Alphabet - Earnings Call - Q3 2012
October 18, 2012
Transcript
Operator (participant)
Good day and welcome, everyone, to the Google Inc. third quarter 2012 earnings conference call. This call is being recorded, and at this time, I'd like to turn the call over to Jane Penner, Director of Investor Relations. Please go ahead.
Jane Penner (Director of Investor Relations)
Good afternoon, everyone, and welcome to today's third quarter 2012 earnings conference call. With us are Larry Page, Chief Executive Officer, 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. 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 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 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 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'll turn the call over to Patrick.
Patrick Pichette (SVP and CFO)
Actually, why don't Iā hello, everybody. Why don't I invite Larry to give us the first round of commentary, and then I'll go through our financials, and then Nikesh will have some comments before we turn to Q&A, so here you go, Larry.
Larry Page (CEO)
Thank you, Patrick. Hello, everyone. Thanks for joining us. It's great to be on the call today and to share our progress since we last spoke six months ago. As you can hear, my voice is still hoarse, so I'll keep my remarks reasonably short. I'm sorry for the scramble earlier today. As our IR team has said, they had sent out the release just a bit early. We had a strong quarter. I'm really happy with our business. Revenue was up 45% year on year, and at just 14 years old, we cleared our first $14 billion revenue quarter. Not bad for a teenager. Today, we live in a world of abundance: abundant information and abundant computing. Most of us carry at least one device all the time, every day. In fact, many of us feel naked without our smartphone.
Apparently surprising, mobile search queries and mobile commerce are growing dramatically across the world, and when we use these devices interchangeably, depending on our situation, I switch between my Nexus phone, my Nexus 7 tablet, and my new Chromebook that we just announced today many times every day. While this abundance causes disruption, it also creates amazing opportunity, and Google is super well placed to take advantage of these disruptive opportunities. Why? Because our search query volumes have grown this quarter, as measured year over year, and we're seeing tremendous innovation in advertising, which I believe will help us monetize mobile queries more effectively than desktop today. Indeed, our mobile monetization per query is already a significant fraction compared to desktop. In short, as we transition from one screen to multi-screens, Google has enormous opportunities to innovate and drive ever higher monetization, just like search in 2000.
Now, we took a big bet on Android back in 2005. We believed that aligning standards around an open-source operating system would drive innovation across the industry. Most people thought we were nuts. Today, there are over 500 million Android devices - 500 million - with 1.3 million more being activated every day. You should all run out and buy the Nexus 7 tablets for $199. It's had rave reviews and recently won Gadget of the Year from T3, the gadget experts. You'll love the integration with Google Play. It's an amazing device. This time, last year, I announced that our run rate for mobile advertising hit $2.5 billion. That seemed like a pretty big number, even for Google.
But now, when we've built up additional mobile revenue from users paying for content and apps in Google Play, including these new sources grossed up, I can announce our new run rate for mobile is now over $8 billion. That's quite a business. We have so many opportunities today that unless we prioritize, we spread ourselves too thin. Last month, we sunset another 19 products. We've now closed or have combined 60 products and features in the last year, and we put a ton of energy into ensuring that our remaining products work really well together. Because as screens multiply, it's more important than ever we converge our services. Users want one consistent, beautiful, and simple Google experience. Technology should do all the hard work, liberating users to get on with the important things that matter in their lives, and the screen independence is at the core of our strategy.
Take Chrome on Android, for example. We only launched in February, but the experience is already amazing. When you're using Chrome, switching devices is truly painless. All your tabs are there, ready to go. Search on your desktop, and the result is right there on your smartphone. You can even click the back button, and it just works. And as more users upgrade to Google+, it's now over 400 million. Users are enjoying amazing experiences across devices, like instant photo upload. In the same way, we want to make advertising super simple for customers. Online advertising is developed in very device-specific ways, with separate campaigns for desktop and mobile. This makes arduous work for advertisers and agencies and means mobile opportunities often get missed.
While we're working to significantly simplify the campaign experience, working very hard on that, advertisers should be free to think about their audience while we do the hard work of dynamically adapting their campaigns across devices. I'm very excited about this. I talked at the start about the abundance of information. In the early days of Google, you would type in a query, or you return 10 blue links, and you move on fairly happily. Today, you expect more. You expect Google to understand deeply. And you expect us to turn your intentions into actions in the blink of an eye. If you search for Tom Hanks movies, chances are you want movies with Tom Hanks. And thanks to our Knowledge Graph, that's what we show now, right from the results page: clean, fast, and organized.
And if you're shopping, say, for UGG boots, we now give you pictures, details about the different boots, prices, and information about the local inventory again right from the results page: clean, fast, and organized. There's much more we can do to get you the right information at just the right time. You might have a really important event in the city, perhaps a first date. And the traffic is bad. You need to leave early to avoid being late. Or maybe you've just landed in a new country, and you're at the airport ATM trying to figure out how much cash to withdraw. Google Now, which we launched on Android in June, gives you all that information and more automatically, with zero effort required on your part. It's early days, these kinds of tips and recommendations are super powerful. They really save users time and hassle.
