Alphabet - Earnings Call - Q2 2011
July 14, 2011
Transcript
Operator (participant)
Good day and welcome, everyone, to the Google, Inc second quarter 2011 earnings conference call. This call is being recorded. At this time, I'd like to turn the call over to Jane Penner, Senior Manager, Investor Relations. Please go ahead, ma'am.
Jane Penner (Senior Manager of Investor Relations)
Good afternoon, everyone, and welcome to today's qecond Quarter 2011 earnings conference call. With us are Larry Page, Chief Executive Officer; Patrick Pichette, Senior Vice President and Chief Financial Officer; Susan Wojcicki, Senior Vice President Advertising; Nikesh Arora, Senior Vice President and Chief Business Officer. First, Larry, Patrick, Nikesh, and Susan will provide us with their thoughts on the quarter. As you know, we now distribute our Earnings Release through our Investor Relations website, located at investor.google.com. 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 that we make today may be considered forward-looking, including statements regarding Google's future 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 that 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 related 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 Larry.
Larry Page (CEO)
Thank you, and good afternoon, everyone. Thanks for joining us today. It's really exciting to be in the room today and share directly with you the progress we have made in my first quarter as CEO. As you have seen from our Press Release, we had a great quarter, with revenue up by 32% year-on-year and a new record for quarterly revenue at over $9 billion. We have substantially increased our velocity in execution this quarter, which is a key goal of mine since taking over as CEO. That's why I created a new product-focused management structure with clear leaders responsible for each area. The management team is working together fabulously and has already achieved a lot in just these three months. First of all, I want to talk about Google+, which we launched as a field trial invitation only.
Our goal of Google+ is to make sharing on the web like sharing in real life, as well as to improve the overall Google experience. Circles lets you choose with precision who you are sharing with. Not surprisingly, this has been very well-received, because in real life, we share different things with different people. Hangouts allow for serendipitous interactions, like in real life, when you run into a few friends. It gives you seamless and fun multi-user video, and it's really amazing. Last quarter, we launched the +1 button in search results and ads, enabling users to recommend stuff they liked and to have those recommendations show up in the search results of people they know. This quarter, we released the +1 buttons to the entire web, and many sites like Huffington Post, The Washington Post, and Best Buy have added +1 buttons.
Google+ is still in field trial with limited access as we scale the system. Users have to be invited and sign up with a profile in order to use it. However, the growth on Google+ has been great, and I'm excited to release some new metrics for you today. Over 10 million people have joined Google+. That's a great achievement for the team. There's also a ton of activity. We are seeing over 1 billion items shared and received in a single day. Our +1 button is already all over the web. It's being served 2.3x billion a day. While we still have a lot of work still to do, we are really excited about our progress with Google+. Google+ is also a great example of another focus of mine, beautiful products that are simple and intuitive to use.
Actually, it was one of the first products to contain our new visual redesign. We also launched that beautiful, consistent, and simpler design on our homepage, Gmail, and Calendar, with many more products soon to come. Greater focus has also been another big feature for me this quarter. More wood behind fewer arrows. Last month, we announced that we'd be closing Google Health and Google PowerMeter. We've also done substantial internal work, simplifying and streamlining our product line. While much of that work has not yet become visible externally, I'm very happy with our progress here. Focus and prioritization are crucial, given our amazing opportunities. Indeed, I see more opportunities for Google today than ever before, because believe it or not, we are still in the very early stages of what we want to do.
Even in Search, which we've been working on for 12 years, there's never been more important changes to make. For example, this quarter, we launched a pilot that shows an author's name and picture in search results, making it easier for users to find things from authors they trust. Of course, when we started doing Search, people thought we were crazy. They said there's no money to be made in Search over and above a bit of banner advertising. Most new Internet businesses have had that same criticism. Fast forward to today, it feels like we are watching the same movie again in slow motion. We have tremendous new businesses being viewed as crazy. Android, and actually, we have a new metric to report in Android of 550,000 phones activated a day. That's a huge number, even by Google standards.
Chrome, which is the fastest growing browser, has over 160 million users. Now, people rightly ask, how will we monetize these businesses? Of course, I understand the need to balance the short-term with the longer-term needs, because our revenues and growth serve as the engine that funds our innovation. Our emerging high-usage products can generate huge new businesses for Google in the long run, just like search. We have tons of experience monetizing successful products over time. Well-run technology businesses with tremendous consumer usage make a lot of money over the long term. I think about our products in three separate categories. First, there's Search and our ads products, the core driver of revenue for the company. Nikesh and Susan are going to talk more about ads later in the call. Next, we have products that are employing high consumer success: YouTube, Android, and Chrome.
We are investing in these in order to optimize their long-term success. We have our new products: Google+, E-commerce, and Local. We are investing in them to drive innovation and adoption. Overall, we are focused on long-term absolute profit and growth, as we have always been. I will continue the tight financial management we have had in the last two years, even as we are making significant investments in our future. I'd like to finish on our people. Great companies are no greater than the efforts and ingenuity of their people. Continuing to hire the best, keeping them happy and well-rewarded, is crucial to our future. Many of you will be interested in hiring, whether we hired a few hundred more or less than we expected this quarter. We will optimize headcount for the long term and the opportunities we see.
I'm happy with the investments we've made in people, though we're probably even a little ahead of where we need to be with headcount growth at the edge of what's manageable now. It is easy to focus on things we do that are speculative, e.g., driverless cars. We spend the vast majority of our resources on the core products. We may have a few small speculative projects happening at any given time, but we're very careful stewards of shareholder money. We're not putting the farm on this stuff. All of us at Google want to create services that people in the world use twice a day, just like a toothbrush. We strive to make those services beautiful, simple, and easy to use. That way, we can provide huge benefit to the world. We've made a good start, but we're only at 1% of what's possible.
