Alphabet - Earnings Call - Q1 2014

Transcript

Operator (participant)

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.

Jane Penner (Director of Investor Relations)

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 the latest company news and updates. Please check it out. 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 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 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 to these forward-looking 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 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 restructuring. 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 turn the call over to Patrick.

Patrick Pichette (SVP and CFO)

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's 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 continue 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 that we'll disclose CPC and paid click growth rates for both our sites and our network businesses. We will continue to disclose, obviously, the aggregate growth rates for CPC and paid clicks. Turning to the geographic performance, we saw strong performance in the U.S. and rest of the world, solid performance in the U.K.

In our earnings slides, which you can find on our investor relations website, you'll see that we've broken down our revenue by U.S., U.K., and rest of the world to show the impact of FX and the benefits from our hedging programs. So please refer to those slides for the exact calculations. 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 an $8 million benefit from our hedging program. And in fixed FX terms, the rest of the 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.

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 and 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 of $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 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.

Nikesh Arora (SVP and Chief Business Officer)

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 a very strong auto sector showing around the Super Bowl. We had strong play growth in Asia, and we had a few isolated drags. By now, you're aware of the four areas driving our business. The first one, direct response, or as I like to call it, performance marketing. The second one, helping clients build their brand. Third, our ad tech platforms for publishers and agencies. And fourth, our emerging businesses like Digital Content, Enterprise, and Hardware. Let me give 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 a 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 really well positioned to help people navigate between web, apps, and the places around them. They help marketers measure the entire customer journey and to drive better monetization. Next week, we'll be welcoming hundreds of advertisers to our AdWords 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 Campaigns and Estimated Total Conversions. For instance, Shutterfly recently began measuring cross-device conversions in AdWords to understand sales that start on one device and end on another.

As a result, they saw a 60% increase in mobile conversions for non-brand terms, leading them to include 100% of their keywords on mobile devices. We're seeing great momentum in Product Listing Ads as well, with the new Shopping Campaigns system. International retailer Farfetch upgraded their shopping campaigns and increased their conversion rate by 13% while reducing their cost 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, and their Android app. Moving on to brand building. For years, we'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 hugely popular channels like fashion guru Bethany Mota, cooking maven Rosanna Pansino, and the 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 brands on TV are reorienting their creative planning and investments to put digital at the center. This year, nearly all Super Bowl advertisers turned to YouTube to extend the life and reach 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 watched the ads on TV. In Australia, we worked with Nissan to create a made-for-YouTube video for the launch of their new petrol SUV. The campaign, which is promoted by TrueView Ads and YouTube Masthead, drove a 340% increase in daily visits to their website, and more than 2% of those who interacted with 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 Nielsen and Comscore. 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. They hosted the first-ever live stream of a fashion show in an ad using our Lightbox Ads, and were able to share the exclusive event with more than seven million of their biggest fans. Third, moving to our ad technologies and platforms.

Our programmatic ad technologies continue to see great momentum with premium publisher partners like the Local Media Consortium, that's comprised of more than 800 daily newspapers and 200 local broadcast stations, as well as Time Inc., both of them signed on with us in February to create private exchanges. This maximizes the value of their ad space through a handpicked premium environment. One thing we know is that agencies and publishers want a trusty environment in which they're transacting. Our ad network and exchanges are widely regarded across industries as having the best quality controls, and we continue to invest here. In February, we acquired well-known 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 introduced new developer tools for Google Play Games, including game gifting and iOS multiplayer support. Over 75 million new users joined Google Play Games in the 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 to the car, in March, we 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, and 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 to developers, and in just a few weeks, more than 3,000 developers worldwide signed 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 have 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 adopting public clouds because of our experience in building and operating one of the world's largest cloud computing environments for over a decade. We're able to pass on the savings that come from lower digital storage costs 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 São 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 people around the world, from the fourth annual Google Science Fair to Doodle for Google in the United States, to hugely popular ad campaigns.

They've also helped to build a great retail experience for Chromecast in over 6,000 stores. I'd like to thank all Googlers around the world who helped make this a terrific quarter. I'll now hand over back to Patrick.

Patrick Pichette (SVP and CFO)

Thank you, Nikesh. So we'll work with Jamie to go straight to the Q&A. Jamie?

Jane Penner (Director of Investor Relations)

Thank you. If you would like to ask a question at this time, please press star one on your telephone keypad, and you'll join the question queue. If you are using a speakerphone today, please make sure your mute function has been turned off, or pick up your handset to ensure that our equipment can hear your signal. Again, that is star one for questions. And we'll take our first question from Ben Schachter with Macquarie.

