Google Inc. (GOOG) Q1 2014 Results Earnings Conference Call April 16, 2014 4:30 PM ET
Jane Penner - Director, IR
Patrick Pichette - SVP and CFO
Nikesh Arora - SVP and Chief Business Officer
Ben Schachter - Macquarie
Douglas Anmuth - JPMorgan
Ross Sandler - Deutsche Bank
Mark May - Citigroup
Mark Mahaney - RBC Capital Markets
Carlos Kirjner - Sanford C. Bernstein & Co.
Stephen Ju - Credit Suisse
Justin Post - Bank of America Merrill Lynch
Eric Sheridan – UBS
Peter Stabler - Wells Fargo Securities
Heather Bellini - Goldman Sachs & Co.
Colin Sebastian - Robert W. Baird & Co.
Jordan Monahan - Morgan Stanley
Robert Peck - SunTrust Robinson Humphrey
Gene Munster - Piper Jaffray
Good day, everyone, and welcome to the Google Inc. Q1 2014 Earnings Call. Today's call is being recorded.
At this time, I'd like to turn the conference over to Jane Penner, Director of IR. Please go ahead ma'am.
Good afternoon everyone and welcome to Google's first 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 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 latest company news and updates. Please check it out.
This call is being westbound cast from investor.google.com. A replay of the call will be available on our website later today.
Now, quickly -- 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 descriptions of the risk factors that may affect our results.
Please note certain financial measures 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 turn the call over to Patrick.
Good afternoon and thank you for joining us on our first quarter 2014 earnings call.
Before we jump into my usual remarks, I'd like to bring two points to everybody's attention. First, a reminder that on April 2nd, we issued our Class C stock dividend with twice as many shares outstanding, our usual per share information will look quite different starting this quarter.
Also, second, and also as a reminder, our expected sale of the Motorola business -- mobile business to Lenovo triggered discontinued operations accounting treatment which means Motorola's quarterly results are shown separately from Google net income. You'll see this new presentation in our financials starting this quarter.
So with these two caveats noted let's dive into the details of Google's financial performance in Q1. Our gross total consolidated revenue grew a healthy 19% year-over-year to $15.4 billion and it was down 2% quarter-over-quarter.
Without currency fluctuations, our gross total consolidated revenue growth would in fact have been 21% year-over-year. Google sites revenue was up 21% year-over-year to $10.5 billion and was down 1% quarter-over-quarter driven by the strength in our core search advertising business.
Network revenue was up 4% year-over-year at $3.4 billion and was down 4% quarter-over--quarter driven by improved year-over-year growth from our Ad Exchange and AdMob businesses.
Finally, Google's other revenue grew 48% year-over-year to $1.6 billion and was down 6% quarter-over-quarter. Digital sales of apps and content in our Play Store drove year-over-year growth. Chromecast sales were also strong.
Our global aggregate paid click growth was strong this quarter again up 26% year-over-year and down just 1% quarter-over-quarter. Our aggregate cost per click was down 9% year-over-year and flat quarter-over-quarter.
Currency fluctuations had a minimal impact on Q1 CPC growth. Our monetization metrics continued to be impacted by a number of factors discussed on previous calls, including geographic mix, device mix, property mix as well as products and policy changes.
And to help investors better understand the complex dynamics of these monetization metrics, we'll begin disclosing paid clicks and CPC growth by property in Q2.
To be clear this means we'll disclose CPC and paid click growth rates for both our sites and network businesses. We will continue to disclose aggregate growth rates for CPC and paid clicks.
Turning to the geographic performance, we saw strong performance in the U.S. and rest of world, solid performance in our U.K. 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 benefits from our hedging program. So, please refer to those slides for the exact calculation.
U.S. revenue was up 14% year-over-year to $6.7 billion, the U.K. was up 14% year-over-year to $1.6 billion and in fixed FX terms, it grew 11% year-over-year.
Our non-U.S. revenue excluding the U.K. was up 25% year-over-year to $7.2 billion. This accounted for 47% of our total revenue, which includes a $8 million benefit from our hedging program. And in fixed FX terms, the rest of world grew, in fact, 30% year-over-year.