Google's just getting started, and that's why I'm here, working hard to lead the company to the next level. Thank you. We had a great quarter. Now over to Patrick for the financial results.
Patrick Pichette (SVP and CFO)
Thank you, Larry. Thank you, everybody. Thanks for joining us. Larry's going to stay with us for the Q&A. I just wanted to make sure that everybody knows he's not going anywhere. OK, let's go through the numbers. We had, obviously, an excellent quarter with 32% year-over-year revenue growth in Q2. It clearly demonstrates the continuing power of Google's product innovation, but also the relentless momentum of the digital economy. Strength continues to be driven by our core desktop search ads, but also, increasingly, by new emerging areas, just like the mobile display, including YouTube and enterprise that we regularly talk about. Let's turn to the specifics of our performance in the quarter. Gross revenue grew 32% year-over-year, and we reached $9 billion in revenue, 5% quarter-over-quarter growth as well.
Note that while currency fluctuation boosted our revenue somewhat, even in constant FX terms, our growth rates remained strong, particularly in what tends to be a seasonally slower quarter. Google website revenue was up 39% year-over-year to $6.2 billion and 6% quarter-over-quarter, with strength across most major geographies and verticals. Google network revenue was also up 20% year-over-year to $2.5 billion, 2% quarter-over-quarter. Network revenue was again negatively impacted by the search quality improvements made during the latter part of Q1, as you will remember. Q2 reflects a full quarter of this impact. This impact is to be expected in the short-term, given that it is now different publishers that are receiving traffic and may not have yet optimized their sites for our advertising programs. Other revenue was also up 20% year-over-year to $310 million and 15% quarter-over-quarter.
Our global aggregate paid click growth was strong, up 18% and down 2% quarter-over-quarter. Our UI changes to search ads, such as vis URL, drove year-over-year click growth in Q2, along with the ongoing and accelerating shift from offline to online. The slight decline quarter-over-quarter is just typically consistent with our summer seasonality. Aggregate cost per click growth was also very healthy, up 12% year-over-year and up 6% quarter-over-quarter. Note that FX also had a positive impact on CPC. Remember, too, that this is an aggregate number that includes both Google.com and our AdSense properties. Turning to our geographic performance, the U.S. and the rest of the world are growing both at a very good pace. Our results reflect that.
While the U.K. still continues to lag slightly in the global recovery, year-over-year and quarter-over-quarter growth in Q2 continues to show signs of acceleration in the U.K. as well. Revenue from the U.S. was up 26% year-over-year to $4.2 billion. 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 the rest of the world to show the impact of FX and the benefits of our hedging programs. Please refer to those slides for the exact calculations. Non-U.S. revenue accounted for 54% of our total revenue, or $4.9 billion, up 38% year-over-year, which includes only $4 million of benefits from hedging programs, compared to last year, where we had $79 million of benefits for Q2. Year-over-year growth in fixed FX would have been 29% versus the 38% I just mentioned.
Japan's Q2 revenue was, again, negatively impacted by the aftermath of the disaster there. There again, we see signs of faster recovery, faster than expected at first. The U.K. was up 27% year-over-year to $976 million. Year-over-year growth in fixed FX still had been a healthy 19% for the U.K.. Let me turn to expenses. Traffic acquisition costs were $2.1 billion, or 24.2% of total advertising revenue. Our other cost of revenue was $1.1 billion, including stock-based compensation of $51 million. Finally, our operating expenses, which exclude stock-based compensation, totaled $2.6 billion. The stock-based compensation totaled $384 million in Q2. The increase year-over-year in OpEx was primarily due to payroll, increased advertising and promotional spend, and also professional services. As a result, our non-GAAP operating profit was $3.3 billion in Q2, which excludes the stock-based compensation, resulting in a non-GAAP operating margin of 36.7%.
Headcount was up approximately 2,450 versus Q1, ending the quarter with 28,768 full-time employees. When we exclude the ITA ads of roughly 450, the net headcount growth is roughly similar to Q1. Our effective tax rate was 19% in Q2. The effective tax rate is down due to the mix of earnings between domestic and international subsidiaries, as well as our hedges. Let me turn now to cash management. In other income and expense, our results were $204 million for Q2, a solid portfolio management performance from our team, which, like every quarter, is offset by the impact of our hedging expenses associated with FAS 133, which in itself was also significantly lower in Q2, gave us these great results. For more detail on OI&E, again, please refer to the slides that accompany this call on our IR websites. Operating cash flow, very strong, $3.5 billion for Q2.
CapEx for the quarter was $917 million versus last quarter of $890 million, so pretty much in line. The majority of our CapEx spend in Q2 was related to facilities expenses and production equipment. Regarding specifically the facility expenses, like last quarter, we just happened to have a great opportunity in Q2 to purchase buildings in Dublin and in Mountain View, and we took that opportunity. As a reminder, we'll continue to make significant CapEx investments. These have shown to be lumpy from quarter-to-quarter, depending on when we're able to actually make these investments. Overall, we can be nothing but pleased with our free cash flow, which was $2.6 billion for Q2. As Larry mentioned earlier, we continue to deliver growth with a disciplined agenda.
This means investing and making sure that our resources are deployed wisely, with focus and a balance between that short and long-term that Larry covered. With those financial highlights covered, I'm going to turn it over to Nikesh, who will actually cover now our sales performance in the quarter.
Here you go, Nikesh.
Nikesh Arora (SVP and Chief Business Officer)
Thank you, Patrick. I'm going to give you a quick update on our business activities, which spans sales, partnership marketing, and customer service around the world in support of our product and revenue. Let me start by focusing on the first priority for our sales team, the need to continue to drive our revenue growth in core and new businesses. This quarter, we continue to drive revenues in our core areas like Search, as well as new areas like Display, Mobile, and Enterprise. Core Search and Desktop has done really well this quarter, with Google.com accelerating and large advertisers continuing to spend more as they see more value in search. We've also been able to drive tremendous focus on small advertisers around the world, with programs like GxP, which I will talk about slightly later.