Ben Shachter (Analyst)

Hey, Patrick, I was wondering if you could help us quantify some of the expenses you saw, the one-time nature of G&A and anything else there that was really one-time, just to help us understand what that run rate would look like if that wasn't in there. And then maybe, Nikesh, if you could talk about the theme of sort of advertising attribution and how that's going to help you potentially bring over more brand dollars. And how do you think about bringing over those television dollars? I mean, is that something that's going to come sort of a big rush in 2014, or is this going to be a slow evolution over many years? Thanks.

Patrick Pichette (SVP and CFO)

Great. Thanks, Ben. Why don't I start? Look, on the discrete legal expense that impacted, it really impacted our G&A. And then the one-time M&A deal costs impacted all of our operating lines, but most prominently our R&D line, which you'll notice will have jumped a bit. The one-time M&A deal costs are largely stemming from the Nest deal, which was a pretty large transaction for us this quarter. But I think that the best way to describe it is that our expenses in Q1, they're completely in line with our objectives if you kind of take apart these two items. So that's how I would describe it. Nikesh.

Nikesh Arora (SVP and Chief Business Officer)

Thank you, Patrick. Thank you, Ben. The brand question is a very good question. What we've noticed in the past, let's just say a year and a half, is that people have slowly started coming to the digital medium to create extension of their existing brand campaigns. Like I mentioned, the Super Bowl ad, people come to YouTube and say, "I'd like to reach certain audiences, which are only available on digital medium." Hence, we see those advertising dollars shifting, as in enhancing existing television or media campaigns. Now, the real fun will begin when people start doing campaigns exclusively on digital to go out and help them build brands.

That requires us to get ahead of the curve and get into the creative process much earlier because usually what we end up doing now is we get to the end of the creative process, and they just want to extend their brand. So we're working really hard to work with creative ad agencies of the large agency groups, as well as our advertisers, to say, "How can we get ahead of that creative process? How can we help you conceive of brand campaigns that actually start and end in digital, where perhaps you use TV as an extension medium as opposed to the other way around?" I think this is definitely the holy grail. This is going to take us a little bit of time to get there.

But with things like attribution in place with our deals with Nielsen and Comscore, we are beginning to create the compatibility, saying, "Look, the same dollar you spend on television equates to so many dollars on digital," or vice versa. The fact that we can give them sort of cross-media measurement capability, we can give them comfort that their dollars are being well spent, even better spent on digital, will go a long way in making sure that we get them to transition from just using traditional media to including digital in their media mix and eventually designing campaigns that start and end in digital.

Patrick Pichette (SVP and CFO)

Thank you, Nikesh. Jamie, let's go to our next question. Thank you, Ben, for your question.

Jane Penner (Director of Investor Relations)

And we'll go next to Douglas Anmuth with JPMorgan.

Douglas Anmuth (Analyst)

Great. Thanks for taking the questions. Just two things I wanted to ask. First, Patrick, just on the U.S., you had commented on the strength here in terms of 14% year-over-year, but it does look like on a sequential basis, we saw a little bit more of a decel than in recent Q1s. Can you just comment if there's any factors there to point out? And then, Nikesh, can you just talk about the key drivers of mobile pricing going forward, how you think the gap can close with desktop over the coming quarters and years? Thanks.

Patrick Pichette (SVP and CFO)

All right. Thank you for your questions. So in the case of the U.S., if you think about it, we have the Q4 to Q1 issues that are typical. And then, as we've said before, the network business does skew toward the U.S. on a relative basis. So network clearly grew slower than sites. So that's really what you see is that mix of the two. But in aggregate, pretty pleased with the U.S. growth overall. So that was a pretty strong quarter, really happy with it. I'll let Nikesh answer the mobile question.

Nikesh Arora (SVP and Chief Business Officer)

Yeah, Doug, I think thank you again for the question. I've had a firm belief, and I continue to hold on to it, that I believe in the medium to long term, mobile pricing has to be better than desktop pricing. And I think the way to think about it is that in mobile, you have location and you have context of individuals, which you don't have on the desktop. And the more you know about the user and their context, the more effective advertising you can provide them, the better the conversion is likely to be for a search or any piece of advertising that you do. There's a whole bunch of building blocks that need to come into play for us, like you said, to get the gap to close. The good news is a lot of people are spending a lot of time on mobile devices.

There's a lot of mobile search queries that we get. People are more and more focused about what they look for on mobile devices. They're closer to intent. They're closer to transaction. You see that there's a lot of frictionless ways of paying and converting transactions into commerce, which is happening with things like Instant Buy, etc. You're also seeing that a lot of the advertisers are seeing the true value of making sure that they're present and in a great experience on the mobile device. So part of our challenge has been that we've had this huge mass of advertisers on the desktop, which over the last decade have become better at advertising, understanding optimization, understanding conversion, understanding transaction. That journey is just beginning for advertisers on the mobile side. They're just beginning to understand what it takes for the end user to come transact on their website.

