Source: Seeking Alpha
Start Time: 16:40
End Time: 17:38
Google Inc. (NASDAQ:GOOG)
Q2 2014 Earnings Conference Call
July 17, 2014 04:30 PM ET
Patrick Pichette – SVP and CFO
Nikesh Arora – SVP and Chief Business Officer
Jane Penner – Director, IR
Mark Mahaney – RBC Capital Markets
Eric Sheridan – UBS
Ben Schachter – Macquarie
Justin Post – Bank of America Merrill Lynch
Ross Sandler – Deutsche Bank
Carlos Kirjner – Sanford C. Bernstein & Co.
Anthony DiClemente – Nomura Securities
Mark May – Citigroup
Douglas Anmuth – JPMorgan
Peter Stabler – Wells Fargo Securities
Heather Bellini – Goldman Sachs & Co.
Youssef Squali – Cantor Fitzgerald & Co.
Richard Kramer – Arete Research
Colin Sebastian – Robert W. Baird & Co.
Good day, everyone, and welcome to the Google Inc. Second Quarter 2014 Earnings Conference Call. This call is being recorded. At this time, I’d like to turn the call over to Jane Penner, Director of IR. Please go ahead ma’am.
Jane Penner – Director, IR
Good afternoon everyone and welcome to Google’s second quarter 2014 earnings conference call. With us are Patrick Pichette, Senior Vice President and Chief Financial Officer; and Nikesh Arora, Senior Vice President and Chief Business Officer.
Also as you know, we distribute our earnings release through our Investor Relations Web site located at investor.google.com. So, please refer to our IR Web site for our earnings releases as well as the supplementary slides that accompany the call.
You can also visit our Google+ Investor Relations’ page for latest Company news and updates. Please check it out. This call is also being Webcast from investor.google.com. A replay of the call will be available on our Web site later today.
Now, let me quickly cover 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 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 revisions to these forward look statements in light of new information or future events. Please refer to our SEC filings for 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 and restructuring. We’ve 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 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 Patrick.
Patrick Pichette – SVP and CFO
Thank you, Jane. Good afternoon and thank you for joining us for our second quarter 2014 earnings call. So I will dive right into the numbers. Nikesh is going to give you a business update and then we will open-up for Q&A. So let’s dive into the details of our financial performance for Q2.
Our gross total consolidated revenue grew a healthy 22% year-over-year to $16 billion and was up 3% quarter-over-quarter. Without currency fluctuations, our gross total consolidated revenue growth would in fact have been 21% year-over-year, still very healthy.
Our Google site revenue was up 23% year-over-year to $10.9 billion and was up 4% quarter-over-quarter driven by strength in our core search advertising business.
Our Network revenue was up 7% year-over-year at $3.4 billion and was up 1% quarter-over-quarter driven by year-over-year growth in our AdMob and Ad Exchange businesses.
Finally, Google other revenue grew 53% year-over-year to $1.6 billion and was up 3% quarter-over-quarter. Digital sales of apps and content in our Play Store drove the year-over-year growth.
Our global aggregate paid click was strong this quarter, up 25% year-over-year and 2% quarter-over-quarter. Aggregate CPC were down 6% year-over-year, but flat quarter-over-quarter.
And without currency fluctuation, aggregate cost per click would have been down 7% year-over-year. So currency had a very minimal — and currency had no impact on quarter-over-quarter CPC growth.
As we indicated in our last earnings call, we’re now disclosing paid clicks and cost per click changes by property type in addition to aggregate numbers. So to that end, Google sites paid clicks were up 33% year-over-year and up 6% quarter-over-quarter. Our Google site CPC were down 7% year-over-year and down 2% quarter-over-quarter.
On the Network side, network paid clicks were up 9% year-over-year and down 5% quarter-over-quarter. And our network CPCs were down 13% year-over-year and up 3% quarter-over-quarter.
Our monetization metrics continue to be impacted by a number of factors at an aggregate level, including geographic mix, device mix, property mix, as well as our ongoing product and policy changes. And since we’re now disclosing additional property metrics related to our monetization, it maybe helpful to remind you all of what we include in each property. So let’s start with sites.
Sites monetization metrics includes ads that were served on Google owned and operated properties across different geographies and form factors. So these properties include YouTube search obviously — YouTube engagement ads like TrueView, and then other owned and operated properties such like Maps or Finance and otherwise.
Our Network monetization metrics include ads served on non-Google properties participating in our AdSense for Search, AdSense for Content, and AdMob businesses. We also provide corresponding historical data since Q1 of 2013 for reference, which can be found on — in our earnings slides.
Nikesh and I’ll obviously be happy to respond as usual to your question about our Q2 monetization in the Q&A today. But I’m sure that some of you may have detailed questions about monetization trends from prior quarters. And to help you with that, the IR team will be ready to answer your questions after the call.
Turning to geographic performance, we saw solid performance in the U.S. and U.K and continued strong performance in rest of the world. In our earnings slides, which you can find in our Investor Relations’ website, you’ll see that we’ve broken down our revenue by U.S., U.K., and rest of world, to show the impact of FX and the benefits of our hedging program. So please do refer to these slides for the exact calculations.
The U.S. revenue was up 12% year-over-year to $6.6 billion. The U.K. was up 22% to $1.6 billion and in fixed FX terms, the U.K. grew 15% year-over-year, a clear improvement from last quarter’s performance.
As we’ve mentioned in previous quarters, our AdSense for search business skews toward the U.S and the U.K. And our ongoing user focused product and policy changes have continued to have a clear impact on our revenue growth in these two geographies.
Our non-U.S. revenue excluding the U.K. was up 31% year-over-year to $7.7 billion, and this accounted for 48% of our total revenue, which includes a $6 million benefit from our hedging program. So in FX term, the rest of the world grew also 31% year-over-year.
Let me now turn to expenses. Traffic acquisition costs were $3.3 billion or 23% of total advertising revenue this quarter. Our non-GAAP other cost of revenue was $2.7 billion in Q2. This is excluding stock-based compensation.
Our non-GAAP operating expenses totaled $4.8 billion, again excluding SBC and as a result, our non-GAAP operating profit was $5.1 billion and our non-GAAP operating margin stood at 32% in Q2.
Headcount was up, roughly 2,200 people in Q2 in the last 90 days. And in total, we ended the quarter with approximately 52,000 full-time employees, but please note that the headcount does include approximately 3,500 full-time employees from the Motorola business.
Our effective tax rate was 21% in Q2. Our tax rate this quarter was impacted by the continued mix shift of earnings between our domestic and international subsidiaries.
Let me now turn to cash management. Our OI&E, our other income and expense was $145 million for the quarter. Interest income and realized gains on investments offset the continued impact of expenses from our FX hedging program. And for more detail on OI&E, please refer to the slides that accompany this call on our IR Web site.