Broadly, however, our sales teams are getting better at tailoring integrated solutions for our clients using the full array of our advertising products. These solutions create greater opportunities to improve our customers' marketing ROI. Clients have used search to focus their targeting capabilities, such as audience and topic targeting, to help improve the marketing effectiveness. Some of our most successful search clients include people like GM and Egyptair. In addition to our core Desktop Search business, we continue to be very excited about our investments in Display and Mobile. Let me first focus on Display. We've seen continued healthy growth in our Display product space across all fronts: advertiser, publisher, and technology solutions. 98 of the top Ad Age 100 advertisers have bought Display across YouTube and the Google Display Network this quarter.
Customers continue to use our DoubleClick products, and we are happy with the increased use of the DoubleClick Ad Exchange and Invite Media for ad buying. With our announcements to acquire Admeld, we hope to deliver even better solutions to our publishers and buyers. Continuing on Display, on YouTube, where we have over 3 billion daily views, we have had great success bringing popular content to our users, further increasing audience engagement. Take, for example, our April broadcast of the royal wedding, which generated 100 million YouTube views. Our range of platforms and content means that advertisers are beginning to use them for superior branding solutions. A great example of our branding products in action was T-Mobile's launch of the Samsung S 4G on YouTube. In this campaign, T-Mobile took over YouTube, running ads on the home page, watch page, and mobile.
That particular campaign helped them reach 46 million unique users. Continuing to talk about revenues, our mobile business continues to be in another area of robust growth. The number which Larry just shared of 550,000 Android, that and the success of smartphones and general mobile data devices around the world is acting as an accelerator to our mobile advertising efforts. Let me just take one quick example. One format which was launched by Susan's team, called click-to-call or click-to-share, has been particularly successful. Team Leaver is a great use case of these formats. They integrated our AdMob product into a very large campaign to launch a new product. They used the banner to drive traffic to a campaign mobile site and achieved unprecedented results, with almost 700,000 unique visitors accessing their content. Another leg of our revenues is the enterprise business.
We've seen great results in enterprise as well. In particular, Google Apps for Business continues to grow as organizations move to the cloud. We've had key wins with InterContinental Hotels, the MoMA, and State of Wyoming. In addition to that, some small, simple changes in our product side have allowed us to tremendously accelerate Google Apps for Small Businesses. Looking at our revenues from a slightly different perspective, geographies and customer segments, we've seen strong growth in regions and across customers of all sizes. First, let's take a look at geographies. We maintained our strength in large mature countries while we accelerated in emerging ones. In our large mature countries, even though some are facing economic challenges, the secular trend of online advertising and the effectiveness of the teams to continue to drive healthy revenue growth is showing great results. Several countries are worth noting, as Patrick mentioned.
The U.K. has accelerated this quarter with strong growth by small advertisers. In Japan, we've seen recovery, driven primarily by display and mobile spending by large advertisers. Our focused execution in Canada and Spain has led to these markets beginning to show recovery. Finally, we saw tremendous growth in emerging countries, especially Brazil and Russia, where our display products are getting strong adoption from advertisers. Across each country, we're focused on improving the product knowledge and selling capability of our sales force. Our frontline teams can now sell Search, Display, and Mobile to the needs of our customers, which is a great trend we're seeing of integrated product selling across multiple mobile ad formats. As a result, we're becoming better advisors in the digital space for our large advertisers.
For example, Nike, Sony Ericsson, and Telefónica, all of them partnered with us to create integrated solutions around their sponsorship of Copa America. Outside of revenue, one key area of responsibility is marketing. We continue to use marketing as a strategic lever. We use marketing to both drive customer acquisitions, as well as usage of our key consumer products. I'm very proud of my team's work on Get Businesses Online, GxP, as I mentioned. In Q2, we successfully launched campaigns in Brazil, Canada, Australia, and Thailand. The objective is to try and bring another million small and medium businesses across 20 countries online for the first time. As you know, more advertisers get more queries, have more ads served against it, resulting in a more robust auction for us. In addition, we also saw strong results from our own advertising campaigns, including the most recent one around Google Chrome.
The web is what you make of it. I'm sure many of you might have seen Justin Bieber or Lady Gaga in these campaigns. These campaigns have shown tremendous effectiveness and have helped convince more users to switch to the Chrome browser. Last but not the least, I want to spend a quick minute on talking about something we're more and more passionate about, which is continuing to drive better customer satisfaction on our advertiser front. We continue to improve service and support across all customer segments. We have started providing a large set of advertisers proactive phone support and onboarding help, which includes signing up for campaign building, signing up and getting assistance, as well as free phone support after they become a customer of ours. As a result of these initiatives and others, spending by our small businesses continues to accelerate.
Overall, as Patrick and Larry mentioned, Q2 was a great quarter. I'm very proud of the work of our teams across the world in various countries, who have done a tremendous amount of work to serve our customers, partners, and users. I'm going to turn it over to my business partner, Susan, who is going to talk about all the positive impact that our products have had this quarter.
Susan Wojcicki (SVP of Advertising)
Thanks, Nikesh. Larry started the call by talking about a few of the quarter's product highlights, and I'd like to cover some more of them. Let me begin with Search. We're always looking for new ways to help our users find answers to their questions. This quarter, we brought two of the most popular mobile search innovations to the desktop: Voice Search and Search by Image. Voice Search traffic from mobile devices is up 6x in the past year. We thought this would be a useful feature for our desktop users as well. It's especially useful for searches that you know how to say but not how to spell, like Bolognese sauce or Schenectady, New York, neither of which I could easily spell.