So sort of like right now, we can lead the horse to the water. We can't make it drink. But with all the advertisers coming on board and working with us, we're actually beginning to show them real transactions. And as that begins to gain traction, I think we begin to see that gap continue to converge.

Douglas Anmuth (Analyst)

Thank you.

Patrick Pichette (SVP and CFO)

Thanks, Doug, for your question. Jamie, let's go to the next question.

Jane Penner (Director of Investor Relations)

I'll go next to Ross Sandler with Deutsche Bank.

Ross Sandler (Analyst)

Great. Thanks, guys. I had a question on the Google Play App Store revenue. So Nikesh, you just mentioned that you guys paid out 300% more revenue to developers in 2013 versus 2012. So I guess, how much is Play contributing to the overall licensing and other line? And there's clearly some lines or some items in that line that are not growing nearly as fast to get to the current 48% average. So can you talk about maybe what's underperforming in that area? And then last question on this topic is, I think if you go back to the infamous Andy Rubin slides from the Oracle case, the rev share was around 5% for Google Play App Store rev share. Where is that now, and is it changing as the Android ecosystem gets larger? Thanks.

Patrick Pichette (SVP and CFO)

So why don't I take a shot at this? Ross, if you think of our other revenue estimates for this quarter, right, first of all, we're really delighted by the Play business. So you'll remember that a year ago, we had—I mean, I'm going to bring everybody back to Q1 of 2013—we had a lot of Nexus 4 hardware sales because we were sold out in Q4. And that, in combination with the accounting change of our Play app content revenue recognition, again, remember back to Q1 of last year, both just simply created a bit of a tougher year-over-year comp this quarter. But overall, very pleased with all of the kind of big lines of growth in this space. As per the rev share, I mean, obviously, this accounting change kind of goes to 30% rather than what you would have seen before, which would have been the net.

But we don't divulge what the percentages are that we keep going forward. So that's basically where we stand on it. And that's why we're pretty pleased with this line for this quarter.

Nikesh Arora (SVP and Chief Business Officer)

And if I can add to Patrick, I think the important part is it's taken us a while to get all the capabilities in place around the world in different markets, making sure we have all the content we need, we have all the app providers we need, as well as we have the payment mechanisms. So really, we are excited about the Google Play business going forward.

Ross Sandler (Analyst)

Great. Thanks, guys.

Patrick Pichette (SVP and CFO)

Thanks. Thanks, Ross. Jamie, let's go to our next question.

Jane Penner (Director of Investor Relations)

We'll go next to Mark May with Citi.

Mark May (Analyst)

Thanks. Question regarding the CPC segmentation for next quarter. While you might not be in a position to provide the specific data points for Q1, I was hoping that maybe you could give us directionally how CPCs have trended between the owned and network businesses and kind of what your expectation is going forward? Thanks.

Patrick Pichette (SVP and CFO)

So Mark, you'll get the information in Q2. What we really wanted to do was a recognition as we think about giving more transparency to our shareholders. Just looking at having, exactly as you just mentioned, the split between kind of our core sites and then the network itself. I think it'll be useful for everybody. And then, obviously, we'll have the information going forward. So a lot of insights are going to come out of that, and we're very pleased to be able to share it with you starting next quarter. We've just made this decision over the last little while and shared it with the committee, the board. So just stay tuned for next quarter on it.

Mark May (Analyst)

There are a number of dynamics that play into the blended CPC that you've called out before: property, policy, geo, and device, among others. Once you provide this new layer of transparency, does that really capture the major, is it really the property and maybe, to some degree, policy differences that are influencing CPCs between owned and network? Or will geo and devices continue to play a major role in the reported CPC, even once you provide this extra segmentation?

Patrick Pichette (SVP and CFO)

They all will. And if we do make changes to policies that affect network, you'll see them much more in a much more transparent way. In that sense, it's a very positive kind of news. Whether devices kind of have effects on network versus others, it'll be much more difficult to see. But clearly, the impacts that are driven specifically for network or for sites, you'll be able to see on a quarter-by-quarter basis. I think that's good news for our investors. All right. Thank you so much for your question, Mark. Jamie, why don't we go to our next question, please?

Jane Penner (Director of Investor Relations)

We'll go next to Mark Mahaney with RBC Capital Markets.

Mark Mahaney (Managing Director)

Thanks. Two questions on the U.K. revenue growth at 11% number and on the partner websites at 4%. Is there anything you'd want to call out as being unusual drags on those growth rates? I think that U.K. is the lowest we've seen. And maybe that's just a lot of large numbers and really successful execution in that market. But anything you'd want to call out for either of those two revenue streams? Thanks.

