That’s part of the equation clearly for sure that drives both
sides of the equation. I just want to remind everybody that it’s
always dangerous to just look at CPCs by themselves or just look at paid clicks by themselves.
But, in fact it’s a combination of the two that gives you the health of the business.
And, these mixes move all over the place, depending on the number of changes going on
in any quarter. But, overall, very pleased with the overall performance. On headcount,
I’ll led it to Larry to jump in.>>Larry Page:
Yes, Mark, I think — I don’t think we’ve seen any significant change in the short-term
on hiring. I think we’re really lucky that we have really great people at the company
and more great people who want to work with us. We’ve been able to buy small companies
too where you get great people. And, I don’t see any major changes in how that’s been changing. I also think retention for the company has
been great. People are excited to work here. They’re excited to work on important things
and make the world better. And, we’re able to hire some of the best people in the world.
I think that’s been continuing and it’s pretty stable.>>Patrick Pichette:
Thank you for the question, Mark. Jamie, let’s go to the next question, please.>>Operator:
Carlos Kirjner, Sanford Bernstein.>>Carlos Kirjner, Sanford C. Bernstein & Co.
– Analyst: Thank you, two questions. Larry, I think you
sometimes say that technology has done only 1% of what it can do, suggesting that there’s
a lot of opportunity for Google. If that’s the case, why isn’t your R&D budget 10%, 20%
or materially higher than today? Or in other words, what limits your ability
to spend more to capture these opportunities? Secondly, Patrick, can you tell us in general
what specific financial operating metrics you use to evaluate the success of Google
Fiber as a business? Thank you.>>Larry Page:
Yes, that’s a really great question, Carlos. I think that’s our main job is to figure out
you how to obviously invest more to achieve greater outcomes for the world, for the company
and so on. And, I think those opportunities are clearly there as we’ve seen in the past
with things like Chrome and Android, and I’ve talked about that a lot. I think that execution of velocity, I’ve talked
about it a lot too. It’s pretty easy to come up with ideas. It’s pretty hard to make them
real and get them to billions of people. That’s what’s for me is so exciting about being a
company who, like Google, is that we get to do technological innovation at scale and get
it out to — on the scale of the whole world, to billions of people. But, I wish we could
just snap our fingers and accomplish that. It’s actually a lot of hard work and takes
a lot of great people working really hard to make that happen. And, we’re working every
day to improve our processes, improve our leadership, improve how we’re organized and
to make that all go faster. That’s why I come into work excited every
day. And, I think everyone else does too. I wish we could snap our fingers and just
do a tremendous amount more instantly. But, the reality is it’s hard work to scale and
that’s what we do.>>Patrick Pichette:
Carlos, I’ll take the second one related to Google Fiber. Just as a context for everybody,
we have been on the public record to say we’re running Google Fiber and excited about it
and we always had profitability as one of the key criteria for this opportunity. And,
in terms of metrics, they should be just aligned with any sound business that’s in that domain
of access which is a combination — but first, actually, it was interesting because the question
was how successful was it going to be, the product. And then — meaning how many people would
want to take it. And then, the second — so, we’ve been obviously very pleased by our results
in Kansas City and now the announcements of the other two cities we’ve made since then.
And then, there’s all the regular metrics you can imagine which have to do with cost
of infrastructures, cost to serve and then how they flow into a profitability model. There’s no real rocket science in the financials
of it. The real magic occurs with the definition of the product, the innovation on the technology
that the teams are pushing, and what makes Google Fiber 100 times faster than the next
best thing. That’s really what we’re really focused on. So, I hope that answers your question.