With Search by Image, you can drop pictures of places, art, or even mysterious creatures, like the Loch Ness Monster, right into the Google Search Box, and Google can identify and tell you about those pictures. In addition to these changes, we released about 100 other quality improvements to the search algorithm. More and more people are searching and using apps for mobile phones, where Android has had terrific momentum. There are now 135 million Android devices that have been activated in total, up from 100 million just two months ago. There are also now over 400 different Android devices available globally. The Android market is also picking up momentum. It has over 250,000 different apps, and users have downloaded apps over 6x billion, which is double the downloads from just a few months ago. We're expanding beyond apps, too.
This week, we started renting movies and selling books on phones from the Android market. Earlier in Q2, we launched Music Beta, which lets users upload their personal music collections and playlists to the cloud. All of this media—movies, music, books, and apps—are instantly available on your Android devices, no cable required. Smartphones are also becoming key to the shopping experience. Making shopping mobile and local is the vision behind Google Wallet and Google Offers. We announced the Google Wallet mobile app in May in partnership with Citi, MasterCard, Sprint, and First Data. We are now testing it in field trials. As of this week, Google Offers are available in San Francisco, Oakland, New York, and Portland. Now on to ads, which is a product area that I manage.
On the search ad side, we had a great quarter for quality, with over 50 ads quality improvements and a big upgrade to the ads relevancy system. We launched the latest in a series of small tweaks for our search ad format. This quarter, we added the landing URL to the headline so that users know where a click will take them. This may seem like a small thing, but we launched several of these small tweaks over the past year, and cumulatively, they have had a big impact. There were also a lot of quality improvements across our display network, over 20 launches, making it one of our strongest quarters from a quality perspective. In general, display advertising is moving to a scientific model based on technologies like real-time bidding.
With this technology, when you land on a web page, advertisers decide what they want to pay for the ad space, and an auction is held. The best ad is matched with the publisher's ad space. It's a lot more efficient. It provides better performance for both advertisers and publishers and more relevant ads for users. Real-time bidding is an important technology shift that we are investing heavily in. Invite Media, which is the buying platform for advertisers and agencies that we bought last year, has doubled its client list in the last year, with over 5x growth outside of the U.S. Mobile display is starting to take off, too, with traffic on the AdMob network up more than 3.5x in the past year. More and more of that traffic is coming from tablets. We launched a new set of formats designed specifically for tablets.
These formats are web-based. They use HTML, and brand advertisers don't need to make different versions of their ads for different models. Nikesh also mentioned our great momentum with YouTube, where we're getting strong performance from YouTube skippable ads. Because users can choose to skip these in-stream ads, the people who choose to watch them are much more engaged. More and more advertisers are choosing to make their ads skippable, and now, over 1/3 of in-stream ads on YouTube are in the skippable format, which is a pretty remarkable stat, given that we launched this format in December. Finally, I'd like to update our progress on Chrome. Larry mentioned how we passed 160 million users, which is more than double year-on-year. This quarter, our partners Samsung and Acer started shipping Chromebooks in seven countries.
Chromebooks are designed to be fast, to just work, and to get better over time, thanks to our automatic updates. They're now available through Amazon and Best Buy. Chromebooks are also available to schools and businesses via a subscription model. The subscription includes Chromebooks, course, administration, warranty, and support, starting at $20 a month. Overall, it was a very busy quarter for us. Maybe the coolest thing we did was the Les Paul Doodle we ran last month. It was a guitar you could actually play, and users recorded over 40 million songs while it was up. That's about five years of music. I'm looking forward to hearing your questions and comments. For now, back to Patrick.
Patrick Pichette (SVP and CFO)
Thank you, Susan. Jamie, our operator, is going to help us through this. Jamie, you can just set up the call for Q&A. As I said, we'll have Susan, Nikesh, Larry, and myself to answer any questions you may have.
Operator (participant)
Thank you, sir. To ask a question, please signal by pressing the star key followed by the digit one. If you are using a speakerphone today, please disengage your mute function or pick up your handset to ensure that your signal reaches our equipment. If you find your question has already been asked and answered, you may remove yourself from the queue by pressing star two. Again, that is star one on your touch-tone telephone to signal with a question. We'll take our first question from Spencer Wang with Credit Suisse.
Spencer Wang (Managing Director and Head of US Media and Internet Equity Research)
Thanks. Good afternoon. Two quick questions, if I could. First for Patrick, or perhaps Nikesh. International revenue growth, as you mentioned, was really strong. I was wondering if you could just provide a little bit more color on perhaps what's driving that, if you could give us a sense of how much of that is core search versus some of the newer initiatives like Mobile, YouTube, and Display. The second question is for Larry. I was wondering if you could just talk a little bit, Larry, about the patent strategy, our understanding is you guys have about 650 patents. Just given the Oracle situation, I was wondering if you could talk about the patent strategy to ensure that you guys can continue to innovate going forward. Thanks.
Patrick Pichette (SVP and CFO)
I'll let Nikesh answer the first part of the question, and then Larry will talk about the patent issues.
Nikesh Arora (SVP and Chief Business Officer)
As I mentioned in my prepared remarks, we've seen tremendous growth across pretty much all product areas. The growth you're seeing international is driven by Mobile, by Display, by Search. Clearly, international is not one market. There are many different countries. We have seen different effects in different markets. Places like Japan, as I said, have been driven more by Display and Mobile. Various parts of Asia are just getting up to curve for us on Display and are strong contributors in Mobile. Having said that, Russia has been very strong for us. Brazil has been very strong for us, Brazil in the back of Mobile and Display as well, and as well as core Search.
If you think about what we're seeing, we're seeing more and more pickup of Display and Mobile, because we have established sales teams operating in almost every major market around the world to help sell Display. The Mobile takeup, based on takeup of smartphones and Android, et cetera, is helping that trend as well. In addition to that, a lot of effort has gone into bringing small businesses online. That increases the number of advertisers in many international markets. As we get more advertisers in our international markets, it has a very positive impact on our RPMs in those markets. We're seeing that effect as well.