This is why I'm incredibly excited about the opportunities ahead, given our expertise in search and mobile and our track record monetizing high-usage products. Every day, I wake up, and I'm delighted that our opportunities keep growing and that we're bringing to our users great products that are defining the future. It's a truly exciting time to be at Google, and now we'll hear from Patrick some details about our quarter.
Patrick Pichette (SVP and CFO)
Thanks, Larry. Good afternoon, everyone, and thank you for joining us. Overall, we're very pleased with the growth trajectory of our business this quarter. And this, in fact, despite significant currency fluctuations in many of our international markets. So, for example, if currencies had remained constant year over year, our consolidated revenue growth would actually have been 6% higher. On a positive note, our U.S. growth continues to be strong. And as Larry noted, we had a great quarter on the product front, gaining traction in a number of critical areas. So before I dive into the financials, I just want to give you a bit more detail on the new $8 billion annual mobile run rate that Larry mentioned. The new run rate is different from the one we gave you a year ago. And more specifically, last year, it included only our gross revenue from mobile ads.
But this year, in this new number, we also added the gross revenue from the mobile sales of Google Play content. And finally, it also includes the consumer spending on the Play apps. So with that, and now, why don't I just jump into our financial performance? Our total gross consolidated revenue grew 45% year over year to $14.1 billion. And that's also 15% quarter over quarter. Google standalone revenue grew 19% year over year to $11.5 billion, 5% quarter over quarter. In that, our Google website revenue was up 15% year over year to $7.7 billion, 2% quarter over quarter, with strengths across most major geographies and verticals. Our Google Network grew 21% year over year to $3.1 billion and 5% quarter over quarter. And our other revenue grew 73% year over year to $666 million, 52% quarter over quarter, and this driven by the Nexus 7 sales.
Were it not for these currency fluctuations, Google standalone revenue would actually have grown 24% year over year. As Larry mentioned, Google standalone business continues to perform very well. The dramatic growth in our new devices is driving mobile queries and clicks. And although it's early days, some of our existing ads have better monetization than desktop already today. And we're confident that this transition opens a whole new space for innovation and new formats and future monetization. Turning to MMI, Motorola gross revenue was $2.6 billion. The Mobile Device division revenue for that period was $1.8 billion. And the Home division revenue was $797 million. Look, we're really pleased with Motorola's progress in its first 150 days. As indicated in our public filings, our team has made a lot of operational changes. We harmonized and narrowed the product portfolio. It's been streamlining of software operations.
We scaled back the markets in which we operate. But that said, we're just at the beginning of the Motorola Google story. And we should expect, as I mentioned before, results from this segment to be quite variable for quite a while yet. Remember that we inherited an entire product pipeline where hardware business cycles are typically in 12-18 months. At Google, our aggregate paid click growth was very strong again this quarter, up 33% year over year, 6% quarter over quarter. Our aggregate CPC, or cost per click, was down 15% and down 3% quarter over quarter. But once again, please remember that currency headwinds also had a significant negative impact on our CPCs in Q3. In fixed FX terms, aggregate CPC would have been down only 8%, almost half of the 15, and down only 1% quarter over quarter.
Turning to geographic performance of Google standalone business, we continue to see robust performance in the U.S., the U.K., and Japan. On the other hand, we feel the continued impact of the economic situation in Continental Europe, where we've seen pressure in sectors like travel and retail. 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 of our hedging program. So please refer to those slides for the exact calculations. Revenue from the U.S. was up 23% year over year to $5.4 billion. The U.K. was up 16% to $1.2 billion, which includes $6 million of benefit from our hedging program. And in FX terms, in fact, the U.K. grew 20%.
The non-U.S. revenue, excluding the U.K., accounted for 42% of our total revenue, or $4.9 billion, up 15% year over year. But in FX terms, in fact, was 26%. And all this includes a $56 million benefit from our hedging program. So let's come back now to an aggregate level for total consolidated business. Our other cost of revenue was $3.6 billion in Q3, excluding our stock-based compensation. Non-GAAP operating expenses totaled $3.9 billion, which again excludes SBC and the restructuring and related charges recorded in our Motorola business. And our non-GAAP operating profit was therefore $3.8 billion in Q3, resulting in a non-GAAP operating margin of 27%. For Google standalone, our traffic acquisition costs were $2.8 billion, or 25.5% of total advertising revenue. Our other cost of revenue was $1.6 billion. And that excludes $103 million of stock-based compensation.