And, let’s go to the next question, Jamie.>>Operator:
Doug Anmuth, JPMorgan.>>Doug Anmuth:
Great, thanks for taking my question. Just wanted to ask about the network sites deceleration
that you saw, a 12% growth last quarter and 7% growth this quarter. If you could just
talk about some of the key drivers there and perhaps how much is self-inflicted as you’re
cleaning up more of the sites and quality and everything? Secondly, can you talk about the key drivers
that you see in terms of improving conversion rates for mobile ads? I know you mentioned
the conversion analytics. What else do you think gets mobile ad conversion up over the
next few years? Thank you.>>Patrick Pichette:
For the first part — I’ll answer the first part of the question, Jamie — and then — sorry,
Doug, and then, Nikesh will answer the second part. Clearly, the network deceleration, we’ve
— that’s why we made the comment last quarter about the DLA and the policies. And, it’s
clearly having an impact as now we’ve had a number of partners that have, through Q1
and Q2, have all been notified and made the changes to their behavior. So, these policies are now coming into compliance
and as a result of it, you see the impact. But, we really believe that this is a really
good thing for our users. And, in the long term will really benefit both the users and
Google. That’s the core elements of what’s going on there. And then, for the second question,
I’ll let Nikesh jump in.>>Nikesh Arora:
Yes, thank you, Patrick. I think it’s important to understand, as I said, that improving conversion
rates for us requires us to do a lot of things. One is we have to understand the cross-device
behavior better. We have to understand the cross-device conversion people. People can
start a search on one device and conclude it on another device. These opportunities did not exist in the past
when we were all focused on one screen. In addition to that, as we talk about mobility,
we start to understand the context of the users a lot better. As I said, where are they,
where have they been, what could their search possibly mean? When they’re searching — in a car parking
lot and searching for another car dealership, that gives us a very different signal than
if you’re sitting at your desk and searching for a car. All those attributes, all those
factors need to go in, into creating better targeting, better advertising for our end
users so that that actually helps increase ROI for advertisers and hopefully ROI for
us in the longer term.>>Patrick Pichette:
Thanks for your question, Doug. Jamie, let’s go to our next question, please.>>Operator:
Scott Devitt, Morgan Stanley.>>Scott Devitt:
Hi, I had two questions. First, Larry mentioned some of the new features in the maps update.
I think also the Gmail tab update seems like it’s being pushed to users you now. It would
be great to know — if you could share the time line just for the full roll-out for the
US and internationally, any implications you foresee the update may have on those that
are relying on marketing as a distribution channel? And then, secondly, Larry also spoke about
balloon deployed Internet access. I was wondering if you could talk about another initiative
that seems like it has significant opportunity long-term, the automated vehicle opportunity?
And, when you think of that as a commercial opportunity at scale. Thanks.>>Larry Page:
Yes, thanks for the questions, Scott. I think — I’m not sure the detail of the Gmail roll-out.
I think — I’ve been excited to use it and I think it’s a really great experience. I
think we’re doing a lot to improve people’s experience on Gmail. I mentioned we have a
huge number of users on Gmail. It’s growing quickly. We’re really, really excited about
it. And, obviously there’s some things around
the e-mail experience that can be improved and we’re doing a lot to organize commercial
offers and things like that, make sure that they’re — you’re not getting overwhelmed
by spam and so on. I think those have been great, very user positive features that we’re
rolling out. I think in terms of automated cars, I think,
again, that’s a very early stage thing. I think we’re very excited about it. I think
it has potential again to have tremendous impact on people’s lives on mobility and so
on. And, I think there’s nothing that’s changed about that. We’re super excited about it,
we’re working hard, It’s very early stage project, obviously. Then there’s the last part of your question,
I mean, I think it’s hard to predict exactly when these things will be commercial. My question
I always ask is why aren’t you doing it today? So, we try to reduce whatever roadblocks that
we can to getting things out as quickly as possible. And, I think — I think there’s
great opportunity there.>>Patrick Pichette:
Thank you for your questions, Scott. Jamie, let’s go to our next question, please.>>Operator:
Anthony DiClemente, Barclays.>>Anthony DiClemente, Barclays Capital – Analyst:
Hi, thanks. I have one for Patrick and one for Larry. Patrick, just want to ask about
CapEx. I think you mentioned in your comments that data centers and other network infrastructure
was lumpy and responsible for the doubling of CapEx. I’m just wondering, I’m not sure from an accounting
perspective what the useful life is on some of those investments? And, whether or not
the amortization of those assets is part of what’s causing a little bit of the uplift
in operating expenses? Would love to hear a little more about CapEx. Larry, as Google continues to invest for future
growth, I just wanted to ask how do you, as a leader of the company, ensure that the people
at Google and your employees keep the small entrepreneurial culture that Google had and
was known for in its earlier days? Thanks a lot for the question.>>Patrick Pichette:
Let me jump in, Anthony, on the first part and then I’ll let Larry answer the second.
We don’t give the details of the different categories of depreciation for our assets.
But, you can imagine that as we build these — the data centers and the computers, clearly
data centers have a long lifetime. Because if you think of them as land, electricity,
power, building shells, cooling towers, all that technology has much longer useful life.