Larry Page (CEO)
Yeah, I think for your question on Android and patents and so on, obviously, we have a number of intellectual property in progress too, not just already issued. I'd also just say Android's really on a tear. I mentioned there are over 550,000 new Android daily activations previously. There's over 400 such devices, 39 OEMs, 231 carriers in 123 countries, and over 78 Open Handset Alliance partners. That velocity is only increasing. Of course, despite the efforts of some of our competitors, there hasn't been any slowdown in any of those things. Partners and developers are continuing to expand the Android ecosystem. I should say, of course, we're really committed to Android and continue to support that platform and ecosystem and do it in a cost-effective manner.
Patrick Pichette (SVP and CFO)
Thanks, Larry. Let's go to the next question. Thanks, Spencer, for your question.
Operator (participant)
I'm going to take our next question from Mark Mahaney with Citi.
Mark Mahaney (Internet Analyst)
Two questions. Larry, could you talk about what you have maybe put in to improve the velocity of decision-making? As you step back and think about the management improvements you could see over the next year or two, how significant do you think, how much better, how much more efficiently do you think Google could be running what we've seen maybe over the last two or three years? Susan, real quickly, Social Search signals, how important do you think they are now? How key are they? How much of that is Google+ the strategy for trying to make the core search results more relevant? Thanks.
Larry Page (CEO)
I'm mute.
Thanks, Larry. Sorry about that. I'm super excited about the changes we've made. I think, as companies scale, we always change how we're running the company over time. I think we have much more of a product-focused structure now, which I'm very excited about and talked about it. I think that maintaining and improving our velocity and execution is a really noble goal for us. It requires always a lot of work in companies. I think that's a super important direction for us. I'm really excited about it. Susan on Social?
Susan Wojcicki (SVP of Advertising)
I think the first thing I would say about Social is that we're very early right now. Our focus with Google+ will be to focus on making sure that we have a wonderful consumer and user experience. From a targeting perspective, there are a number of signals that we use right now, obviously keyword on search, contextual, interest-based advertising, demographics. Social and social signals over time can be an important part of that. It would be one of multiple ways that we actually do targeting. When we did roll out Google+, we do have pluses on all the ads, just as we do on search results. If a user does click on it and someone on their circle actually does a query and triggers that, there will be social annotations, which will be useful information for the user to see that their friend has +1 that ad.
Mark Mahaney (Internet Analyst)
Thank you, Susan. Thank you, Larry.
Patrick Pichette (SVP and CFO)
Thanks, Mark, for your question. We'll go to the next question, Jamie.
Operator (participant)
I'm going to go next to Ben Schachter with Macquarie.
Ben Schachter (Senior Analyst)
Hey, guys. Congratulations on the execution and the launch of Google+. Larry, at a high level, what, if any, are some of the key differences in how you think about managing specifically the economic model of the company today versus when Eric was the CEO, specifically any changes to target margins, revenue growth targets, etc.? Then separately, on mobile search specifically, it's clearly been successful in terms of search share. When we're trying to figure out the overall impact to net revenue and kind of balancing out some of the positives, like incremental searches and share gains and higher click-through rates, but also having the headwinds of tax payments to partners and lower CPCs, how should we think about the overall net impact of mobile to the business? Thanks.
Patrick Pichette (SVP and CFO)
Why don't I take the second part of that question? Larry can talk about the economic model versus in the context of what you said. Look, for Mobile search, you have to go back and focus on what we focus on, build businesses that are going to be billion-dollar businesses and that actually contribute significant operating dollar margins. These are businesses that scale to a humongous scale as they grow. For us, that is the focus that we have. The second piece in the specifics of Mobile is we really see Mobile a bit like Search was in 2001, 2002, 2003. All these formats are so new that you know that there's so much more room for optimization on top of it.
It is, in fact, a bit of a mistake to kind of say, OK, today, whatever we have is a good proxy for what the future will look like. That's why we're excited about it. That's why we focus so much on Mobile. Now, for the economic model and how we run the company, maybe, Larry, your thoughts on that?
Larry Page (CEO)
Absolutely. Thanks for the question. I think, you know, certainly, Eric is a great partner and leader for me and for Google for the last 10 years. He continues to play a big part in the company. I don't think there's, like we said before, there's no major changes in what we're doing. I'll reiterate maybe a little bit, add a little detail to what I already said. I think about really our products in three separate categories. First, there's search and our ads business, which is the core driver of revenue for the company. We really invest in that. We work hard on it. Next, we have businesses that are enjoying really high consumer success, for example, YouTube, Android, and Chrome. We invest in those in order to optimize really their long-term success.
We have some new businesses, Google+, Commerce, and Local, that we're really excited about and that are pretty early stage. Those things we invest in as well. We don't do things that we don't think will generate really big returns over time. We're optimizing for our long-term economic success. We do have these very different buckets of things that we work on.
Patrick Pichette (SVP and CFO)
Thanks for your answer, Larry. Thanks for your question, Ben. Jamie, let's go to the next question, please.
Operator (participant)
I'm going to go next to Ross Sandler with RBC.
Ross Sandler (Managing Director and Senior Equity Research Analyst)
Hey, guys. Just two questions. First on Google+ and then second on Google Offers. On Google+, we haven't seen any real integration. I know it's only a couple of weeks old, but with Google's kind of core competencies around search and other things that you've been very successful at in the past, can you talk about plans on integrating some of Google's core strengths into Google+ to further, I guess, differentiate the product from other services that are out there? On Google Offers, can you just talk about your overall strategy in terms of rolling out Offers? You're in four cities today. How fast do you think you're going to accelerate into these newer cities? Is international territories also on the roadmap in the near term for Offers? Thanks.