Patrick Pichette (SVP and CFO)

As I said, well, let me start with the U.K. The U.K, look, combination of partner mix this quarter, as well as, again, year-over-year matters a lot. And we happened to have, a year ago, a real revenue-favorable weather. I mean, people kind of tend to forget it, but last year, we had a very strong Q1 for the U.K. And the combination of these two things just kind of year-over-year made the comparison a little tighter for this quarter. As it relates to websites, partner websites, I covered that a bit earlier. And I mean, again, you go back to last year where network, if you think of Ad Exchange and AdMob, continues to be very, very strong. And you will remember, again, last year that we started the DLA policy change in Q1, or maybe it was in Q4.

But the impact of the DLA actually takes time to flow through. We said that it would take multi-quarters. So this has not kind of flowed over completely. So what you have, again, there is very strong on the core where we want the Ad Exchange and AdMob. But on the flip side of that, right, you still have the tails of the DLA change policy that's from a year ago, but the effects have not fully flowed through. So even in the coming quarters, you should see a bit of an effect there. But overall, pretty pleased with, actually, these results, Mark.

Mark May (Analyst)

Thanks, guys.

Patrick Pichette (SVP and CFO)

Thank you. Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Carlos Kirjner with Bernstein.

Carlos Kirjner (Analyst)

Thank you. I have two questions. First, in the last eight quarters, headcount had grown significantly slower than revenue. But this quarter, you hired, I think, 2,300 people in the core, and headcount grew with revenues. Was this change in hiring rate mostly because of acquisitions and, more generally, what prevents you from hiring 2,300 people a quarter or even more as the business grows? And secondly, Patrick, in the spirit of giving more transparency to shareholders, can you give us some color on what has driven such a sustained increase on CapEx over the last four quarters? Because I think clearly it's not just some lumpy behavior. Are you buying data center sites in advance of demand? And if this is the case, can we infer that CapEx will revert to historical levels? Thank you.

Patrick Pichette (SVP and CFO)

Thank you, Carlos, for both of these questions. So to the headcount question, I think you've basically nailed it intuitively, which is the acquisition of Nest. The acquisitions this quarter had quite a bit of people impact on this number. Or kind of, if you think of our organic numbers, have actually not changed in any material way. So it just happened. You buy Nest, and it comes with a lot of people. We also had, you'll remember, the acquisition of DeepMind and a few others. So for us, we had the double hitter of having the opportunity to continue to attract people on an organic basis through our processes. And these few acquisitions kind of moved the needle quite a bit for us this quarter.

As it relates to CapEx, listen, you're right that we, and I've mentioned this in the last couple of quarters, where we have, and just a reminder to everybody, right? If you think of the CapEx categories, right, data centers first and data center construction, then production equipment, then all other facilities is kind of like the hierarchy of needs. And in the case of data center construction, we have found that the option value of having more capacity on standby and available to us to grow versus not having it is actually a real strategic issue for the company. And in that sense, if for whatever reason we had a spike in demand that was really pronounced and sustained for a couple of quarters and we did not have the capacity, it would be a real issue strategically for us relative to the quite low cost of having the infrastructure in place.

So that's why we're really pushing ahead of the curve. And so it's with this view of long term. So from that perspective, you're also right that that's the mindset we're applying. And we've always said that CapEx was lumpy. So you have a good manifestation of it right now, right here. So thank you for those two questions, Carlos.

Carlos Kirjner (Analyst)

Thank you.

Patrick Pichette (SVP and CFO)

Cheers. Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Stephen Ju with Credit Suisse.

Stephen Ju (Analyst)

Okay. Thanks, guys. So Nikesh, so in order to attract greater brand advertising dollars, it seems like safety and context are also important factors because you're certainly not falling short on reach. So how close do you think you are to either engineering or coming up with some sort of a solution to contextualize all the video content on YouTube so you can guarantee your advertisers' brand safety? Thanks.

Nikesh Arora (SVP and Chief Business Officer)

That's a good question. I think, as I alluded to, we are going to do an upfront in a few weeks in New York City called Google Preferred, which is sort of our way of trying to create a premium sort of concentration of content that we can have advertisers advertise against, which gives them a higher level of brand safety, a better level of measurement, and hopefully a place where they believe that they can actually build brands. And hopefully, that will manifest itself in our ability to have a premium compared to what we can attract in the market without providing those kinds of things. So that's a very good question. I think that's what we're hoping to achieve. And stay tuned for our detailed announcement at Brandcast.

Stephen Ju (Analyst)

Thanks.

Patrick Pichette (SVP and CFO)

Thanks, Stephen. Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Justin Post with Merrill Lynch.

Justin Post (Analyst)

Great. I have three quick things. Did Enhanced Campaigns, which you rolled out over the summer, impact Q4? And do you see some more benefits coming this year? Second, on PLAs, we think you had very good success in the U.S. in Q4. Do you still have some benefits to come from that as you roll that out in Europe? How are you looking at the timing there versus how you rolled it out in the U.S.? And finally, in the first quarter, maybe you could call out some specific verticals that might have been strong or weak for you. Thank you.