Let me now turn to expenses. Traffic acquisition costs were $3.2 billion or 23% of total advertising revenue. Our non-GAAP other cost of revenue was $2.6 billion in Q1, excluding our stock-based compensation.
Non-GAAP operating expenses totaled $4.6 billion, again excluding stock-based compensation and as a result, our non-GAAP operating profit was $5 billion and our non-GAAP operating margins were 32% in Q1.
Just a quick word on a few items that may have created noise in our operating expenses this quarter. We had some discrete legal expenses that hit our G&A line as well as one-time M&A related costs that increased our operating expenses, particularly in R&D. So, absent these discrete items, our expenses continue to demonstrate the same disciplined agenda we've always had.
Headcount was up, roughly 2,100 people in Q1. In total, we ended the quarter with approximately 50,000 full-time employees and please note that the headcount still includes approximately 3,700 full-time employees from the Motorola business as well as the employees from the acquisition completed in this quarter.
Our effective tax rate was 18% in Q1 and our tax rate this quarter was impacted obviously by the federal R&D credits, which expired in 2013.
Let me now turn to cash management. Other income and expense was $357 million for the quarter and realized gains on investments and interest income, offset the continued impact of expenses from our FX hedging program. For more details on OI&E, please refer to the slides that accompany this call on our IR website.
We continue to be happy with our strong operating cash flow at $4.4 billion. CapEx for the quarter was 2.3 billion this quarter; again the majority of CapEx was related to data center construction, production equipment, and real estate purchases.
As I mentioned last quarter during my remarks, we continue to invest in the long-term and our infrastructure continues to be a key strategic area of investment for us. Our free cash flow was $2 billion for Q1.
And before I close, I want to give a brief update on Motorola. Motorola had a great quarter in Q1 with the Moto G showing strong sales momentum especially in emerging markets. The team continues to be hard at work and we look forward to seeing them join up with Lenovo soon.
So, there you have it, strong results and an optimism that provides us the confidence to fund strategic growth opportunities including Android, Chrome, YouTube, enterprise just to name a few.
And now I'll cover more details -- I'll let Nikesh, in fact, cover more details of our business performance in the quarter and after his remarks, we'll open up the phone lines for questions. Here you go Nikesh.
Thank you, Patrick. You're welcome to cover more details if you'd like.
Our business is growing well, with $15.4 billion in gross revenue; we had a particularly good advertising performance in the United States, highlighted by very strong auto sector showing around the Super Bowl. We had strong Play growth in Asia and we had a few isolated tracks.
By now you're aware of the four areas driving our business. The first one direct sponsor, or as I like to call it performance marketing; the second one helping clients build their brands; third our ad tech platform for publishers and agencies; and fourth, our emerging businesses like digital content, enterprise, and hardware.
Let me give you an you an update on all of those and talk about industry trends that are driving the investments we're making. On performance advertising, people are now always online and they want seamless, easy experience as they move from screen-to-screen.
This constant connectivity is driving our investments here as people use search to navigate their world, Google is well-positioned to help people navigate between web, apps and the places around them. They help the marketers measure the entire customer journey and to drive better monetization.
Next week, we'll be welcoming hundreds of advertisers to our adverse performance forum where we'll talk more about our work in this area for marketers. But clients are already benefiting from our recent investments like enhanced campaign and estimated total conversion.
For instance, Shutterfly recently began measuring cross device conversion networks to understand sales that start in one device and end on another. As a result, they saw 60% increase in mobile conversions for non-brand terms, leaving them to include 100% of their keywords on mobile devices.
We're seeing great momentum in product listing adds as well, with a new shop in campaign system. International retailer Farfetch upgraded shopping campaigns and increased their conversion rate by 13% while reducing cost there per acquisition or CPA by 20%.
And Domino's Pizza -- who doesn't like pizza, recently made it easy for customers to pay with Google Wallet, instant buy in their in Android app.
Moving on to brand building. For years you've all seen the rise of digital video, over-the-top networks, connected screens, streaming devices and high quality digital programming. Already for example, YouTube reaches more than 1 billion people a month through usually popular channels like fashion guru, Bethany Mota; cooking maven, Rosanna Pansino; and cult hit Nerdist.