The increase year over year in this other cost of revenue was driven by data center costs, equipment costs, including costs associated with the sales of the Nexus 7, and finally, content acquisition costs. Non-GAAP operating expenses were $3.2 billion, excluding again SBC of $585 million. And finally, our non-GAAP operating profit was $4 billion in Q3, resulting in a non-GAAP operating margin of 34% for Google standalone. Lastly, many of you have asked for the depreciation amortization expense on PPE for standalone Google, which was $465 million for this quarter. If we flip to Motorola, our total non-GAAP operating expenses, including cost of revenue, totaled $2.7 billion for the quarter. And keep in mind that intangible amortization expenses attributed to the standalone Google and Motorola are included in these non-GAAP measures.
As a result, the non-GAAP operating loss at Motorola was $151 million for Q3, resulting in a non-GAAP operating margin of 6% for that segment. Let's switch over to headcount. For the consolidated business, it decreased by roughly 1,000 in Q3. Standalone Google added about 1,800 people. And remember that historically, we often see some seasonal effect on the hiring in Q3, as folks that we hired in the spring and early summer actually start working in September. In total, the consolidated company ended up the quarter around 53,500 full-time employees. Our effective tax rate for this quarter was 22% in Q3. The changes from last quarter reflect the mixed shift in earnings between the domestic and international subsidiaries and our hedges. But finally, fewer capital gains offsets versus last quarter.
If you allow me to turn to cash management, OI&E, or other income and expenses, was $63 million, which reflects the continued impact of our FAS 133 expenses of our hedging program, but also fewer capital gains versus last quarter. For more detail on OI&E, again, please refer to the slides that accompany this call on our IR website. Operating cash flow was very strong, $4 billion. CapEx for the quarter was $872 million versus last quarter's $774. The majority of our CapEx spend continues to be related to production equipment and facilities-related purchases. All this actually delivers us a free cash flow, which was $3.1 billion, with which we were quite pleased. The success of our product really gives us the confidence to continue to fund the strategic growth areas, areas that Larry talked about, such as search, YouTube, Android, Chrome.
As always, we continue to show our discipline in making the tough calls on products that just don't live up to our expectations. In Q3, we've seen a number of these decisions, including the sunset of our Google TV Ads as an example. With that, I'll hand it off to Nikesh. We'll cover more detail on our business performance in the quarter. After his remarks, we'll open up the floor for Q&A. Nikesh, here's to you.
Nikesh Arora (SVP and Chief Business Officer)
Thank you, Patrick. I'd like to reiterate what Patrick said. Our business had a strong quarter with $11.5 billion in Google standalone gross revenue. I want to talk to you about our focus and progress on four major trends that are actually helping drive our business growth. First, the trend Larry already talked about, the rise of the multi-screen consumer. This is creating huge opportunities for us, especially in our advertising business and focused on video and mobile. At the moment, everybody thinks about the online world as divided into desktops and mobile. Larry shared the amazing $8 billion run rate. And we believe in the medium term, these screens will continue to diverge, but our advertising opportunities will converge to allow our marketeers to run common campaigns across all these screens.
Our teams have been putting the same focus on mobile and video in the last few quarters that we brought to display a few years ago, and it's rewarding to see it bear fruit. We've intensified training for our sales teams across the globe, integrated sales tools, so we can really bring our customers mobile, video, search, and display as a cohesive solution. We're also educating our advertisers through initiatives like Go Mobile to ensure they have the right creators and landing pages to make mobile truly work for them. However, we feel the progress we've made is just the very first step in the journey of monetizing many screens Larry talked about. As we develop advertising that can take advantage of the context in which consumers use these many screens, we expect to continue to see better monetization.
As we help marketeers reach consumers closer to the point of purchase, the opportunities will only get bigger. We're already seeing glimpses of this. Take T-Mobile, who used location-based mobile ads to drive people nearby into their stores, and in their words, "win the last 10 feet." They achieved a click-through rate of about 13% and was a very successful strategy. These rates are three to four times of what you would see without using some of these contexts, and our click-to-call ads work because consumers can respond by contacting an advertiser immediately from the ad, but generating approximately 20 million phone calls per month for clients through our various call products for advertisers. The second trend, which I'm excited about, is it's not just the context that matters, but also our ability to deliver more precise answers to consumers, something also that Larry talked about.
We're working very hard on this. Larry talked about Google Now and Knowledge Graph. It's exciting to see how that even makes opportunities for us happen as search becomes smarter in a commercial environment. We can do a better job of connecting marketeers with consumers in the moments that matter, irrespective of what device they're using. For example, we're pleased that as of yesterday, Google Shopping completed its transition to a fully paid model based on Product Listing Ads. Now we're providing product information, pictures, pricing, local inventory information for over a billion products from tens of thousands of merchants and over 100,000 sellers. So the new Google Shopping experience at Adorama, one of the U.S.'s largest photo retailers and mail order suppliers, saw their click-through rate jump by 176%, and the conversion rate went up by 100% in June as compared to a year earlier.