Nikesh Arora (SVP and Chief Business Officer)

It's a good question, Justin. Thank you. I'm not sure I can give you a lot of detail in terms of precise impacts of any individual products that we have. But Enhanced Campaigns are working. It is a necessity that we had to do them, both for process reasons as well as the reason that consumers are going from screen to screen, as well as advertisers need to advertise across multiple screens. So from that perspective, Enhanced Campaigns is working. It's part of life here. We don't do anything without Enhanced Campaigns across the board. It's gone from being Enhanced Campaigns to regular campaigns because we don't have any unEnhanced Campaigns anymore. In terms of PLAs, it's something, as I alluded to, it's actually working. It's providing a lot of color in the shopping vertical. It's providing a lot of the whole new shopping campaign effort that we have.

PLA is working for us, and it's sort of working from multiple perspectives. It is providing users the detailed information that they need when they're declaring intent and saying, "I'd like to search for a particular product. Please don't send me to a website." So it is working. We are going to roll that out one step at a time around the world. I cannot comment on the timing exactly, but I think both of those things are having a positive impact in our minds to everything we're doing around here.

Patrick Pichette (SVP and CFO)

Just to close on this, just a few verticals here. I mean, again, completely reflecting the economy around us. If you go to automobile has been quite strong across the world. Travel, actually quite strong in the U.S., so in the U.K. as well as in the rest of the world, a little bit less in the U.S. But just to give you a sense of, and then real estate, clearly in the U.S. has been a strong vertical as well as in the U.K. So again, a good reflection of the economy there, Justin. So Google Trends, I always encourage people to go and check out Google Trends as well because they continue to give good insights as to what's going on in the economy, which would mirror in terms of verticals.

Justin Post (Analyst)

Thanks, Patrick. Thanks, Nikesh.

Patrick Pichette (SVP and CFO)

Thanks, Justin. Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Eric Sheridan with UBS.

Eric Sheridan (Analyst)

Thanks for taking the question, guys. So two ones. One for Nikesh. Nikesh, we'd love to get your view on sort of your view of the travel industry, sort of how you're approaching that industry as a participant from an economic basis in that industry, both the marketing funnel and potentially the booking funnel longer term. There's been a lot sort of written lately about the way in which you guys might approach that industry vertical. And then second, Patrick, for you, maybe taking a stab at the one-time expenses from a different approach.

When we look at the model, if we take your comments before about sort of smoothing out the expenses we saw in the back part of the year and even year-on-year, it appears the one-time expenses might have been about a 50 to 100 basis point impact on each of those two lines, which would have sort of brought the blended number back up to sort of somewhere between 75 to 150 basis points on margins. But just wanted to take a stab at that from a different direction just to quantify it. Thanks, guys.

Nikesh Arora (SVP and Chief Business Officer)

Thanks, Eric. Thanks for the question. I was actually while talking, I was pulling up the article which recently Darren Huston talked about the effectiveness of Google advertising for Priceline. I think that's a public endorsement that all our efforts in the last many years around the travel industry are actually working. They see tremendous value in our ability to help them bring more travelers to their sites and for them to help convert them into real transactions. So whatever we're doing is working. I think I'm suspecting that the comments you're talking about are continued efforts in providing more and more detailed information when people do searches, and as we've talked in the past before, that people's information needs are getting more and more precise.

And we have to keep evolving the results at Google, whether it's Knowledge Cards or Google Now, all the things that we do towards giving them more and more precise answers. In which case, sometimes we are required to go work with various industries to get the underlying data to surface it when the users are looking, as opposed to send them to other sites where they have to go through that search process again. So I think you can expect us to continue to do that, but our intent there is to provide a better answer for the users, whether it's on their desktop or mobile devices.

Accordingly, we also work together with the advertisers to provide them various advertising opportunities, which allow them to work effectively with the end user and provide them the answer that they're looking for, or perhaps in this case, the ticket or the hotel booking that they're looking for.

Patrick Pichette (SVP and CFO)

Great. And on my side, Eric, look, as I said in my earlier comment, our Q1 expenses were completely in line with our objectives. And there's always seasonality. As you've noticed, from Q4 to Q1, there's always we spend less on marketing. And so that's true for this year as well. And for the other areas, right, we would have been in line with the objectives we set for ourselves. So these one-time costs were genuinely in that truly one time. And I mean, when you acquire Nest for a bit over $3 billion, there's just a lot of stuff that flows through the P&L, a lot of accounting. And so that's really the issue there. So I would go back to your instinct of at least kind of we should be roughly in line with what our expectations were. And that's why the nature of truly extraordinary items.

So thanks for that question.