The computers themselves, the machines, the servers have a much shorter lifetime. And,
we track all these by categories, obviously. And, clearly there’s a relationship between
that and our depreciation rates that have been — between that and that have been climbing
over the last few quarters. There’s nothing magical about it as well. It’s just basically
what you would expect by category. On the second question, I’ll let Larry answer.>>Larry Page:
Yes, it’s a great question, I think. I think I’m very, very excited to see — I mentioned
the Project Loon or the automated cars. I think a lot of it is making sure that our
employees and Google as a company has permission to do important things. And, those things
always start with a small group of people. They start with 1 or 2 people, then 10 people
and so on, and those people can get a lot of things done. So, I think partly I measure the health of
the company in that way is we’re able to start up new and important things and make traction
on them. And, that’s the only way we end up with things like Android and Chrome, those
kind of projects. So, I look at it as a portfolio thing. There’s some number of people that like to
work on really crazy things that are going to really change the world. And, want to deal
with 10 other friends and work hard on them and make sure we’re creating those opportunities
and growing them into things that become Gmail or Android or Chrome or things like that.
So, I look at it across the portfolio and I think we’re doing quite well and I’m pretty
excited about it.>>Patrick Pichette:
Thank you for your question, Anthony. Jamie, let’s go to our next question, please.>>Operator: Mark May, Citi.>>Mark May, Citigroup – Analyst:
Thanks for taking my questions. The first one, I’m wondering, there was an expectation,
I think, starting this quarter that we’d start to see some of the impact of Enhanced Campaigns.
And, obviously, you’re seeing great adoption of that. And, that that adoption and the impact
that that might have on blended prices might offset these mix factors that you referenced. I wonder if you could help walk us through
why that wasn’t the case necessarily in this quarter? And then, secondly, probably for
Patrick, I wonder can you help estimate the impact on the network growth in the quarter
from the quality improvement initiatives? And, are these issues that might impact future
quarters or was this mainly a first half of this year impact?>>Larry Page:
Yes, that’s a great question. I’ll just say maybe one sentence, then turn it over to the
other guys. I think it’s important to keep in mind Enhanced Campaigns the largest change
we made in AdWords, ever. It was done pretty quickly. So, I think we’re still very, very
early stages of that. We changed tremendous amounts for how our
teams operate, how our advertisers operate, how everyone buys those ads, what the users
see. And, we’ve done it pretty well. It’s been pretty smooth, which I’m really excited
about. But, like I said, that’s the early stages of a very, very major change. I think
we’re very pleased with how that’s going.>>Patrick Pichette:
Yes, very much so. And so, on the second part of your question, Mark, I think the quality,
the force for quality around our policies, they will take a year to flow through. Once
you reset the bar, then it actually — by the time — people will adhere to these changes
but then you have to actually navigate through the entire year-over-year effect which will
probably take a couple more quarters. That’s just a timing issue. Having said that,
I just want to remind everybody, again, that the fundamental issue that we see is it’s
really important for us to actually have a great user experience. And, Susan and her
teams pounded this by making changes on a constant basis to make sure that at the end
of the day there is that smart about the quality of the user experience, and the quality of
the ads. Because in the end that’s what really drives
the benefit in the long term. So, when we have to hit — take some hits in the short
term in order to get the right answer in the long-term for our users and our advertisers,
we’re always ready to them. And, that’s a great example it. We’re actually not too worried
about it. We have so many other areas that — we’ve
just talked about Enhanced Campaigns. There’s PLAs. There’s so many other areas that offers
us opportunities that we just got to keep this in balance. Thank you for your question,
Mark. Jamie, let’s go to our next question, please.>>Operator:
Heather Bellini, Goldman Sachs.>>Heather Bellini, Goldman Sachs – Analyst:
Great. Thank you very much for the question. I just wanted to follow up on Enhanced Campaigns.
I guess one of the questions people are trying to get at is was there any impact from Enhanced
Campaigns on paid clicks and CPCs in the quarter that you could try and help us calibrate? And then, I guess the other question would
be given obviously it is still new and broad roll-out this quarter, how many quarters do
you think this needs to be in place for you to have a good sense of the impact it might
have on those metrics? And then, sorry, then my last question was anything related to the
impact on FX related to CPCs? I didn’t think I heard that. Thank you.>>Nikesh Arora:
Hi, Heather, this is Nikesh. Thank you for your question. I think — let me step back
and say first of all, it’s, as Larry mentioned and Patrick mentioned, it is an existential
requirement for us to take our advertisers and move them to a campaign strategy which
allows us to move them across multiple screens. This wasn’t something that is just a remedy
imperative. It’s an imperative from a simplicity perspective, from an advertiser return perspective,
and also from the way our teams operate. We have spent the last six months migrating over
6 million campaigns, as I mentioned. We’ll probably be done by the end of this month
which is not too far away. And, as you can imagine, that we’ve been focusing
and moving these things across the board. So, we’re still looking at the full impact
since the impact has graduated over the last few months. Now, in terms of what the impacts
of this should be in the longer term, as I mentioned earlier, the impact in the longer
term should be that we should be able to provide, simpler, faster, better ads to our advertisers
across multiple screens. In terms of when you should be able to see
effects of these things, obviously there are effects that we see and we monitor and we
take a look at, but it’s too early for us to go out and start detailing what the impact
of these things are. Of course, in the long-term it should have a positive impact on conversions
and, as a result, all resulting metrics that affect conversion.