Using the same technology that powers our Knowledge Graph, we'll provide even better answers for Google Shopping and other areas where users want to make a purchase. We're going to reduce the number of steps from search to transaction, making the online experience even more valuable to consumers and marketeers. The third trend, which I'm excited about, is that we're actually making real headway, amplifying offline brand campaigns with online media. We have a unique approach that helps advertisers succeed across media. We allow them to use and leverage the attributes of each media and adapt their campaigns for online success. YouTube, energized by new professional content and display, are the core of the business, helping clients increase awareness, increase favorability, and also drive engagement. In addition, we also continue to make progress on our end-to-end technology platform to help advertisers of all sizes succeed with display advertising.
Today, our top partners in the agency world and very large advertisers and publishers are using a consistent technology stack. The number of impressions that we've been able to pass through AdX and Invite platforms have doubled over the last year. We're also working on creating more video premium inventory with our channel strategy on YouTube. As more and more viewers move to online video, we expect more and more brands will do the same. Our brand business is actually creating quite a buzz in the industry because we have great media and our solutions really work. For example, on YouTube, we looked at about 92 different ad campaigns and sales impact. We found that on average, spending on YouTube was approximately 2.4 times more efficient than the equivalent television spend. We have 200 times more video advertisers than the average U.S. television network.
Our TrueView format, in which advertisers only pay for ads that users watch, has really taken off. We have twice as many advertisers using TrueView as last year. That's a very important statistic. But like any good brand marketer, the best way for me to tell you the story is to actually show it. So let's see what two of our leading brands have done this quarter. We launched the YouTube Gillette Football Club with Procter & Gamble in Europe. We've created a global brand platform for Gillette that will reinvent the way people watch football online. Their campaigns have generated over 30 million video views. We're working with Coca-Cola on their vitaminwater branding efforts. We partnered to build a strategic music program, leveraging YouTube as a platform to anchor, distribute, and syndicate their video content.
It's particularly exciting to see that over 100 brands now have over 1 million followers on Google+, including ESPN, PlayStation, Ferrari, H&M, Burberry, and Toyota. The last trend I want to talk about is the trend of cloud computing in the enterprise. Our enterprise business continues to thrive. We saw especially great traction in retail and education sectors this quarter with Dillard's, Kohl's, and Office Depot, all using Google Enterprise products. In education, there are over 20 million students, faculty, and staff now on Google Apps, including Princeton, Virginia Tech, and even the Philippines Department of Education, which has over 600,000 users. With the recent launch of Google+ for enterprise customers, organizations of all sizes, including Kaplan and Banshee Wines, are starting to use our Hangouts and other tools to work together and get things done from anywhere.
In addition to all these trends, our marketing team continues to do an excellent job. We launched a global cross-product initiative to bring the 2012 Olympics to our users worldwide. YouTube streamed the games live to 64 countries. Also, YouTube was the official live streaming provider with over a million hours of live content from the Democratic and Republican National Conventions. And we passed yet another milestone just this week when YouTube broke its own record to reach more than 8 million concurrent live streams of Felix Baumgartner's record-breaking leap from space with the Red Bull Stratos mission. So with that as an update, I'm going to hand you back to Patrick.
Patrick Pichette (SVP and CFO)
Thank you, Nikesh. So Jennifer, if you'd like to tell us the rules, we'll just get on to the Q&A, please.
Operator (participant)
All right. Thank you. If you would like to ask a question, please signal by pressing the star key, followed by the digit one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Also, if you pressed star one earlier during today's conference, please press star one to ensure your equipment has captured your signal. We'll pause for a moment to assemble our queue. One moment. And we'll take our first question from Ross Sandler with Deutsche Bank.
Ross Sandler (Analyst)
Thanks, guys. Nikesh, one quick question on revenue and Patrick, one on expenses. The international kind of rest of world organic growth was 26%, pretty strong, but down from 29% last quarter. So was there any incremental weakness that you saw, or was this just mostly from a tougher comp? And then Patrick, your sales and marketing expense was up 18% from last quarter. That's a bit higher than the typical increase in 3Q. Can you talk about what's driving up those investments? Thanks, guys.
Patrick Pichette (SVP and CFO)
Okay. I'll start. Nikesh and I are pointing at each other. Yeah, on the marketing expense, listen, I think what you see is the impact of the support for Nexus 7 that we launched in Q3. Otherwise, everything was pretty much in line with what we would expect. We just got such a great review of the Nexus 7. We wanted to support it in the market, and that's the biggest delta you'll see in that number. In terms of the market, I'll hand it over to Nikesh for his commentary.
Nikesh Arora (SVP and Chief Business Officer)
I think it's fair to say that our revenue growth internationally has been pretty strong. You are seeing some pockets of difference in performance, partly because of seasonal reasons and partly because of the continuing economic effects you're seeing in Europe. So our business is doing better than the economy in most markets in Europe, but it does get impacted a little bit with some of the fluctuations you see there. So from our perspective, there's not any cause for concern.
Ross Sandler (Analyst)
Okay. Thanks, guys.