Eric Sheridan (Analyst)

Thank you.

Patrick Pichette (SVP and CFO)

Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Peter Stabler with Wells Fargo Securities.

Peter Stabler (Analyst)

Good afternoon. Thanks for taking my question. Wanted to revisit attribution for a moment. There are different aspects to attribution, and I think you guys are doing a great job on the cross-screen attribution and taking advantage of your ubiquitous logins across different platforms and Enhanced Campaigns. Wanted to get a better understanding of how you're thinking about online versus offline attribution for those types of marketers, particularly brand advertisers, supermarket advertisers, the 30,000 SKUs and those retail channels that don't have e-commerce and really don't have much of a search opportunity. How are you helping them close the gap between their online activity and offline sales? Thanks very much.

Nikesh Arora (SVP and Chief Business Officer)

Thanks, Peter. Thanks again for the question. I think, as you're right, fully pointed out, the attribution story on the advertising side is kind of becoming clearer as we partner with Nielsen and Comscore and adopted some of the mechanisms that traditional media has used to create the comparability between traditional and new media. I think you identify a good challenge, which is that how do we bridge the gap between online commerce and offline commerce and relate that to the advertising opportunity, i.e., when we sell search or we sell traffic to different people, how do we convince them? How do we make them realize that that traffic that they bought not only results in online sales, but also results in offline sales in stores? And how do we encourage that activity?

Over the past many years around the world, we have run specific studies working with various advertisers, which I call online-to-store studies, where we actually try and measure what online activity created by them through control groups results in more foot traffic in their particular store in certain regions or not. And we've pretty much had very good results across the board. I can't detail specifics right now because they're all specific to individual advertisers we work with. But we do understand that opportunity and the problem. And we work specifically with third-party research teams to work on figuring out how do we keep showing the online-to-store efficacy. And there are other products, as you can see, where we start doing conversion. We start looking at things like Google Shopping Express, which also helps in those areas. Thanks again for your question.

Peter Stabler (Analyst)

Thanks for the color.

Patrick Pichette (SVP and CFO)

Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Heather Bellini with Goldman Sachs.

Heather Bellini (Analyst)

Great. Thank you very much. I just wanted to go back to an earlier question. You responded about the building blocks that were needed in order to get mobile pricing, mobile CPCs to converge with desktop. I was just wondering if you could share with us kind of specifically what you think those building blocks are that need to happen over the medium to long term, as you said, to see that convergence occur. Thank you.

Nikesh Arora (SVP and Chief Business Officer)

Of course. Thanks, Heather, for the question. I mean, look, there are some very simple things, and there are some complicated things. The simple things are we need to make sure that there is payment enablement for users, so i.e., users have a mechanism that allows them to pay with the lowest amount of friction because, honestly, you and I don't want to spend our lives trying to enter payment information on a very small screen where we're trying to conduct a transaction, so that enablement is happening across the industry, across multiple payment platforms. There's also the need that when people search for some things, they can get quickly down to the information, and they don't have to browse multiple sites because people are more keen on declaring intent on mobile devices than going and surfing multiple websites and trying to figure out what they're trying to do.

That intent could be in the form of a restaurant, could be in the form of a taxi, could be in the form of them looking for an individual product. You're beginning to see apps. You're beginning to see solutions on search that allow you to get to that granularity of information. Now, of course, there's a big building block, which is getting all the people out there, which are the advertisers effectively, in this case, the merchants, who actually have to have experiences on the mobile site, which are simpler to execute on. Try buying something on many companies' mobile websites, and it's more onerous than their desktop sites because they've been spending a decade trying to optimize their desktop site, where they haven't spent enough time optimizing their mobile experience.

In some cases, not believing that people want to transact with them on their mobile device. In some cases, they're just slow, and they're just slowly diverting resources from desktop to mobile. So if you take all those things and if you take the notion that we need to keep sort of working hard towards getting these building blocks in place, I think there is a finite time where these building blocks will come into place. And as they keep coming into place, you will see, or as we talked about earlier, perhaps the convergence will happen between pricing and mobile and desktop. There's a whole bunch of other issues that go into this. I think those are the big things that we can think of right now.

Patrick Pichette (SVP and CFO)

Thanks for your question, Heather. Jamie, let's go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Colin Sebastian with Robert Baird.

Colin Sebastian (Analyst)

Great. Thanks. I wanted to ask a question on the cloud platform since this is obviously a huge revenue opportunity for you. And first off, if you could put some context around the impact of this business on CapEx and OpEx, particularly on the infrastructure as a service part of the business. And then secondly, if you could talk about how you're planning to differentiate the services. Is it really about pricing, or is it by tying in the software and platform as a service offerings? If you could touch on that, thanks very much.