Larry Page (CEO)
Yeah, thanks for your question. I'll answer the first part, Larry. Google+ actually has a lot of interesting product integration. The black Google bar that you see is an entry point and notification point for Google+ across basically all of our properties. We're really excited about that and think it's a big deal. We should also say there are many things that you would do with Google+ and with +1 that affect what you would see in search results. Like I mentioned, if you +1 something, your friends will see it in search. Absolutely, I hope it was clear that was our strategy. We are very focused on improving all of Google and improving the sharing and identity across all of Google.
Patrick Pichette (SVP and CFO)
Maybe Nikesh can give a comment on the rollout for the Google Offers.
Nikesh Arora (SVP and Chief Business Officer)
Here we go. Thanks, Patrick. We won't give out details on how we roll out our Offers strategy. I think Susan said it very well in our overall strategy, because Offers for us is not just an isolated event. It is a combined sort of a commerce offering, which includes their mobile phone and other things we talked about. We're very happy with the rollout we've had in the one city where we've been for a while, which is Portland. We just rolled out two more cities earlier this week. From that perspective, you can expect us to roll out other cities. We're going to be testing and looking at the model to see what's working and what's not working, because we want to build the next version of how we roll out an Offers product. Stay tuned.
Ross Sandler (Managing Director and Senior Equity Research Analyst)
Great, thanks.
Patrick Pichette (SVP and CFO)
Thanks for your question, Ross. Jamie, our next question, please.
Operator (participant)
I'll go next to Brian Pitts with UBS.
Brian Pitts (Managing Director and Head of Internet and Interactive Entertainment Equity Research)
Great, thanks. Two quick questions. As we note the proliferation of the newer, richer ad formats, like product image ads that we're seeing more and more of on your site, can you help us better understand the impact on paid click growth specifically? Separately, can you also give us a little more color on some of the Panda or quality changes you're doing on the network? Any commentary on how much impact to growth of AdSense that had this quarter? How long should we expect to see a more than expected impact from continued quality changes? Thanks.
Patrick Pichette (SVP and CFO)
Why don't I let Susan tackle those questions? Susan?
Susan Wojcicki (SVP of Advertising)
Great. Yeah, on the richer ad formats, we see a few important opportunities for us. What we feel about them is it gives us the opportunity to make those ads better for the users. As we can create better experiences for our users, they're more likely to have the information that a user wants. What we'd hope to see is a click-through increase over time, and hopefully for the advertiser on the back end, a better conversion. In terms of click growth and what's actually driving the click growth that we see, it's a number of factors. One of them is always going to be query growth that we have. A second thing would be on improvements that we have to our back-end quality model. The better the quality model is, the more likely we are to actually match the right advertisement to the right user.
We had a number of good, as I mentioned, not just good, we had great ads quality launches this quarter and a number of ad formats that made the ads more readable. By making them more readable, the users are more likely to click on them. That turns into click growth. On the last question that you had, which was Panda, Panda was a change made by the search team with the goal of improving overall search experience. There was, as we talked about last time, some negative effects on the AdSense partners. However, Panda does, or any search quality that we make, have a change of ranking, which means that there are different sites that wind up getting traffic. Those sites may adjust their monetization strategies over time. It may just take some time for that to actually balance out.
Also, in terms of the last question, we don't really comment about future changes that we're going to make. We are always thinking about the right way to continue to improve the search results for our users.
Patrick Pichette (SVP and CFO)
Yeah, Panda is, once again, a great example of putting the user first ends up benefiting everybody in the end, the publishers, the advertisers, and the users. Thanks for your question, Brian. Let's go to our next question, please.
Operator (participant)
I'm going to go next to Justin Post with Bank of America Merrill Lynch.
Justin Post (Managing Director and Senior Equity Research Analyst)
Great. A couple of questions. Larry, thanks for joining the call. While we have you, I'm just going to ask you a question I get all the time. How focused is senior management on the stock, either as an employee retention tool or a measure of management's performance over, say, a three-five-year period? Secondly, if I could just ask about the local opportunity. It looks like a lot of launches happening for Google. Do you see it as a different ad market than your current search ad market? How might your model be different than some of the larger players in that market currently? Thank you.
Larry Page (CEO)
Yeah, Justin, thank you very much for your question, Larry. I think we have a lot of stuff to do here at Google. Unfortunately, one of the things we don't get to decide is our stock price. You all are in charge of that. I think we are, and we really focus on our long-term success as a business. The kind of things I mentioned already are absolute overall profitability over the long-term and our revenue growth. We tend to focus much more on that with a much more long-term view than we do on our stock price.
Patrick Pichette (SVP and CFO)
Susan, views on the difference and the similarities between the local and our traditional ads market.
Susan Wojcicki (SVP of Advertising)
Local can be thought about two different ways. Local can be the large retailers who have many different points of presence. For example, Starbucks or Pizza Hut or any retailer which is a large holding company or one large retailer, but then has many different local points of presence. There is a separate bucket, which are the small Joe's Coffee Shop example. Both of them need different things from a product perspective in order to be able to advertise more broadly. We are working in both buckets to solve and make them advertisers on AdWords with solutions that will work for them. The large ones need functionality of how do I run a campaign in all of these different locations with different keywords, different pricing? We are working to enable location in our AdWords campaigns when you're managing a large account to make that much easier.
The Joe's Coffee Shop example, what we're working on is enabling signing up for AdWords to be a much easier experience. We actually have a product that we released this quarter called Google Boost. The Boost product is a one-page, five-minute sign-up for advertisers. It's very easy to sign up. We haven't marketed it a lot right now, but we have seen good success with advertisers. We're hoping to make that more known to our advertisers.
Patrick Pichette (SVP and CFO)
Yeah, the last piece in the puzzle is obviously Susan Mobile, which is completely integrated from an ads perspective and targeting as well.