Patrick Pichette (SVP and CFO)
Thanks, Ross. Jennifer, let's go to the next call, please.
Operator (participant)
We'll take our next question from Scott Devitt with Morgan Stanley.
Scott Devitt (Analyst)
Hi, thanks. I was wondering if you could talk a little more about the strategy behind the decision to monetize Product Listing Ads and then more broadly about the retail strategy for the company, and then secondly, Google websites revenues, net of distribution tax, slowed to 13% from 20% last quarter. I was wondering if possibly you could, Patrick, normalize that for currency to get a better understanding of FX neutral for websites growth. Thank you.
Larry Page (CEO)
Yes, Scott. This is Larry. I'll take the question about the strategy and product listings. I think we're just really excited about providing a better experience for our customers. When they search for something, I mentioned UGG boots on the call. You search for that. I think you should get a well-organized set of product information, ways to buy it, and really have a great experience there. And we see our ability to do that on the ads or monetized product listing side is really helping us provide a better user experience and provide a better advertiser experience. So I'm very excited about that. I think we're still in the early stages of that. We just launched that yesterday, really, and we still got ways to go. So in all that, Nikesh or Patrick, take the next question.
Patrick Pichette (SVP and CFO)
On your question relative to our Google site and TAC, could you just repeat your question? I'm not sure I understood what you meant.
Scott Devitt (Analyst)
So I'm just trying to understand better that you suggested the 600 basis points effect from currency. And I was just wondering if there's a better way to understand the way that currency affected the Google website revenue, if I should think of that any differently than the overall currency.
Patrick Pichette (SVP and CFO)
Oh, I see. So no, I mean, it's even. I mean, we have our network is slightly skewed to the U.S. versus our Google site. So you'll have some mixed effect there because our network is slightly skewed to the U.S. But overall, I think that it still gives you a good sense of proportion as to what's going on in the market. So that's the way I would kind of think about it from a model point of view.
Larry Page (CEO)
Let me just add also on the first part of the question. I think we're really trying to provide answers to people. And so as a strategy for the company, we really are looking at very detailed information and giving you the exact right answer to what we're doing with Knowledge Graph and in search. And we want to do the same thing also with our advertising, make sure that we get you, as a user, the right answer. And I think that's a very exciting sort of new strategy for us.
Scott Devitt (Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Thanks, Scott. Jennifer, let's go to the next question, please.
Operator (participant)
Next question comes from Mark Mahaney with Citi.
Mark Mahaney (Analyst)
Great. Thanks. Two questions, please. Mobile searches are really strong. What's happening with desktop searches? At some point, it's probably reasonable to assume that they flatline. Have we already reached that? And on the expense side, if we just look at core Google, it looks like margins are coming down. But if you did roughly $200 million, maybe, in Nexus revenue and you really sold those devices at cost, then margins are actually better than they've been in two years. Which is the more accurate interpretation? Thanks.
Patrick Pichette (SVP and CFO)
Actually, let me start with the margins, then I'll answer your first question. On the margins, you actually have a couple of effects this quarter. One of them is clearly, as you said, the cost of the Nexus that will flow into our other cost of revenue. But also, it's the first time that you have the full quarter effect of the amortization of intangibles from the Motorola transaction. So that is also another big kind of lever that actually kicked in, and it should be noted just for the financial community that the amortization of intangibles for Motorola flows to both the Google segment and the Motorola segment in different proportions, so again, it's pretty tough. As I promised you that we'd have a lot of kind of noise in the data, I think that that's a good set of indication.
For the first one, why don't I let Larry give a few comments on the issue of mobile?
Larry Page (CEO)
Yeah, I guess I feel like you're asking the wrong question a little bit. So I think we're really starting to live in a new reality, one where the kind of ubiquity of the screens helps users really move from intent to action much faster and more seamlessly. And I think this will create a huge new universe of opportunities for advertisers where they can focus on platform. Focusing on platform-specific queries won't make as much sense because advertisers will be dynamically adapting across a whole bunch of different devices to reach the right audiences at the right time. And that's kind of how we're thinking about it. And I alluded to changes that we'll make to our ad system to improve the advertiser experience and the user experience around that.
And I also think that we're just seeing tremendous growth in Android, which really, obviously, we have tremendous ability to influence and to improve the user experience, to add location, to notify you of things, as I mentioned, around different kinds of non-commercial experiences. We can notify you of commercial experiences as well. So I think that's a really big and great opportunity for us. I also said that monetization on mobile queries right now is a significant fraction of desktop. So we're kind of living the best of both worlds. We're able to move our existing ads and our existing monetization over to mobile. And we're also able to really innovate by using Android and our strength of having ads on other mobile platforms and really move advertisers and consumers into a new world.
So I think we're uniquely positioned to get through that transition and to really profit from it. So I'm just incredibly excited about that.
Mark Mahaney (Analyst)
Thanks for the correction, Larry.
