Google Inc. (GOOG)
Q1 2009 Earnings Call Transcript
April 16, 2009 4:30 p.m. ET

Executives

Krista Bessinger – Director, Investor Relations
Eric Schmidt – Chief Executive Officer and Chairman
Patrick Pichette – Senior VP and Chief Financial Officer
Jonathan Rosenberg – Senior Vice President, Product Management
Omid Kordestani – Senior Vice President, Global Sales & Business Development

Analysts

James Mitchell - Goldman Sachs
Justin Post - Merrill Lynch
Imran Khan – J.P. Morgan
Christa Quarles - Thomas Weisel Partners
Mark Mahaney - Citigroup
Youssef Squali - Jefferies & Company
Jeffrey Lindsay - Sanford Bernstein
Doug Anmuth - Barclays Capital
Spencer Wang - Credit Suisse
Ross Sandler - RBC Capital Markets
Sandeep Aggarwal - Collins Stewart
Mark May - Needham & Company
Jeetil Patel - Deutsche Bank Securities

Operator

Presentation

Operator

Good day and welcome everyone to the Google Inc. conference call. This call is being recorded. At this time, I would like to turn the call over to Ms. Krista Bessinger, Director of Investor Relations. Please go ahead, ma’am.

Krista Bessinger – Director of Investor Relations

Good afternoon, everyone, and welcome to today''s first quarter 2009 earnings conference call. With us are Eric Schmidt, Chief Executive Officer; Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President of Products Management; and Omid Kordestani, Senior Advisor to the Office of the CEO and Founder. Eric, Patrick and Jonathan will provide us with the results on the quarter, and then Omid will join us for Q&A.

Please note that this call is being webcast from our Investor Relations website located at investor.google.com. Please refer to our website for important information, including our earnings press release issued a few minutes ago, along with slides that accompany today''s prepared remarks. A replay of this call will also be available on our website in a few hours. Please note that we routinely post important information on our Investor Relations website, located at investor.google.com, and we encourage you to make use of that resource. As a reminder, we are continuing with the two-call structure this quarter. First, we will host our traditional strategic overview and Q&A with the usual format, followed by a second call, which is effectively an extended Q&A session giving the opportunity for participants to ask more detailed financial and products questions in an efficient and regulatory compliant manner. The second call will begin at 3:00 p.m. and will also be webcast from our Investor Relations website.

Now, let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward-looking, including statements regarding investments in our core business and growth agenda, expected performance of aspects of our business, operational efficiency in costs, 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 revisions of these forward-looking statements in light of new information or future events. Please refer to our SEC filings, including our annual report on Form 10-K, for the year ended December 31, 2008, as well as our earning press release for a more detailed description of the risk factors that may affect our results. Copies can be obtained from the SEC or by visiting the Investor Relations section of our website.

Also, please note that certain financial measures we use on this call, such as EPS, net income, operating margins, and operating income are 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 GAAP to non-GAAP reconciliations can be found in our earnings press release.

With that, it''s my pleasure to turn the call over to Eric.

Eric Schmidt – Chief Executive Officer

Thank you very much, Krista and good afternoon to everybody. Welcome to our first quarter earnings call. I am going to talk obviously about the big picture, Patrick will then run through all the financials, Jonathan will put together not just products but also a whole bunch of insights about advertising. And despite the tough economic climate, we think Google had a good quarter. It is in the context of GDP falling over 6% in Q4, U.S. consumer confidence falling one-third in February, retail sales falling 9.5% a year-over-year in March, Google revenues were up 6% year-over-year on the back of continued strong traffic growth, down only 3% quarter-for-quarter on a revenue basis. If you look at the economic situation, we are still basically in an un-chartered territory and I think that’s just sort of the frank statement everybody wants to talk about in the business world today in the current economic environment, which everybody on the call is very, very familiar with, remains tough.

No company is recession-proof. Google is absolutely feeling the impact. Users are still searching but they’re buying less. Ultimately, what that really means is that the ads are converting less, more window and comparison shopping, purchasing lower priced goods. In other words, users are doing the right thing. They’re doing what you would expect them to do given the enormous economic changes around us. So advertisers are still spending but they’re lowering their bids to manage their ROI, behaving correctly in our view. So one way to say that is our advertising model is working. The user and advertising behavior that we’re seeing is entirely rational and the auction, we base our whole business, is working to deliver great value for both.

So we think Google is now well placed for the recovery as it occurs, or when it occurs. Obviously we don’t know exactly when, and the shift continues, this is the shift to online, continues to give us a real advantage, users migrating to the web and advertisers investing online where ROI is highest. It appears that the shift to online ROI as movement into our category is outpacing any, on a relative basis, any loss in economic activity, we benefit from that. From a prioritization perspective at Google, our priorities remain unchanged: basically long-term growth. Internet growth continues, our goal is to build business and be an innovator. In our core business, search, making it easier and faster to find things globally, we’re doing well there. Search advertising ads on new properties, for example Google search, we’ll finance all of those Jonathan will talk about.

We also believe that there is growth in new businesses based on superior technical insights. In display, for example, you have a highly fragmented market with multiple buyers, sellers, and data sources. By using our technology we can create an integrated product that will really improve the display as modeled. Look at the success of Android and the mobile space in general. By improving the mobile web experience people search many, many times more than they did in previous mobile devices. We benefit both in terms of end-user happiness as well as ultimately in strong revenue growth from that area, and in enterprise the same thing. People are no longer thinking of IT as these expensive boxes but rather trying to apply the consumer market principles to IT, giving increased efficiency as well as higher productivity. So in that sense our mission is unchanged.