Patrick Pichette (SVP and CFO)

I can cover the first part, and then I'll let Nikesh cover the second. Look, we're very comfortable with our cost structure. In light of Google efficiencies, economies of scale, our vertical integration from data center to chip to servers to software, I mean, we really have—we believe we have an absolute unique position from a cost structure perspective. And therefore, from a margin perspective, it makes us very, very comfortable. In terms of differentiation, I'll just let Nikesh jump in here.

Nikesh Arora (SVP and Chief Business Officer)

I think, Colin, thank you again for the question. The important part to at least acknowledge in the space of cloud computing is we think it's very, very, very early days. I mean, if you think about the potential scope and scale of what this opportunity is, that pretty much every business which is going to be around for the long term has to operate in the cloud. There's no efficiency compared to the efficiency of the cloud, but compared to owning your own infrastructure and running it by yourself. So this shift is going to happen. It's a matter of every company going through that shift one at a time. And if you look at the opportunities out there and the options, there's very few options.

So there's a lot of room for all of us to have a great time for many, many, many years before we start worrying about differentiation and why my sort of thing is better than yours. So right now, the key is to be able to work with the companies out there, the enterprise customers out there, to get them to shift off their legacy systems, get onto the cloud, and realize that Google has been working in the cloud for more than a decade because we have been running one of the largest cloud computing platforms in the world, in the public space. And we have all the expertise and the skills that are required to be able to serve these enterprises and get them off their current legacy systems onto the cloud.

So our effort is really trying to work with each of these third-party partners to try and get them off their legacy systems onto our cloud. I don't think the challenge right now is the need to differentiate. I think our biggest differentiator is we have the most experience in the space.

Colin Sebastian (Analyst)

Great. Thank you.

Patrick Pichette (SVP and CFO)

Thanks, Colin. Jamie, we'll go to our next question, please.

Jane Penner (Director of Investor Relations)

We'll go next to Jordan Monahan with Morgan Stanley.

Jordan Monahan (Analyst)

Hi. Thank you for taking the question. Actually, two, if I may. A couple of big-picture questions, I think, for Nikesh. The first is that I think there is an ongoing debate about whether the mobile web or mobile app is going to win and what the implications are for various businesses, Google included. And I'm just curious to get your view on whether you think one will win over the other and then whether it matters for Google. And then the second is, when you look at Google's share of global advertising, you're coming up on about 10% of total. But when you look at your business in the U.K., you're north of 20% of total.

When you think about your global businesses as economies start to mature, do you think the U.K. is a fair proxy for thinking about your business globally, or are there other factors that you think may prevent you from getting to that type of scale globally?

Nikesh Arora (SVP and Chief Business Officer)

I guess let me answer the second question first, Jordan, because I'm standing here. Patrick is looking at me asking the same question. I think the way to think about it is that we have 10% by some metric, depending on what you believe the total is. As per your metric, we have 10% of the total advertising sort of money. And in the U.K., we have 20%. That just tells me there's 90% more opportunity around the world and 80% more opportunity in the U.K. So we're not going to constrain our thinking in terms of what we believe is a stable state. Our aspiration is to be able to serve every advertiser in the long term. And our aspiration is that, or our hope is that every piece of advertising becomes digital advertising.

The question is, how much of that are we able to provide through our technology platforms? How much are we able to provide through our own sort of properties, and how much do we partner with others to provide on their network? So I guess I'm trying to tell you that we don't constrain ourselves in our thinking. I'm not trying to be arrogant and say we want 100%, but we'd like more than what we have in every market out there. In terms of your question around the mobile web and mobile search, that is a tough question, and that is a very involved question.

And I think the approach, the best way to think about it, is that we're trying to make sure that we can make both of them effective for the end user and make them both work because we're not about to try and pick winners. Right now, you can see that people spend as much time on mobile devices, more time on mobile devices than they've been able to spend on the desktop, and they're spending their time across the mobile web as well as the mobile app landscape. We're participating in both those ecosystems, whether it's through our Play Store on the app front, whether it's through our browser-based search properties, or through our app-based search properties. So we're participating across the board. And I think at the end of the day, it's going to boil down to ease of use and consumer choice.

Jordan Monahan (Analyst)

Thank you.

Patrick Pichette (SVP and CFO)

Thank you, Jordan. Let's go to our next question, please. Jamie.

Jane Penner (Director of Investor Relations)

We'll go next to Robert Peck with SunTrust.

Robert Peck (Analyst)

Yeah. Hi. Thanks for taking my question. Two questions, if you don't mind. The first one is on the revenue side. Can you talk a little bit and maybe give us an update about the breakout of YouTube versus DoubleClick revenues? Where are those today, and where could they be over time? And then on the cost side, Patrick, could you just walk us through just how you think about the ROI on capital? We get a lot of questions from investors asking about spending. Can you maybe just tell us more about the thought process of how the company looks at the ROIC of capital going forward? Thank you.

