Liveblogging Google Third Quarter Conference Call

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Google just released third quarter earnings. It reported revenues of $5.4 billion (about $4 billion after traffic acquisition costs are taken out, which is what Wall Street looks at) and profits of $1.3 billion. The $4 billion in revenues is right around what investors were expecting, and non-GAAP net income of $4.92 a share was well above the $4.79 consensus. Better control over costs contributed significantly to the upside surprise with capital expenditures down 18% from a year ago to $452 million.

Here are my liveblog notes from the call:

CEO Eric Schmidt: Google had a good quarter. Traffic and revenue were both solid. Search query traffic is growing in almost every vertical. As marketing budgets are being squeezed, targetable ads are more valuable to advertisers. And as consumer budgets are being squeezed, people are using the Web for more comparison shopping to hunt for bargains online and in stores.

It is pretty clear the economic situation is worse than even a month ago. What started off as a financial crisis appears to be affecting the wider economy. We are all in uncharted territory. We have always managed for the long term. That is more important than ever.

Search, which is Google’s core, is where we are putting a lot of our investment. Better search, better ads, index side getting larger, better personalization. More highly relevant ads against as many queries as possible. Better tools.

So the opportunities in addition to search and ads are in apps, in display by improving targetting.
Doubleclick doing great
YouTube now running ads against 90% of partners using content ID tool.
Mobile, geo-targeted ads is a big opportunity.

Along the way we are going to keep a close eye on cost. Sergey likes to say, “scarcity builds clarity.”

I think it is a great focusing opportunity for Google as well.

We are confident about the enduring power of the Web. Fundamentally people are moving to the Internet, using information in a smarter way, Google is a beneficiary.

CFO:

We had another solid q, despite a challenging economic environment

gross revenue up 31 % yoy to $5.5B
Google.com was up 34% yoy to $2.7B
AdSense up 15% yoy to $1.7B

paid click growth up 18% yoy, up 4% q over q
US revenues up 22% yoy to $2.7B, up 5% q over q

International revenue:

UK showed some softness, essentially flat Q over Q,

rest of EMEA performed better, relatively good performance in Netherlands and Germany,.

Also good performance in Brazil and China.

Expenmses:

Traffic Acquisition Costs (TAC) were $1.5B or 27.9% of total advertising revenues, down from 28.4% in Q2.

AdSense was TAC $1.3B
Google TAC was $167M

We may see additional pressures on TAC rates going forward.

Majority of capex going to data centers.

Free cash flow from operations up 61%.

While we are focused on operational efficiency.

With great uncertainty also comes tremendous opportunity.

Sergey Brin: Let me update you on improvements in the quarter.

Increased the size of the index. Every 4 hours we index as much information as the entire U.S. Library of conference.

For second quarter in a row we have launched more than 100 improvements in search. More than one per day. A very important feature: Google Suggest running in ten countries. This really helps users and speeds them up more than you might think. As you type we suggest queries.

We continue to blend more and more of those {books, video results} into the main page of results. If you search for Michael Phelps, you will see videos and whatnot. This is very powerful.

People think of video as entertainment, but video is a really good reference material. And often people don’t think to search for video.

On the business front, advertising remains the vast majority of our revenues, and we continue to improve our ad systems.

We have made changes in how we rate landing pages. We want to make sure that when people click on ads they are taken to useful sites so they are encouraged to click on more ads.

We have also worked hard on display ads,with DoubelClick integrated. Launched AdSense for games. Already our network reaches 10 percent of people who play [Flash games} two weeks after launch.

Click to buy feature on YouTube. Now people can click to buy a CD or a video or other content that is relevant t that video. This presents great monetization opportunities.

We also have been investing a lot on geographic and local information. Google Maps. We launched map maker.

Android launching with T-Mobile. It really integrates Google services nicely on the phone. The G1 is just the first of a number of phones that will hopefully be building phones.

Enterprise: N ow more than one million business using Google Apps. A lot of demand for video in businesses.

