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Home » Google (GOOG) Q3 2014 Results – Earnings Call Transcript

Google (GOOG) Q3 2014 Results – Earnings Call Transcript

Google Inc. (NASDAQ:GOOG)

Q3 2014 Earnings Conference Call

October 16, 2014 4:30 PM ET

Executives

Ellen West – Investor Relations

Patrick Pichette – Senior Vice President and CFO

Omid Kordestani – Interim Chief Business Officer, Special Advisor to the CEO

Analysts

Eric Sheridan – UBS

Justin Post – Bank of America Merrill Lynch

Mark Mahaney – RBC Capital Markets

Ross Sandler – Deutsche Bank

Ben Schachter – Macquarie

Anthony DiClemente – Nomura

Carlos Kirjner – Sanford Bernstein

Douglas Anmuth – JPMorgan

Mark May – Citi

Peter Stabler – Wells Fargo Securities

Heather Bellini – Goldman Sachs

Paul Vogel – Barclays

Brian Pitz – Jefferies

Operator

Good day and welcome everyone to the Google Inc.’s Third Quarter 2014 Earnings Conference Call. This call is being recorded. At this time, I’d like to turn the call over to Ellen West, Vice President, Investor Relations. Please go ahead.

Ellen West – Investor Relations

Thank you, Jamie. Good afternoon, everyone, and welcome to Google’s third quarter 2014 earnings conference call. With us today are Patrick Pichette and Omid Kordestani.

As you know, we distribute our earnings release through our Investor Relations website located at investor.google.com. So 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. This call is also being webcast from investor.google.com. A replay of the call will be available on our website 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 [Audio Gap] this presentation and we undertake no obligation to revise or publicly release the results of any revisions 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 and, as applicable, other special items. 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 – Senior Vice President and CFO

Thanks, Ellen. As some of you may know, we have a new leader in our Investor Relations team at Google. Her name is Ellen West. That’s the great voice you just heard a minute ago, a second ago. Ellen is a long term Googler who joined us in 2007. Although she is here with us today in Mountain View, she is actually based out of New York and that will give us a bit more footprint on the East Coast as well. So, Ellen, welcome to the team.

With that, let’s dive into the details of Google’s financial performance for Q3. Our gross total consolidated revenue grew a healthy 20% year-over-year to $16.5 billion and was up 4% quarter-over-quarter. Without currency fluctuations, our gross total consolidated revenue growth would have been 19% year-over-year. Google sites revenue was also up 20% year-over-year to $11.3 billion and was up 3% quarter-over-quarter driven by the strength in our mobile search.

Network revenue was up 9% year-over-year at $3.4 billion and was flat quarter-over-quarter driven by improved year-over-year growth in the AdMob and the Ad Exchange businesses. Finally, Google’s other revenue grew a healthy 50% year-over-year to $1.8 billion and was up 15% quarter-over-quarter, this driven by year-over-year growth mainly from the Play Store but also complemented by an increase in licensing revenue.

Our global aggregate paid click growth was strong this quarter, up 17% year-over-year and up 2% quarter-over-quarter. Aggregate CPCs were down only 2% year-over-year and flat quarter-over-quarter. And without currency fluctuations, aggregate cost per click would have been down 1%, and in fact, up 1% quarter-over-quarter.

As we began to do in our last earnings call, we continue to disclose paid clicks and cost per click changes by property type as well in addition to the aggregate number. So to that end, Google sites paid clicks were up 24% year-over-year and up 4% quarter-over-quarter. Google sites CPC were down 4% year-over-year and down 1% quarter-over-quarter. Our network paid clicks were up 2% year-over-year and down 4% quarter-over-quarter and network CPCs were down 4% year-over-year but up 2% quarter-over-quarter. Our aggregate monetization metrics continue to be impacted by a number of factors including geographic mix, device mix, property mix as well as ongoing products and policy changes.