Susan Wojcicki (SVP of Advertising)
I mean, the other thing, too, is we would like to make all of our products be accessible from a mobile perspective. Click-to-call would be an example. Click-to-call is really nice, so that if someone, for example, is local walking down the street, they can actually call. It is also really nice from the small retailer perspective, because they can understand that they're getting a call and they're getting a lead, which for them would be much more tangible than actually a click to their page. We're investing very heavily in that in terms of click-to-call technology and the good tracking for the local advertisers.
Patrick Pichette (SVP and CFO)
Thank you. Thanks, Justin, for your questions. Let's go to our next question, please.
Operator (participant)
I'm going to go next to Jeetu Patel with Deutsche Bank Securities.
Jeetu Patel (Analysts)
Great, thanks. Two questions. First of all, you've got obviously quite a few products and applications that have had success over the years, kind of that are out there, obviously Search, Gmail, Chrome, Android, etc. As you think about the next generation of consumer relationship and stickiness, how do you think about integrating a lot of these kind of core assets together in terms of building a consumer relationship which kind of moves seamlessly from all these different solutions and formats out there, as well as devices? Second, maybe around Google+, obviously it's only been two weeks now. Maybe can you talk about the overall trend in terms of 10 million users? How does that compare against maybe the early days of how Android or Chrome or maybe even Search or Mail ramped?
What kind of trajectory or kind of what kind of trend schedule does it look like right now if you were to pinpoint it against another product in the business?
Larry Page (CEO)
Thanks very much for the questions. I think those are good questions. We are on the integration point. We obviously have a lot of different products so that they're different things for different people. One effort that I mentioned that I've been really excited about is this visual redesign. I also mentioned the bar that goes across, the black bar that goes across with Google+ that gives you notification and sharing and so on. We are definitely working hard to integrate our products better to make the user experience simpler, intuitive, beautiful, and consistent. I'm really excited about our progress just in one quarter on that. I think we're certainly working hard on that and expect to continue to over time.
On the + growth question, we've been very, very excited about the growth we've seen and the engagement we've seen with the one over a billion items shared and received in a single day. I think that for us, there's a lot of barriers to use + right now. For one thing, you have to be invited and so on. It's still in field trial. I think given all that, we're just extremely excited about that. It's very early days. It's been less than two weeks since we released it into field trial.
Patrick Pichette (SVP and CFO)
Thanks for those insights, Larry. Thanks for your question. Jamie, let's go to the next question, please.
Operator (participant)
I'm going to go next to Jason Maynard with Wells Fargo.
Jason Maynard (Equity Research Analyst)
Hey, good afternoon, guys. I have a couple of questions. First on Local, you've got a lot of interesting services and capabilities. They're still fairly disparate. In some instances, there's some overlapping features. I'm just curious, from an end user perspective, how are you thinking about bringing together your various local commerce products? Maybe to follow up on the Google+ question, since it is so early, what are your longer-term goals for +? I mean, measured by either users or number of items shared, how are you thinking about this over, say, a two-year time frame? Thank you.
Larry Page (CEO)
Maybe I'll take the first question and the second question first. On the +, how would we think about the success of it? I think we are really, obviously, like I said, we want people to make products that everybody uses twice a day, like their toothbrush. We certainly think about + that way and also just generally having really great sharing experience and identity experience across Google and all of its products. That's kind of how we think about the success there. I think it's pretty straightforward. On the first question, local integration, Patrick, do you want to take that?
Patrick Pichette (SVP and CFO)
Let me suggest that what's been really cool about Local for us, in addition to what Susan mentioned a few minutes ago, is you have to think of it as we are, in fact, assembling all the pieces of the puzzle. Local is actually a quite complex experience. When you have Maps, you have Mobile, you have Wallet, you have all the ads serving, you basically have the pieces of the puzzle to succeed. It's not as much what was yesterday's tool that we had and how do we evolve only yesterday's tools. It's about taking those pieces of the puzzle and really creating true innovative services. That's how you have to think about Local. That's why it's not obvious. If you look at the arsenal we're building, it's actually quite formidable. That's why we're excited about it. Thanks, Jason, for your question. Let's go to the next question.
Operator (participant)
I'm going to go next to Doug Anmuth with JPMorgan.
Doug Anmuth (Managing Director and Senior Research Analyst)
Thanks for taking the question. I wanted to ask two things. First, Patrick, can you give us some color on the mix of headcount additions? In particular, if you look at R&D, it looks like it was flat sequentially, yet you added more than 2,000 people during the quarter. I'm hoping you can provide some color there. Secondly, can you give us some context just in terms of how you think about the Display business and whether you need more O&O inventory? Thanks.
Patrick Pichette (SVP and CFO)
OK, so I'll answer the first one. I'll let Susan answer the second. Listen, on headcount, again, as we said on the call, roughly we have ITA for 450. So roughly about 2,000 for the quarter. Larry commented on that. There's still a huge amount of engineers in that. It just happens that R&D is actually in every line item. You'll find it in OS, but you'll find it in many other areas of our P&L. You should not worry. We have a complete focus to make sure that we actually have a majority of our hiring that is focused on engineering, which is really the core of the business. We continue to kind of, then you have the mix of sales and then just general overhead. It's really engineering and sales that have been the focus within that sequence. For Display, I'll let Susan talk about it.
Larry Page (CEO)
I'll just add, too, on the headcount question, none of the focus there has changed substantially from our past. Go ahead, Susan.
Susan Wojcicki (SVP of Advertising)
On display, our biggest O&O property is obviously YouTube. Given the numbers that we saw, we've seen tremendous growth there and a huge opportunity to monetize video as more users come online and more content winds up being uploaded on YouTube. The strategy and our display strategy overall is dependent not just on O&O. It also has many other components, the first being to be a platform to enable advertisers and publishers to much more easily buy and sell display advertising.