Now over 1 million students are sing Google Apps. Indiana, Univ. of Virginia, George Washington.

Something I am really excited about, launch off Google Chrome. As you know we create a lot of Web services. A Challenge to us to have a platform to run those services reliably. Now if you have a problem with one tab in your browser you can just kill that tab and the rest of the browser runs fine.

It raises the bar for all browsers. We want all browsers to be more capable.

Q&A

Q: What about economy, have you seen business weakening?

Schmidt: We see fluxuations, and they are more complex than they appear. Obviously they are going to change as the global financial crisis goes through.

Hal Varian: In the past few weeks, obsessions with financial markets, huge increase in queries on [financial topics].

Mark Mahaney: Do you cut back on operating costs or would you delay investment opportunities like mobile? Also what in display advertising could be fixed?

Schmidt: In the question of investments, Google has shown courage when we need to.

CFO: Fund

Sergey: On display, certainly a lot of opportunities. Let’s not forget that when we first got started with AdWords it took a number of years for that to catch up to what was then the big numbers. I think we might see the same with display. Even though it might be more brand focused, you still want them to be targeted. You still want to reach the right people. We might have better measurement tools. We now have a access to vast inventory, DoubleClick, and properties like YouTube and Orkut.

We are not just talking about banner ads for Webpages. It includes AdSense for games, feeds, video. So a lot of opportunity.

Q: What about U.S. government investigation?

Schmidt: Essentially says people don’t understand how the auction pricing works.

Q: About coverage?

Hal Varian: People focus on aggregate cost per click. aggregated across the world. We don’t think it reflects advertiser behavior. They are buying every click we can give them. Because they don’t want to turn away a customer.

Q: Query volumes from mobile?

Schmidt: We have seen publicly that we are seeing an explosion in mobile search volumes. this is being enabled by these devices with more powerful browsers. The compound growth rate is one of the fastest growing things at the company.

Q: Ebay saw weakness, how will that affect you?

Hal: We saw weakness in U.S retail. but we believe people will be counting their penny, could have an upside for Google. As people shop more carefully they may research more what they buy. this is speculative, but we think it might benefit Google.

Q: A little more clarification to improvement in margins. Was that through better AdSense deals, or through expense controls.

?: Across all categories of expenses people have been very diligent. On specifics of hiring, we continue to hire, we just do it responsibly.

Schmidt: I am not aware of a change on the ad partnership side that would result in a margin change.

Q: Capex is at low point since 2006. Is Capex starting to normalize. Sergey talked about geo and local as big monetization opportunities. we’ve talked about it along time, are we closer to cracking the code on that?

?: Capex is lumpy business, think about data centers going up. We have no plans of slowing down. You just see the nature of that lumpiness. Every extra unit of capacity is cheaper for us.

Q: Was any capex pushed out to Q4?

?: No, none.

Sergey; Mobile and local is a big opportunity but it will be a big bootstrap time because you have to get all the small business in line, and in mobile so many technologies. We will have But we also have substantial revenues from geolocation. this is a good chunk of our business. When there is some settling of the dust in user experience, in both mobile and on the desktop, I think you will see a ramp up.

? this is an area where we are winning Google Maps is the biggest mapping site. On local, taking info like reviews, photos, web results and embedding it on the map. You an now do things like click on street view and see the restaurant. One of the coolest Maps sites I have seen, go to Swisstrains.ch, to see precision of swiss trains in real time.

Q: Can you talk about the rollout of quality score initiative? The scoring index for the syndication network, rating each partner out there.

Schmidt: it is actually in the process of being launched, plan is to get it rolled it early next year.

Q: How often will the scoring system change?

Schmidt: We tend to be dynamic because these systems have feedback in them.

Sergey: It is worth adding have had this system in place for AdSense for content for a long time, extension to AdSense for search. Some of our bigger customers.

Schmidt: From my perspective a lot of stuff going on around the world, there are a lot of actions we hope our governments do well. We have the responsibility to run Google well. We want to build a great future.

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