Turning to geographic performance now, we saw solid performance in the U.S. as well as in the rest of the world. In our earnings slides, which you can find on our Investor Relations website, you will see that we’ve broken down our revenue by U.S., UK and the rest of the world to show the impact of FX and the benefits of our hedging program. So please refer to those slides for the exact calculations. U.S. revenue was up 15% year-on-year to $7 billion. The UK was up 17% year-over-year to 1.6 billion and in fixed FX terms, the UK grew 10% year-over-year. In the UK, growth was impacted by a combination of factors this quarter including platform and property mix as well as tough comps from year-over-year and quarter-over-quarter growth rates for a number of reasons including for example weather. Our non-U.S. revenue excluding the UK was up 26% year-over-year to $7.9 billion. This accounted for 48% of total revenue which includes a 10 million benefit from our hedging program. In fixed FX terms in fact the rest of the world also grew 26% year-over-year, very healthy.

Let me turn now to expenses. Traffic acquisition costs were $3.3 billion or 23% of total advertising revenue. Our non-GAAP other cost of revenue was 2.8 billion in Q3 which excludes stock-based compensation and also a non-cash impairment charge of 378 million related to a patent licensing royalty asset acquired as part of our Motorola Mobility purchase. Non-GAAP operating expenses totaled 5 billion, again excluding SBC. And as a result, our non-GAAP operating profit [Audio Gap] and our non-GAAP operating margin were 32% in Q3.

Headcount was up roughly 3,000 in Q3. In total, we ended the quarter with approximately 55,000 full time employees. And please note that the headcount does include still approximately 3,500 full time employees from the Motorola business. In the past year, we continued to attract and hire the best talent from the best colleges and universities from all around the world. Continuing our past trend, graduate starts are much more heavily concentrated in Q3, which is part of why you are seeing the significant bump in headcount with the majority being tech hires, I want to kind of emphasize.

Our effective tax rate for the quarter was 22% for Q3 and which includes the impact of the impairment charge that I mentioned earlier which is a non-deductible for income tax purposes.

Let me turn now to cash management. OI&E or other income and expenses was $133 million. Interest income and realized gains on investments offset the continued impact of expenses from our FX hedging program. And for more details on OI&E, please do refer to the slides that accompany this call on our IR website. We continue to be happy with our strong operating cash flow at $6 billion. CapEx for the quarter was 2.4 billion. In this quarter the majority of the CapEx was related to our data center construction, production equipment and real estate purchases, in that order. It’s important to remember that our infrastructure supports all of our products, whether they are core products like or Search or Ads, Maps or YouTube, but in addition to fueling our growth products like Photos and Hangouts, Google For Work and the Cloud platform. If you look at our data center announcements over the last four quarters, you will also see that we’ve been really busy with both groundbreakings and expansion all around the world including Finland, Taiwan, Singapore, recently announced Netherlands in addition to our ongoing investments in the U.S. In total, our free cash flow was then 3.6 billion.

And before I close, I want to give a brief update on Motorola. The team continues to work hard and we look forward to seeing them join the Lenovo team soon. Motorola had a great Q3, with strong user reviews for products like the Moto X, Moto 360 and Moto Hint, clearly demonstrating the impressive momentum of the company.

So there you have it. Strong results with continued strong growth in both revenue and profits and an optimism that provides us the confidence to fund strategic growth opportunities including the usual Android, Chromes and YouTube but also Google For Work and Cloud to name a few.

Before I hand things over to Omid, I’d like to share with you some great news. I am really thrilled to announce that Omid is now officially Google’s Chief Business Officer and this on a permanent basis. All of us at Google couldn’t be happier to see Omid at his post running our business organization once again. And with that, I will turn it over to him for more details on our performance in the quarter. And after his remarks as usual, we will have Jamie open up the lines for your questions. Here you go, Omid.