>>Patrick Pichette: Heather, I’ll just jump on your very last
question about FX related to CPCs. As I said in my comments, there’s actually a marginal
effect. FX was not a big factor this quarter. It has been a little bit for the UK, as I
mentioned, but for the rest of our — the world, it has not been a major impact for
the CPC issue. Thank you for your questions, Heather. Jamie, let’s go to our next question,
please.>>Operator:
Justin Post, Merrill Lynch.>>Justin Post, BofA Merrill Lynch – Analyst:
Great, thank you. Patrick, the gross profit growth has been trailing revenue growth, I
think it was about 14% this quarter, for about three quarters especially. Can you talk about
what really drove the step-down last year in 3Q? And, is there any way to see that gap close?
And, do you use gross profit as a measure or do you look more at revenue growth? Just
some of the drivers of the difference would be really helpful. Thank you.>>Patrick Pichette:
Thanks, Justin. Again, a topic that’s for financial analysts have been always top of
mind. I just want to reiterate some of the basic messages that have not changed in how
we think about this. First of all, we care about revenue growth we care about profitability.
We care about both. And, as I said before, we’re not in a business
to lose money or cross subsidize or any of these things. Regarding margins, we really
look at every incremental profit $1 that creates shareholder value. And, really focused on
these profit dollars rather than the percentage margins. Many of the new opportunities that we may
be exploring, whether it be hardware, whether it be play, whether it be — many of these
will have different margins in our core business. But, they actually offer great huge revenue
pools, huge margin pools in absolute dollars. And then, create much shareholder value and,
in many cases, with Larry and the product area leads, great synergistic value between
the products to create these great experiences. That’s basically the mindset that we apply
at it. And, we track them independently and together and make sure that we actually deliver
continued revenue growth and profit growth. So, that’s the mindset at which we apply. And, don’t read in my comment that we’re not
focused on our core business. It remains our core business. The core is the core is the
core and it continues to give us both revenue and oxygen profit to fuel our growth as well.
So, that’s the balanced answer to your question.>>Justin Post, BofA Merrill Lynch – Analyst:
If I could follow up?>>Patrick Pichette:
Yes, yes.>>Justin Post:
Is there anything in there that may be operating right now at negative gross margins that is
intransitory in nature?>>Patrick Pichette:
I wouldn’t comment on a specific product by product. But, it’s clear that if there are
timing issues, if there’s a product that is actually in investment mode and at the beginning
of its investment curve, you know that you’re actually investing in it for the timing of
future profit. We do that too. You can imagine our very first customer in
Kansas City, right, the P&L for that day was negative. But, that’s not why we did Kansas
City. We did Kansas City because we knew as a city it was going to be very profitable. So, there’s clearly products that have, because
of the timing investment moments that actually show, will show, negative. But, not because
we want them to be negative, just because of where they are in their investment phase.
So, that’s how we think about it. Thank you for your question. Jamie, let’s go to the
next question, please.>>Operator:
Brian Pitz, Jefferies.>>Brian Pitz, Jefferies & Company – Analyst:
Thanks. Nikesh, you briefly mentioned PLAs. We continue to see that format in Search and
recently we noticed integrated deals and offers into that format. Any additional color on
the impact from PLAs in the quarter? Larry, regarding product search, I guess more broadly,
do you think users will be able to purchase items without ever leaving the search results
page at some point? Thanks, so much.>>Larry Page:
Thanks, Brian. I’ll take the second question first. I think to the extent, obviously, we
can streamline your process of doing transactions or fulfilling any task, that’s a good thing. I think in the trial we’re doing in the Bay
area with same day delivery you can buy things very easily and get them delivered in a couple
hours, which is a pretty great experience. We definitely look at any ways we can find
to really improve our user’s experience. Nikesh, do you want to take over the PLA parts?>>Nikesh Arora:
Yes, as Larry mentioned we’re trying to get the user experience to be better and better.