Second, to enable all of the sites out there, of which there are, of course, many, many, many millions, hundreds of millions of them, for them to be able to monetize and sell display advertising and for us to be able to help them as part of that process and via our network, where we have a lot of different targeting techniques to try to serve the right ad to those users. Really, our strategy is part O&O with our sites like YouTube, but also to continue to build a great network and platform products so that advertisers and publishers across the industry can serve display advertising.
Doug Anmuth (Managing Director and Senior Research Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Thanks for your question. Let's go to the next question.
Operator (participant)
I'm going to go next to Anthony DiClemente with Barclays Capital.
Anthony DiClemente (Equity Research Analyst)
All right, thank you. I have one for Patrick and one for Larry. Patrick, if we just isolate the 6% sequential growth in cost-per-click versus last quarter, I wonder if you'd just help us understand the driver of that acceleration. Moving forward, should we expect that to continue or moderate, given that as mobile queries start to take up more of the query mix? A question for Larry. It would appear that in social media, switching costs for users are high, perhaps years of photos on a social network platform. As you look at Google+ and the growth there, what are the most compelling offsets to those switching costs, do you think? Do you perhaps see a future where folks can simultaneously be a part of multiple social networking platforms? Thanks for the question.
Patrick Pichette (SVP and CFO)
Why don't I let Susan actually give you a bit of color on our CPC and evolution, and then Larry will take on the latter, the social one.
Susan Wojcicki (SVP of Advertising)
The drivers of CPC, there are a few of them. One of them this quarter was FX, certainly. We have been really focused on our ads quality improvements and how we continue to obviously make our ads better for our users and for our advertisers. In doing so, we have actually done a lot of optimization of our ads that appear above the search results, like site links, some of the ad changes in the formats that we made this quarter. A lot of the ads that appear above the top search results tend to be higher CPC because they're the first three ads.
As we continue to optimize and really drive a lot of increased click-through and visibility for the ads that appear above the search results, you will see, since those tend to be higher CPC because they're at the top of the results, you will see some of that increase.
Patrick Pichette (SVP and CFO)
Larry, on social and switching costs.
Larry Page (CEO)
Yeah, I think we've been really excited about Google+ really improving the overall social experience and making it more like how you would share in real life. That's really a different product than is out there now. We're getting just rave reviews for that. People really like being able to share with more discrete groups in an easy, intuitive way. There's a lot of magic built into the product that causes that. You asked about photos. We actually have a really great photo experience on Android. If you take a picture on Android and you have the Google+ clients, which you would have if you're using it, it uploads your photos automatically. It's super easy to share them and post them to your friends or your family or whatever. It's a really, really great experience. There is legacy.
Google as a company believes in users owning their own data and being able to easily move it out of Google. Some of our competitors don't believe in that. We think that users will eventually move to services that are in their best interest and that work really well for them.
Patrick Pichette (SVP and CFO)
Thank you for your question. It's already 2:30 P.M., so why don't we take, Jamie, one last question, and then we'll have to close the call, unfortunately.
Operator (participant)
Thank you, sir. We'll take our final question from Jim Friedland with Cowen and Company.
Jim Friedland (Analyst)
Thanks. I wanted to ask the question on or follow up on where you guys said that you're a little ahead of where you expected to be on hiring. Should we think about the hiring, and particularly in R&D, coming in waves where you hire a bunch of people, get them integrated, maybe it slows down and picks up again? The second question is just on the P&L. Other costs for revenues as a percentage of Revs ex-TAC seem to be a little high. Is that coming from increased data center depreciation? Is it maybe coming from YouTube and content-related costs? Thanks.
Patrick Pichette (SVP and CFO)
I'll answer the first one and then the latter one. I'll let Larry talk about hiring in general. The P&L, yeah, it is a combination of factors this quarter. In that cost is also included headcount, and headcount has actually increased. Power has increased because of seasonality. It's summer now, so our power is a little higher. We've also had kind of catch up on expenses on some of the equipment. There's been a bit of a, if you think between Q1 and Q2, there's been a bit of a cleanup in some of the areas of equipment that have actually slightly deflated Q1 and inflated Q2 as we finished the cleanup. There was a bit of a catch up there. I wouldn't read the data point between Q1 and Q2 as I don't create a graph with that, with a line.
It's a bit of everything, including a bit of cleanup in some of the equipment accounts. For the issue of hiring, I'll let Larry actually talk about generally where we stand right now.
Larry Page (CEO)
Yeah, that's a great question. I think just a couple of factors affected that. I think you know we implemented compensation changes in Q1. We increased our employee compensation, and they've had an even more positive effect on hiring and retention than we expected. That's been a super successful change. I think in general, there's just more excited people who want to work at Google and who want to stay working at Google than we expected. That's had some impact on those numbers. Of course, there's a limit on how many we can and how fast we can productively hire. I said in my remark, I think kind of my judgments were at the edge of that pace being reasonable. We're just adding a lot of people.
I'd say that we're always looking for good people, and the exact rate is going to depend on success and where we really want to invest in the company. We have a really strong management team, I said, that's working together fabulously, and we can absorb those hires and put them to use well. Like I said, we're surprised at the success of our previous changes around compensation as well.
Jim Friedland (Analyst)
Great, thank you.
Patrick Pichette (SVP and CFO)
Thank you very much for your question, Jim. With that, I just want to thank Larry for joining us today and Nikesh and Susan for the comments as well as the Q&A. I want to thank, once again, as I always do, all the Googlers out there, our fantastic Googlers that have made this quarter possible and all the innovation. Especially, I think it's worth mentioning our Google+ team that has done a phenomenal job in this launch. Two thumbs up. On behalf of all of us here, congratulations and many thanks to all our gang at Google. With that, I'll let you, Jamie, close the call. Thank you, everybody, for participating today.
Operator (participant)
Thank you, sir. That does conclude today's conference. We do appreciate everyone's participation.