Omid Kordestani – Interim Chief Business Officer, Special Advisor to the CEO

Thank you very much, Patrick. And hello, everyone. I am Omid Kordestani. I am happy to be back at my new old job and thank you for joining us this afternoon. I joined Google back in 1999 to help get our business off the ground and led our business operations until 2009. Since then I have served as an advisor for Larry and outside Google actively helped many entrepreneurs. I am thrilled to be back at Google leading our global business again.

We continue to have the same boundless energy and endless curiosity we’ve always had as a company and we are as focused as ever in our mission of making information useful and accessible to everyone. Case in point, we are really excited about this week’s Android Lollipop launch. This is our largest release on Android ever with over 5,000 APIs for developers. It adds new features including better notifications, battery life and security and introduces a refreshed, consistent visual style. And alongside the new devices Nexus 6, Nexus 9 and Nexus Player, consumers in India who bought the recently announced Android One will get the update to the latest software at the same time.

Now I’ll do a quick walk through of the business highlights from Q3. As usual, we’ll give an overview of these four areas, performance and brand advertising, our advertising platforms and our emerging non-ads businesses. Let’s start with performance advertising, the core of our business.

People want the right information at the right time. They don’t want to have to think about whether it’s on the web or in an app. We’ve learned this first hand as a developer of many services, Maps, YouTube, Gmail that also are some of the world’s most popular mobile apps. With that in mind, we have a simple goal with performance ads: help marketers connect with customers at the right moment to drive measurable results.

Our partners have driven hundreds of millions of app downloads with AdMob on our click to download formats. But most mobile apps are downloaded, used once and eventually deleted. So we launched new features to help advertisers re-engage with users post download. For example, advertisers can now deep link from their search ads directly into their mobile apps. To succeed with multi-screen marketing, advertisers also need modern measurement tools so they can understand when their ads drive phone calls from customers resulting conversions on other devices or lead to store visits and purchases. Last October we announced estimated total conversions, our effort to help marketers better measure the value of their multi-screen advertising. We’ve worked to continue developing this product and launched cost device measurement for display ads. Clients have already found that mobile display campaigns drive 15% more conversions than they had previously measured.

Let’s shift gears to talk about our shopping efforts. [Audio Gap] with performance ads we are directly connecting people with [Audio Gap] and then enabling them to buy and have them delivered. We keep making improvements to our products to help retailers. Keeping inventory organized and up to date is a constant challenge for retailers. We help them manage this issue by completing the transition of product listing ads to our shopping campaigns platform.

And finally, people often want to find stores near them to make a purchase in person. We’ve long had local inventory ads that enabled merchants to show customers this information in the U.S. and we launched these in the UK, France, Germany, Japan and Australia last quarter. In summary, the core of our business, performance advertising, continues to deliver great results.

Let’s move on now to our brand business. Our objective is clear here, make digital the best possible canvas for creative and effective brand-building campaigns. First let’s talk about YouTube. Any conversation about great advertising starts with great content. On YouTube, stars produce amazing content that our users love from Bethany Mota to Smosh to Mental Floss. Earlier this year we launched Google Preferred to help connect brands with premium ad inventory on our most popular YouTube channels. Since then we have secured upfront commitments from top media agencies. We’re just getting started with YouTube and its potential. We’ve sold out the majority of our U.S. Google Preferred offering which represents among the top 5% of popular channels inventory on YouTube. And as a result of terrific brand events in Germany, France, UK and Australia, we’re seeing tremendous interest from local agency partners around the world.

Last quarter we also saw some great progress in our brand efforts beyond YouTube. We launched new ad formats customized for mobile screens. We also announced an expansion of YouTube’s TrueView ads into AdMob’s network of more than 650,000 mobile apps. Everyday our teams work to develop both the products and terrific partner relationships that enable us to tackle any digital marketing challenge across multiple channels together. With encouragement from Google and YouTube, ABC executed a digital first marketing plan for their new fall TV line up. Their effort included custom five second-ads for TrueView and collaborations with homegrown YouTube stars. We’re very excited about the new deal with Mondelez and Starcom MediaVest. This global agreement will focus on video and display and is Mondelez’s largest digital media deal ever.