Larry Page (CEO)
You're welcome.
Patrick Pichette (SVP and CFO)
Thanks. Thanks, Mark. Jennifer, let's go to our next question, please.
Operator (participant)
Our next question comes from Carlos Kirjner with Sanford Bernstein.
Carlos Kirjner (Analyst)
Hi, two questions. If you run a website with proprietary high-quality content today and had to choose a protocol to add metadata about this content, why wouldn't the clear choice be the Open Graph protocol instead of RDF or one of its variables? And if that happens and the semantic web arises on the back of Open Graph, doesn't it place Google at a fundamental disadvantage to achieve the vision that Larry laid out in the beginning of the call? The second question is, what do you think is the future of vertical search? And why is that, that there are sites that specialize in certain verticals, such as travel and local, that seem to do a better job than Google today? And is this going to change over time? And what happens with vertical search? Thank you.
Larry Page (CEO)
Yeah, Carlos, I'll take those questions. I think if you're not an expert on the protocols you're talking about, I think in general, we made a huge investment in Knowledge Graph and really understanding in detail about everything. And that's a major effort for us. And we'd obviously love to have other people help us with that. I think it's been a little bit of a challenge in the past to get all the labeling aligned and all those things. So I think we have a big part to play in that. But we're absolutely very excited about that. And I think we're going to do a lot of work in that area. And I think we're doing well in that space. Vertical searches, you asked about. I think our goal has always been to get you to the right place.
But we also, to do that, we need to really understand in detail your context, what you need, what's really going on with that information, if it's airline tickets, where are the flights between, what do they cost, products, someone selling, we need to know how much they cost, again, what the shipping is, and so on. So I think any place we can get that information accurately, we can present it to our users. We're very happy to do so. In general, we found that we've needed to really build more of that experience in order to provide a really high-quality experience to our users. But again, we're always open also to working with partners.
Carlos Kirjner (Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Thank you, Carlos, for your question. Jennifer, let's go to our next question.
Operator (participant)
We'll take our next question from Ben Schachter with Macquarie.
Ben Schachter (Analyst)
One question for Larry, and then a couple of housekeeping points on the Apple relationship for Patrick. Larry, there's a lot of this talk about internet use on mobile devices. But switching gears a little, I was wondering if you could talk about the potential for internet access on television screens and how Google might benefit from that. And then, Patrick, just two quick housekeeping questions on Apple. One is, 100% of the TAC that you pay Apple recognized in the Google.com TAC line. And then on iOS 6, there's a seemingly small change in the default search bar where it now says the word search, whereas it used to say Google. How does, if at all, that change the economic relationship between Apple and Google? Thanks.
Larry Page (CEO)
Okay, so Ben, thanks for the question. I mean, obviously, we're excited about television, television screens, displays, and we have been for a while. We've had Google TV as a product for quite some time. I use it. I love it. I think it's great to have a real browser available on your television and easily access YouTube and all those kind of things. YouTube is integrated on many, many devices, from DVD players and so on to game consoles and things like that, so we obviously are working hard to get distribution for YouTube, for Chrome, and for the internet as a whole on television screens, as well as our own products, and we're very excited about that. I think we're obviously still in the early stages of that. It's not that everybody has a great user experience, and we'll work hard to make that happen.
Patrick Pichette (SVP and CFO)
On the, sorry, just do you want to talk about the TAC line? And just to say that, yes, I mean, obviously, all the TAC that we pay to Apple is just another partner for distribution. So it all is tied to the TAC line that we have for Google.com. On your question of the default, I mean, all it is is nothing's changed, right? I mean, when you use Google, we're a great partner with Apple. We're a great partner with many of them. And in doing so, when you do search, I mean, we have a great the fact that they've changed from Google to search is still kind of run by our engines. So I hope that clarifies the point, Ben.
Ben Schachter (Analyst)
Thanks.
Patrick Pichette (SVP and CFO)
Thanks, Ben. Jennifer, let's go to our next question, please.
Operator (participant)
Next question comes from Anthony DiClemente with Barclays.
Anthony DiClemente (Analyst)
Hi, thanks. Sorry to harp on the CPC question, but you mentioned them being down 8% ex-FX. Can you just, Patrick, talk a little bit about the other drivers? I think everybody assumes that the bulk of the down 8 is mobile. But I know there are other factors driving that down 8%. So if you could just kind of give us order of magnitude, emerging markets, and so forth, if possible. And then secondly, on allocation of your sizable free cash flow and on your cash balance, Patrick, in the past, you've talked about reviewing and considering capital returns at the board level. And at the same time, you've talked about your cash balance being a strategic asset for Google. Just wondering if you could give us an update on yours, on Larry's board's thinking on allocation of capital and use of your cash balance. Thanks for the question.
Patrick Pichette (SVP and CFO)
Yeah. Listen, on the CPC trends, nothing has changed from the last few quarters. And in fact, I think people have a tendency just to harp on assuming that it's automatically mobile. And if you look through our results, right, just to kind of point to a few areas, if you look at our mix between our Google properties and our network, right, our network grew quite a bit again this quarter. And that would drive a lot of TAC as well. And again, that's the reason why I kind of want to educate and remind everybody that just all of these mix effects, whether it be mobile versus tablet versus desktop, but also emerging market versus developed markets, and also our Google.com versus network. And then we haven't even talked about the changes in our ads quality, which actually can change quite a bit as well.
So I think that that matters a lot. And I think that it's really important that we understand that all these mix effects are actually at play there in the CPCs. So rather than, and that's why we don't give, if we start breaking down all the breakdown, right, it's just endless. So for us, the real issue for us is, look, what really matters is they're going down. But on the flip side of that, right, given all these mix issues, what we really see is our paid clicks going up at a pretty healthy rate, at 33% again this quarter, which actually gives you a sense of people are engaged, people are using our products. It's really about this transformation of multi-devices. And the fact that there's a little bit less CPC is not a concern compared to all the upside that we see on the other side.
On the issue of our cash and capital balance, I think you get the same answer, and maybe Larry wants to kind of chime in if he wishes to, but we just review this on a constant basis. We ask ourselves the question, is there real options for us actually to use the cash from a strategic perspective, and we've come to the conclusion that it is a real strategic asset for us right now with the ability to pounce, and so we think it's prudent to actually manage our capital structure the way it is as we speak.
Larry Page (CEO)
We have nothing to announce at this time. So.
Anthony DiClemente (Analyst)
Okay. Thank you very much.
Larry Page (CEO)
Thank you. Thanks, Anthony.
Patrick Pichette (SVP and CFO)
Thanks, Anthony.
Larry Page (CEO)
Can we have the next question?
Operator (participant)
Next question comes from Heather Bellini with Goldman Sachs.
Heather Bellini (Analyst)
Great. Thank you for the question. I have two for Patrick and then one for Larry. Patrick, I'll start out with yours first. Can you give us an idea of the run rate that you're talking about, the $8 billion for mobile? Can you give us an idea of what that is on a kind of same-store sales basis? You gave us the $2.5 billion run rate last year. What is the mobile advertising piece? I think that's something people are really interested in. So, ex the stuff from Google Play. The follow-up question I had for you was, what's the margin profile on the Google Play content revenue that you're recognizing?
And then the question for Larry is, I guess, just in listening to Mark Mahaney's question, I was wondering, in this new reality you mentioned in response to his question, how does Google Fiber play into this vision to have your content and search capabilities go across multiple screens? Thank you.
Larry Page (CEO)
Let Patrick take the first part.
Patrick Pichette (SVP and CFO)
Okay. So on the $8 billion, so let me give you just a bit more information on it. But clearly, we don't break down each of the categories. We just wanted to kind of give you a sense of proportion. A point that's important is, of the three categories I gave you, ads continues to be the bulk of it, the vast majority of it. And then on the case of the Google Play, it's important to note from a modeling perspective that everything that's content, that is whether a book, a movie, content, is actually booked on our books on a gross basis. Everything that is tied to apps is booked on a net basis. But it's still a huge kind of number in all cases.
So without giving you, I just want to give you that so that you don't start thinking that there's actually $8 billion that is booked to revenue in our results that you see. But in fact, two of the three are there. The third one is done on a net basis just because of our accounting rules. And the vast majority is still ads.
Heather Bellini (Analyst)
Can you just give us a sense of the margin profile on the non-ad piece?
Patrick Pichette (SVP and CFO)
We don't provide that. We don't give any of the details of that, but clearly, it is a different profile because it's content, so we have partnerships that we deal with.
Heather Bellini (Analyst)
Great.
Patrick Pichette (SVP and CFO)
Why don't I turn it over to Larry to talk about Google Fiber and role of TV?
Larry Page (CEO)
Yeah. Heather, that's a great question. I think on the Google Fiber, I think we're in the early stages, right? It's not just rolling it out in one city or two cities that are one city. And we're really excited about it. And I'm excited about the user experience there. In fact, I think I'm about to get one soon for my house to try out. But you control it with a Nexus 7 tablet, actually. That's the remote for it. I think it'll be an amazing experience from a user standpoint, one that can really drive that industry forward. So we're quite excited about that. But like I said, we're in the early stages, obviously rolling that out.
Patrick Pichette (SVP and CFO)
It's worth just to close on that. It's worth kind of noting also that we are pushing for the next chapter of the internet in the U.S. with Google Fiber. People, there's such a demand for higher speed access at reasonable prices. I think that we got a great mousetrap with Google Fiber, and we hope it excites everybody and promotes the environment that will actually give us that kind of connectivity in the U.S. and elsewhere as well.
Heather Bellini (Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Thanks. Jennifer, let's go to our next question, please.