Patrick Pichette (SVP and CFO)

Okay. Well, Robert, let's start with the last one first, and then we'll go back to revenue. ROI, clearly, we always look at capital intensity. The fact that we're investing quite a bit in CapEx right now, right, is a real tribute to kind of the potential and the optimism we have about our business going forward. Most of our core businesses, if you think of YouTube or advertising or search, right, are not that capital-intensive relative to other areas that we have, such as, for example, Google Fiber, if you think of the access portion, right, which is much more traditional CapEx. For each of these areas, we actually track and make sure that we have good returns and we have a capital efficient.

So even though an area that, I don't know, take the advertising business that we run, even though you could argue that it's phenomenally good on return on capital, the question that we will ask internally is, "Okay. So if the utilization rate is X on our machines on this business, right, why can't it be X plus something?" So even though we have already good return on capital in these areas, we continue to always push the envelope to make sure that our capital efficiency continues to be better and better on a year-to-year basis. And then across the portfolio, every area has some capital kind of targets to make sure that we're driving for value. Finally, there's a number of areas, if you think of, take the newer stuff, like Loon, for example.

In those cases, you test through the hurdles that we kind of seed capital to the Loon team as they hit their hurdles, and they kind of earn their right to the next tranche of funding. And in doing so, right, we continue to always have the business case in mind that says, "Hey, here's why this continues to make sense to fund and invest." And with an ROIC or value in mind for the long term, but in the short term, it's really kind of delivery of milestones on very specific engineering objectives that actually gives them the next round of funding.

Robert, as you can see, given the portfolio of mature stuff we have and growing areas, as well as kind of much more R&D and innovation at the early stages, right, we just need to have a basket of tools to actually manage the concept of ROIC or ROI on each of them. And that's what we do. I mean, it's not rocket science. It just requires a lot of discipline on our part. On the revenue side, look, we don't break out DoubleClick or YouTube. I can just tell you, as I mentioned a bit earlier, we're really pleased with our network revenue in the kind of AdMob, Ad Exchange. Many of our areas, right, continue to grow very well, and we're very, very pleased by these investments and clearly continue to be very pleased with YouTube, as Nikesh mentioned a bit earlier.

Robert Peck (Analyst)

Thank you very much.

Patrick Pichette (SVP and CFO)

That's the story there. Thank you. Jamie, we'll take one last question. We're running out of time, so we'll take one last question, if you don't mind.

Jane Penner (Director of Investor Relations)

Our final question comes from Gene Munster with Piper Jaffray.

Gene Munster (Analyst)

Hey. Good afternoon. Another question regarding trends in mobile CPCs. I know yesterday you announced an offline conversion tracking plan and program with Datalogix. Is that something potentially the whole online-to-offline tracking that could have a positive impact on CPCs? And separately, any updates on how you think about fiber longer term? Thanks.

Patrick Pichette (SVP and CFO)

Okay, so why don't I take the last portion, and then Nikesh may have views on this data conversion plan. On fiber, look, you've heard our announcement earlier this quarter where we're working with 34 cities and looking for working with these municipalities where, I mean, they've indicated to us they're really excited about, they kind of self-selected to be really excited about getting fiber and the next generation of access, so right now, we're basically working directly with them to look if we have the right conditions to actually go to the next stage, which would be to build, so very excited about it. I think that it's a really good sign of things to come in access in general. I think that everybody now in the industry is talking about the gig.

It's becoming the standard, and we're absolutely thrilled for all of the users out there that can think that they'll one day get a gigabit of symmetrical internet at a reasonable price. So stay tuned on the next part of the chapter, but really excited to work with these communities. And Nikesh, maybe you want to talk about.

Nikesh Arora (SVP and Chief Business Officer)

Yeah. Thank you, Gene. I mean, as I mentioned earlier and the question earlier from I think it was Heather, that the online-to-offline conversions are a really important opportunity where it's important for offline merchants to be able to understand what results they get from their online activity. And some of the experiments that we talked about require partnerships with third-party data providers to understand how that happens. And I think Datalogix is one of those things which we are looking at to see how we can help quantify the opportunity and quantify the answer for our offline partners. So it's just one of those things that we're doing.

Gene Munster (Analyst)

Great. Thank you.

Patrick Pichette (SVP and CFO)

Thank you, Gene. Just in closing before I headed over to Jamie, just to reiterate the point that Nikesh made a bit earlier, to all of our Googlers out there and all of our partners out there, right, thank you so much for the great work in Q1. What a great start to the year, and then we'll see you in Q2, so thanks a million. Jamie, I'll leave it with you to close the call, please.

Jane Penner (Director of Investor Relations)

Thank you. Again, that does conclude today's conference. We do thank everyone for your participation. Please have a great day.