Next let’s take a look at one of the fastest growing parts of digital advertising world, programmatic platforms for agencies and publishers. For many years now our goal has been to provide world class technology for brands, agencies and publishers who power their ads businesses. Today our DoubleClick suite is used by all major agencies and we’re particularly focused on multi-screen and video. DoubleClick Bid Manager is the go-to tool for marketers and agencies to navigate the rapidly growing programmatic advertising space. It’s doubled in size year-over-year by impression volume and we really love the progress we see here. For publishers, we help them make money from their content via our publisher tools from our Ads Exchange to customized private exchanges which complement our core offerings. This quarter we signed new private advertising exchange deals with publishers like Fox TV and Edmunds. This helps publishers generate revenue from premium ad space. We have nearly doubled the number of private [Audio Gap] our system year-over-year.

Finally, we’re seeing remarkable momentum in our newer non-ads businesses, whether it’s Play, Hardware or Google For Work, we continue to see strong growth and we’re thrilled to be a platform for our partners’ successes as well. Google Play’s growth continues to impress. It’s a linchpin of the amazing Android ecosystem. We brought Play Music to 17 new countries, bringing the total to 45 and our expansion continues. Today, Play Movies is available in 93 countries and Play Books is available in 61 countries.

On the hardware front, just yesterday, we unveiled three fantastic new Nexus devices, Nexus 6 phone, Nexus 9 tablet and Nexus [Audio Gap] and Android powered streaming media player. This quarter we worked with HP, Toshiba and Acer to introduce five new Chromebook devices and teamed up with Asus, LG, Motorola, Samsung and Sony to help launch new Android Wear devices. We’re also selling Chromebook in six new countries. They’re now available in 31 countries around the world. And we sold more than 1 million Chromebooks for education this quarter, even more than last quarter.

Chromecast celebrated its first birthday this past quarter. It’s been a smashing success. Users have hit the cast button more than 400 million times since it launched to enjoy their favorite sports, music, premium movies and TV shows. In September, we added even more content to Chromecast, including Disney content. And we were so proud to launch Android One, an effort to make high quality low cost smartphones available to as many people as possible. We started in India and we’ll be expanding to other countries, including Indonesia and the Philippines in the coming months.

For businesses, what was called Google Enterprise, is now simply Google for Work. This business has great traction. In addition to the tremendous growth in our Apps business, we have more than 1,800 signups for Google Drive for Work every week. Plus there are almost 250 billion active Google Drive users, including consumer, education and business users.

We continue to invest in our growing Cloud platform business, helping developers realize the promise of cloud computing by providing affordable on-demand access to world-class technology. We recently announced Google Cloud Platform for Startups and offer up to $100,000 in credits to enable the best and brightest startups to use Google’s Cloud platform.

Sony Music recently built an interactive app in less than three weeks using App Engine to engage fans tuning into One Direction Day, an eight-hour YouTube livestream featuring the band, one of the largest ever YouTube music live streams.

Lastly, our marketing team had a great quarter as well. Google My Business helped more small businesses get online. And our Art, Copy & Code project showed advertisers the creative potential of digital marketing. And from the annual Google Science Fair to more recent campaigns showcasing amazing content on Play, YouTube stars and the power of the Google App, the magic of Google was on prominent display.

All told, it was another terrific quarter at Google, continued momentum in our core business and exciting innovation in new areas. Kudos to the Googlers around the world who made it all happen.

I’ll turn it over to Patrick to wrap up and start our Q&A.

Patrick Pichette – Senior Vice President and CFO

Thank you, Omid. So Jamie, if you want to give us the instructions then we’ll get going on the Q&A.

Question-and-Answer Session

Read the Full Transcript Here

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