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pww.comGoogle Inc., Q2 2009 Earnings Call, Jul-16-2009 - NasdaqGS:GOOGL

NasdaqGS:GOOGL

Maria Shim [Executives] đź’¬

Maria Shim began the earnings call by welcoming everyone and introduced the speakers for the call: Eric Schmidt, the CEO; Patrick Pichette, the CFO; Jonathan Rosenberg, Senior Vice President of Product Management; and Nikesh Arora, President of Global Sales Operations and Business Development. She explained the format of the call, mentioning that Eric, Patrick, and Jonathan would provide their thoughts on the quarter, and Nikesh would join for the Q&A session.

Maria also noted that the call was being webcast from Google's Investor Relations website and directed listeners to the website for the earnings press release and accompanying slides. She informed attendees about the availability of a replay on the website and emphasized the importance of checking the website for updates and information.

She reminded the audience of the two calls scheduled for the day, with the second call focusing on detailed financial and product questions in a Reg AC compliant manner. The second call was scheduled to start at 3 p.m. Pacific Time and would also be webcast.

Maria covered the Safe Harbor statement, cautioning about forward-looking statements and the risks and uncertainties that could cause actual results to differ. She advised listeners to refer to Google’s SEC filings and the annual report for a detailed discussion of risk factors.

Lastly, Maria turned the call over to Patrick Pichette for the financial portion of the presentation.

Patrick Pichette [Former Chief Financial Officer and Senior Vice President] đź’¬

Patrick Pichette, the Former Chief Financial Officer and Senior Vice President of Google, discussed several topics during the Q2 2009 earnings call. Here’s a detailed summary of his comments:

Opening Remarks

  • Financial Performance Overview:
    • Noted that Google had a good quarter, demonstrating resilience despite a challenging economic environment.
    • Reported 3% year-over-year growth in revenue.
    • Highlighted the stabilization of the business amidst a weak economy.

Financial Highlights

  • Revenue Growth:

    • Gross revenue grew by 3% year-over-year to $5.5 billion.
    • Foreign exchange (FX) fluctuations had a negative impact, estimating a $500 million difference if last year’s rates were applied.
    • Benefited from a $124 million hedging program to mitigate FX impacts.

  • Google.com Strength:

    • Contributed the majority of the year-over-year growth, up 3.5% to $3.7 billion.
    • Observed healthy traffic growth and signs of strength in consumer verticals like shopping and electronics.

  • AdSense Performance:

    • AdSense revenue increased by 2% year-over-year to $1.7 billion.
    • Solid results in AdSense for content, with strong year-over-year growth in the Display business.

  • Paid Clicks and Cost-per-Click (CPC):

    • Aggregate paid click growth remained healthy, up 15% year-over-year.
    • Aggregate CPC growth was down 13% year-over-year but up 5% quarter-over-quarter.
    • FX had a negative year-over-year impact but a positive quarter-over-quarter impact.

  • Geographic Performance:

    • U.S. revenue grew by 2% year-over-year to $2.6 billion.
    • International revenue accounted for 53% of total revenue or $2.9 billion.
    • U.K. revenue declined by 8% year-over-year to $715 million, impacted by FX and macroeconomic weakness.

Expense Management

  • Traffic Acquisition Costs (TAC):

    • TAC was $1.5 billion, or 27% of total advertising revenue.
    • Other cost of revenue was $655 million, including $14 million in stock-based compensation.

  • Operating Expenses:

    • Total operating expenses were $1.5 billion, including $279 million in stock-based compensation.
    • Year-over-year, operating expenses were lower by nearly $120 million and flat quarter-over-quarter.

  • Operating Profit and Margin:

    • Non-GAAP operating profit increased to $2.2 billion in Q2 from $1.9 billion the previous year.
    • Non-GAAP operating margin reached 39.2%.

  • Headcount:

    • Approximately 20,000 full-time employees at the end of Q2, down 375 from Q1.
    • Decrease mainly due to the reduction in sales and marketing positions.

Cash Management

  • Other Income and Expense:

    • Net expense of $18 million for the quarter.
    • Realized gains on marketable securities were $18 million.
    • Accelerated hedging expenses due to high volatility in option strike prices.

  • Effective Tax Rate:

    • Effective tax rate was 20% for Q2.
    • Changes in the mix of earnings between domestic and international subsidiaries affect the tax rate.

  • Cash Flow and Capital Expenditures:

    • Operating cash flow was strong at $1.6 billion.
    • Capital expenditures (CapEx) for Q2 were $139 million.
    • Free cash flow was strong at $1.5 billion.

Closing Remarks

  • Summary:
    • Satisfied with Q2 results, despite seasonality, economic conditions, and FX fluctuations.
    • Disciplined cost management while investing in strategic growth areas such as search, display, mobile, and apps.
    • Noted that Q3 tends to be impacted by summer seasonality.

Additional Comments

  • Q&A Session:
    • Addressed questions on various topics, including cost structure, efficiency gains, and the outlook for the business.

Patrick Pichette's comments provided a comprehensive overview of Google's financial performance and strategic initiatives during the second quarter of 2009.

Eric E. Schmidt [Former Technical Advisor] đź’¬

During the Q2 2009 Earnings Call, Eric E. Schmidt, then the Chief Executive Officer of Google, provided the following comments:

  1. Business Resilience and Performance:

    • Google demonstrated resilience with 3% year-over-year growth in a challenging economic environment.
    • The core business has stabilized despite the weak economy, indicating advertisers and customers are benefiting from performance-based advertising.
    • Consumers are increasingly using search to find the best deals.