For marketers this is an irresistible trend, and we're now at a significant industry moment. Marketers and agencies that have historically built their brand on TV are reorienting their creative, planning, and investments with digital at the center.
This year nearly all Super Bowl advertisers turned to YouTube to extend the life and reaches of their TV spots and Super Bowl related ads on YouTube have been viewed over 300 million times. That's roughly three times the size of the audience that watch the ads on TV.
In Australia, we work with Nissan to create made for YouTube video for the launch of their new Patrol SUV. The campaign which is promoted by TrueView ads and YouTube mass set for over 340% increase of daily visits to their websites, and more than 2% of those were interactive for the campaign booked a test drive.
In a few weeks in New York at our annual Brandcast Upfront Event we'll focus on our new Google preferred offering. This features exclusive access to the best, most engaging content on YouTube with guaranteed audiences through third-party measurement providers, Neilson and Counselor. We're really excited about this and we're looking forward to the results of that Upfront Brandcast Event.
We're also helping brands through our newest display ad formats. We recently teamed with Tory Burch to bring her New York Fashion Week Show to a global audience across our display network. Then also the first ever live stream of fashion show in an ad using a light box ads, and we're able to share the exclusive event with more than 7 million of their biggest fans.
Third, moving to our ad technologies and platforms; our programmatic ad technologies are seeing -- are continue to see great momentum with premium publisher partners like The Local Media Consortium.
That's comprised more than 800 daily newspapers and 200 local broadcast stations as well as timing. Both of them signed on with us in February to create private exchanges. This maximizes a value of that ad space for handpicked premium environment.
One thing we know is that agencies and publishers want to trust the environment in which they're transacting. Our ad network and exchanges are widely regarded across the industry as having the best quality controls and we continue to invest here.
In February we acquired wellium fraud fighter Spider.io and thousands of our clients are already using our MRC-accredited Active View technology to buy high-quality viewable ad impressions.
Let me switch over to our emerging new businesses, digital content, hardware and enterprise. Google Play continues to be the thriving hub of our digital content business. This quarter we introduced Google Play movies to 39 new countries, so now people in more than 65 countries can enjoy movies through Play.
We also teamed up with Sonos to bring high-fidelity play music into the home and we introduce new development tools for Google Play games including game gifting and iOS multiplayer support.
Over 75 million new users joined Google Play games in last six months; all of this is helping turn developers around the world into full-fledged businesses. In fact, we paid out more than four times as much money to developers in 2013 compared to 2012.
And following the Open Automotive Alliance that we announced with partners in January designed to bring android as a car, in March we've announced Android Wear, a project that extends android to wearables.
We're also already working with several consumer electronics manufacturers, chip makers and fashion brands who can't wait to see what developers come up with for your wrist.
We also continue to see strong momentum from our suite of hardware products, our $35 Chromecast is a real hit. Last month we brought Chromecast to 11 more countries. We also recently opened up Chromecast developers, and in just a few weeks, more than 3,000 developers worldwide sign up to bring their apps and websites to the platform.
Turning over to enterprise. We continue to see strong product adoption around the globe. We launched Chromebox for meetings, which makes it easy for any company to have high-definition video meetings through the power of Google+ Hangouts and Google apps.
We're also investing significantly in the Google cloud platform and I've seen a very positive response to our most recent product announcements.
We expect to see continued momentum in this area and we believe we can bring significant value to the many companies that opting public cloud because of our experience in building and operating one of the world's largest cloud computing environments for over a decade.
We able to pass on the savings that come from lower digital storage cost to our customers through highly competitive pricing. In addition, every day more businesses, governments and schools start using Google apps to work better together including the state of Sao Paulo who moved to Google apps for more than 4 million students and 300,000 teachers and staff.
Before I close, I want to call out our marketing team who continues to highlight the magic of Google to beep around the world, into fourth annual Google Science Fair, the doodle for Google in United States, the hugely popular ad campaigns.
They also helped to build great retail experience for Chromecast in over 6,000 stores. I'd like to thank all Googlers around the world who help makes a terrific quarter.
I'll now hand over back to Patrick.
Thank you, Nikesh. So we'll work with Jamie to go straight to the Q&A. Jamie?
Earnings Call Part 2: