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Google Inc. (GOOG)

Q3 2010 Earnings Call Transcript

October 14, 2010 4:30 pm ET

Executives

Jane Penner – Senior Manager, IR

Patrick Pichette – SVP & CFO

Jonathan Rosenberg – SVP, Product Management

Eric Schmidt – Chairman & CEO

Nikesh Arora – President, Global Sales Operations and Business Development

Analysts

James Mitchell – Goldman Sachs

Spencer Wang – Credit Suisse

Imran Khan – J.P. Morgan

Justin Post – Merrill Lynch

Mark Mahaney – Citigroup

Douglas Anmuth – Barclays Capital

Brian Pitz – UBS

Ross Sandler – RBC Capital

Jeetil Patel – Deutsche Bank Securities

Jason Maynard – Wells Fargo

Jason Helfstein – Oppenheimer

Youssef Squali – Jefferies

Ben Schachter – Macquarie

Jordan Rohan – Stifel Nicolaus

Sandeep Aggarwal – Caris & Company

Mark May – Needham & Company

Marianne Wolk – Susquehanna

Presentation

Operator

Good day and welcome everyone to the Google Inc. third quarter 2010 earnings conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Jane Penner, Senior Manager, Investor Relations. Please go ahead, ma’am.

Jane Penner

Good afternoon everyone, and welcome to today’s third quarter 2010 earnings conference call. With us are Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President, Product Management; and Nikesh Arora, President, Global Sales Operations and Business Development.

First, Jonathan and Patrick will provide us with their thoughts on the quarter, then Nikesh will join Patrick and Jonathan to answer your questions.

Also, as you know, we recently began distributing our earnings release exclusively through our Investor Relations Website located at investor.google.com. So, please refer to our IR Website for our earnings releases as well as supplementary slides that accompany the call. This call is also being webcast from investor.google.com. A replay of the call will be available on our Website in a few hours.

Now let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward-looking, including statements regarding Google’s future and investments in our long-term growth and innovation, the expected performance of our business 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 we use on this call such as operating income and operating margin are also expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based compensation. We have 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

Thank you, Jane. Good afternoon everyone and thank you for joining us. As Jane mentioned, Jonathan and I will begin with our prepared remarks, and then Nikesh will join us for Q&A.

In addition and as a bit of a surprise, we may actually have Eric join us for the first 30 minutes of Q&A before he has to run to a plane. So, let me start by giving you some general thoughts before I get into the details of our financial performance for Q3. At the highest level, we are very pleased with our Q3 results and it’s clear that the digital economy continues to grow rapidly, a relentless trend that continues to drive continued growth in both our core business, core search and creating market and also for fuelling momentum in our newer businesses.

Our Q3 results clearly reflect this phenomenon that is our continued strong growth in our core business and continued very strong growth in our emerging businesses year-over-year, and indeed we saw strength in every major product area in Q3, that is search, display, mobile as well as apps enterprise. And when I say our newer businesses are seeing great momentum, I really mean it, and in that, Jonathan will back that statement up with some hard facts in a few minutes. So, stay tuned for the details.

Now, let’s turn to specifics of our performance in the quarter from a financial perspective. Let’s move quickly to the results. Gross revenue grew 23% year-over-year to $7.3 billion. Our Google Website revenue was up 22% year-over-year to $4.8 billion, which strength as I mentioned across most major geographies and verticals. Our AdSense revenue was up 22% year-over-year to $2.2 billion, again reflecting continued strength in our Google display network.

Our other revenue was up 35% year-over-year to $254 million, down sequentially reflecting the end of our direct-to-consumer sale of the Nexus One. Our global aggregate paid click growth remained healthy up 16% year-over-year and also up 4% quarter-over-quarter. Aggregate cost per click growth was up 3% year-over-year and 2% quarter-over-quarter. You should note that the FX had a negative impact on CPC growth year-over-year, but the impact for quarter-over-quarter was quite neutral. Remember too that this is an aggregate number which includes both Google.com and our AdSense properties.

So, now turning to our geographic performance, the U.S. and rest of world are growing at a healthy pace as our results reflect, but also, while the U.K. continues to lag a little bit in the economic recovery again seen in our results. Revenue from the U.S. was up 26% year-over-year to $3.5 billion and in our earnings slides, which you can find in our Investor Relations Website, you will see that we have broken down our revenue by U.S., U.K., and rest of world to show you the impact of FX and the benefits from our hedging programs. So, please refer to those slides for the exact calculations.

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