  2. Cost Controls and Efficiency:

    • Careful cost controls have been implemented to improve business efficiency.
    • This sets Google up well to benefit from any eventual economic recovery.

  3. Investment in Innovation:

    • Companies that invest in innovation during downturns typically emerge stronger than those that cut costs.
    • Google aims to avoid becoming conservative and instead focuses on big innovations.

  4. Chrome OS Announcement:

    • Announced Chrome OS for netbooks, aiming to rethink what an operating system should be based on the Chrome browser technology.
    • The goal is to develop a faster operating system to match the needs of the internet age.

  5. Core Business and Search Improvements:

    • Search remains an unsolved problem, and Google is working on the next generation of search that is more social, personal, and intelligent.
    • More than 100 search quality improvements were introduced in Q2, improving the ability to find precise information.
    • Mentioned Google Squared, which automatically fetches and sorts facts and data from across the web.

  6. Ads Quality and Sales Growth:

    • Healthy revenue growth in ads despite the tough economic environment, driven by improvements in ads quality and sales.
    • Experimenting with innovative ad formats for search, particularly in local, products, and video.
    • Sales management has become more rigorous, focusing resources on high-potential areas.

  7. New Businesses Performance:

    • Display business, including YouTube, performed well, with YouTube on a positive trajectory.
    • Mobile and Android are also areas of innovation, with plans for 18 to 20 Android-powered phones by the end of the year.
    • Noted significant Q2 deals in the enterprise sector, including Motorola’s Mobile Handset Division moving to Google Apps and several universities and companies adopting Google Apps.

  8. Perspective on Recovery:

    • The economic situation continues to be challenging, but there are signs of relative stability in Google’s business.
    • It’s too early to predict when the recovery will materialize, but Google is well-positioned for the future due to its continuous investment in innovation.

  9. Closing Remarks:

    • Eric expressed satisfaction with the year-over-year performance, emphasizing the importance of innovation and the company's strategic investments.

Jonathan J. Rosenberg [Former Head of Product Development and Senior Vice President of Product Management] đź’¬

During the Q2 2009 Earnings Call, Jonathan J. Rosenberg, the Former Head of Product Development and Senior Vice President of Product Management at Google, discussed several topics related to product updates and innovations. Here’s a detailed summary of his contributions:

Jonathan J. Rosenberg’s Remarks

  • User Focus and Active Power Users:

    • Google’s focus remains on users, with a recent emphasis on “active power users” who are becoming more sophisticated in their search queries.
    • Power users are typing longer queries and have higher expectations from search results.

  • Launch of “Search Options” Feature:

    • The new feature allows users to filter search results by time or type, enabling them to “slice and dice” the results.
    • Users can access this feature by clicking the “Show Options” link at the top of the search results page.

  • Speed Improvements:

    • Google emphasizes that “fast is better than slow,” and this principle applies to all products, not just search.
    • Picasa has been updated with improvements that allow for quick slideshow functionality of uploaded photos, demonstrating the speed and responsiveness of cloud-based applications.

  • Product Development Principles:

    • Google encourages teams to make “big product bets” based on key technical insights.
    • Products like Search, Maps, Gmail, News, and Chrome are examples of innovations driven by technical breakthroughs.

  • HTML 5 and Mobile Innovations:

    • Google is bullish on HTML 5, which helps make the web a platform for powerful and rich applications, especially on mobile devices.
    • Mobile versions of Gmail and Mobile Web Maps have been launched using HTML 5, offering remarkable performance.
    • The runway for innovation on mobile devices is seen as nearly unbounded.

  • Google Chrome OS:

    • The new operating system is designed to provide a better, faster user experience for web-based applications.
    • The goal is to enable users to access their online content and applications quickly upon opening their computers.

  • Monetization and Advertising Quality:

    • Mobile monetization has gained momentum as search traffic grows, driven by smartphone usage.
    • Users on high-end phones are very active, and display advertising on these devices is emerging as an interesting mechanism.
    • Monetized views on YouTube have more than tripled in the past year, with billions of partner videos being monetized monthly.
    • More than a dozen improvements were made to ad quality this quarter, with a higher-than-usual impact on RPM (revenue per thousand impressions).

  • Wave and Open Innovation:

    • Google Wave is described as a new way to communicate and collaborate online, conceived and developed by a small autonomous team in Australia.
    • Open source projects like Android, Chrome, Wave, and Chrome OS foster innovation by empowering the broader community of web developers.

  • Q&A Session Contributions:

    • Vertical Search and Monetization: Jonathan noted that there is significant opportunity for incremental monetization gains by further qualifying leads for advertisers, particularly in finance and travel.
    • YouTube Monetization: He mentioned that monetizable views on YouTube have tripled in the past year, with billions of views being monetized monthly. There is significant interest in homepage mastheads and pre-roll advertising, particularly for short clips and long-form videos.
    • Trademark Policy Update: Jonathan explained the recent update to the trademark policy in the U.S. for google.com, AdSense for Search (AFS), and AdSense for Content (AFC), allowing advertisers to use trademark terms in their ad creatives under certain conditions.
    • YouTube User Experience: He commented that there is very little drop-off with pre-roll ads, indicating general user acceptance of pre-roll advertising for premium content.

These remarks provide insight into Google’s product strategy and innovations during the second quarter of 2009.