And, as we’ve talked in the past, things are moving from tend to a link to entity level
search where people are searching for specific entities and they expect response as a specific
entity when doing that search. You think about PLA in the broader context,
when people search for something they like to get their answer. If it’s a product they’re
searching for, of course, PLA satisfies that requirement. We are signing up tens of thousands
of merchants who want to share that data with us, who want to make that data visible as
part of Google Search. We think this is a good thing. Again, as we provide more and more PLA information,
obviously, it has an impact on people’s clicking of those links. So, the long-term that should
have a positive impact on click-throughs on various ad formats. But, for now, it’s too
early to talk about the impact of those on the overall numbers that we have.>>Patrick Pichette:
Thank you for your question, Brian. Jamie, let’s go to our next question. We have time
for a couple more.>>Operator:
Gene Munster, Piper Jaffray.>>Gene Munster, Piper Jaffray & Co. – Analyst:
Good afternoon. Question on the Motorola X phone, I know you haven’t said a ton about
it, but there has been some talk that you’re going to be aggressively marketing this. Can you just talk a little about this relationship
you have between having the Motorola X phone be enough of a success that you make a statement
but not enough of a success that you end up corrupting or impacting your Android partners?
So, talk about that relationship. Thanks.>>Larry Page:
Thanks for the question, Gene. I think nothing about what we said has changed. We operate
Motorola independently. You can see the level of work that’s gone on there to operate that
business. I think the team’s been doing a great job,
as we mentioned. I think they’re working hard on making great products and I think we’re
real excited about it. I think they’re excited about it. And, obviously, you’ll get to try
it out pretty soon.>>Gene Munster:
Do you feel that the incremental investment, is it going to be — it’s been rumored to
be $500 million. Is it something in that range?>>Larry Page:
Are you talking about — I guess people have been speculating about marketing and so on.
I think that, obviously, we’re going to — we’re operating Motorola independently. We’re running
it much the same way you would run any business like that. And, I think we’re doing things
that are normal for that business. I think probably too much has been made over those
things.>>Patrick Pichette:
Thank you, Gene, for your question. Okay, we have time for one more question. So, Jamie,
can you give us the last question. Operator:
Thank you. Richard Kramer, Arete Research.>>Richard Kramer, Arete Research – Analyst:
Thanks, very much. One for Larry and one for Patrick. For Larry, given the recent launch
of YouTube subscriptions and then also music services, how widely do you see Google expanding
into subscription based services in the future? Do you see this in three to five years as
something that would be a meaningfully-sized segment that would rival network in size,
for example? For Patrick, since you’ve had questions about Motorola, being excited about
it is nice but the business has lost nearly $1 billion on a GAAP basis in the last three
quarters. So, can you give us some sort of time scale
for achieving returns here? And, I know you mentioned you’re just looking for absolute
profit dollars. But, what’s the ultimate gain for Motorola in terms of contributing to Google’s
profit base or even just to distribute more widely Google services? Thanks.>>Larry Page:
Yes, the question about subscription services, I think, like we said, we’re really excited
about the play music subscription being really well received. I love using it. I think we’re
always looking for ways to meet our users’ needs better. And, obviously subscriptions
are one way to do that. So, I’m sure over time we’ll try to meet our
users’ needs better and have our products in that area. I don’t have anything to announce
at this time there. On the Motorola question, Patrick, you want to take that?>>Patrick Pichette:
Sure. I think the Motorola question has to be put into context of two things. One is
what we originally paid for Motorola and all the assets we acquired and the benefits we
got out of that acquisition because there wasn’t only a short-term financial play, there
was a number of strategic issues. We’re very pleased with the divestiture of the home business
which generated quite a bit of cash over the last — in Q2. I think you have to put this conversation
in the context of the entire acquisition for which we’re really pleased. And, we also are
incredibly proud of what the team has accomplished in the last year in having now created this
great entity under Dennis who is now lean and mean with 5,000 employees focused on the
future and really pounding away on the next generation of products. I’ll leave it to the coming quarters to really
demonstrate the new Motorola that’s showing up. And, you’ll see that in the coming weeks,
actually. Larry, any last comments before we close?>>Larry Page:
No, I want to thank everyone for spending so much time with us today. And, we will see
you all next quarter.>>Patrick Pichette:
Jamie, I’ll let you close the call. Thank you, everybody, for your time.>>Operator:
Thank you, sir. Again, we do thank everyone for their participation. That does conclude
today’s conference. Please, have a good day.

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