Operator (participant)
Next question comes from Douglas Anmuth with JPMorgan.
Douglas Anmuth (Analyst)
Great. Thanks. Just wanted to ask two questions. First, just in following up on Scott's earlier question, we saw a deceleration in Google properties and then an acceleration on network sites. But hoping you could talk about it a little bit beyond the U.S. and international mix. Is there anything else that you would attribute those dynamics to? And then secondly, you've talked a lot about multiple screens and the ubiquity of devices. How concerned are you that in a mobile world, behavior is different and we're living in more of an apps-based environment and Google might not be that starting point for people on mobile devices? Thanks.
Larry Page (CEO)
Yeah. Thanks. That's a great question, Doug. I'll take the second one first. I think a lot's been made of that. And I don't think that's really true, kind of apps versus search. We obviously have a great position in apps. We have the Android Play Store, which has a huge number of apps. And I think that those experiences are great experiences. And there's some things that are better than them about the web. There's some things that are better than the web about than apps. I think over time, if we do our jobs right, you'll have the same capabilities in both places. You'll have searchability in apps. You'll be able to more easily go to apps the same way you would go to web pages and so on. So I think those differences will emerge or be reduced anyways over time.
I think we obviously have a strong position in both. So I'm not so worried about that. I think that there's obviously innovation that goes on in mobile. And we talked a little bit about all the different context and location you could have on mobile, the fact that you're always carrying a device with you. And those things are very powerful. But you want all that when you're on desktop as well or on the web. You want that same information. And so what we want is a seamless experience that goes across both mobile and desktop and TV or whatever screens you have. And that's what we're building. I think that we're going to see tremendous growth in these things. The other point I make is that there's a relatively small number of people right now that have Chrome on their mobile devices.
And I find Chrome on my mobile device is like the same as having a desktop computer a year ago or something. I mean, it's an amazing experience. You can buy things and remembers your credit card numbers. And I mean, it's a very, very easy, great experience. And that's rolled out to a relatively small number of people, but it will be increasing quickly. So I guess just seeing all those trends, I think it's a tremendous opportunity for us. And I don't think people are really thinking about it correctly now. So Patrick, do you want to cover the detailed question?
Patrick Pichette (SVP and CFO)
Yeah. My pleasure. Look, just to reiterate that our Google websites' revenue was up and with strength across most geographies and most verticals. I mean, obviously, you've heard Nikesh talk about we can't control the economy in the short term. So if there's a country that is slowing down a little bit, then we clearly kind of see it in the results as well because Google is actually a pretty good predictor of the present, as our economist Hal Varian kind of reminds us, and then on the Google network, I think we're just really pleased with it skews slightly more to the U.S., but really pleased with the performance overall with all of our networks that's been performing well, so nothing additional to kind of highlight apart from just the good general trends. [crosstalk]
Douglas Anmuth (Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Jennifer, our next question, please.
Operator (participant)
Next question comes from Richard Kramer with Arete.
Richard Kramer (Analyst)
Hi. Thanks very much. I've got one question for each of you, if I may. For Larry, if you could just expand a little bit more on YouTube and maybe provide not only some metrics, but really your maybe three- to five-year vision of its role in video distribution between Google TV and the Fiber project and some of the other options. For Nikesh, could you talk a little bit about emerging markets and where Android really is the dominant and only scale mobile computing platform? And what might drive that to show faster international growth? Is it adding sales force or purchasing power or something else? And maybe, Patrick, could you help us understand a little bit the FX headwind on the top line, how it might have been expressed moving down the P&L, especially in sort of net profit terms? Thanks very much.
Larry Page (CEO)
Yeah. Richard, that's a great question on YouTube. I've had, like I mentioned, Google TV for a while. I think recently, kind of YouTube transitioned for me maybe a year ago to be really something that could keep me entertained for hours on the TV. I can play back lots of really high-quality, highly exciting things. They're now kind of tailored for me at my channels and so on. And I think we have tremendously increasing YouTube usage. It continues to grow like crazy. And we've had increasing monetization as well, which causes people to put more content on it and to monetize it worldwide. Kind of in the blink of an eye, you can put something up. Sorry, what is the recent video with the horse dancing?
Gangnam Style. I've been watching. It has 400 million views now. Sorry, 500 now. I'm out of date, and that kind of thing to really just flip a switch, turn it on, get a worldwide distribution, and sort of almost without doing any work, if you're a provider of this content, is an amazing thing. I think that's how we see the future. We're just going to continue to grow that. YouTube's going to be available everywhere on your mobile, on your TV, on your desktop, whatever, wherever you want. It's going to keep track of the kinds of things you're interested in and really provide you an amazing experience and provide a great experience for the advertisers. TrueView is exploding, which gives us high-quality ads from an end user standpoint because they can skip them if they want.
So it encourages ads that are actually entertaining, not annoying. And that's been working. We're making money with that. And it's growing like crazy as well. So I couldn't be more excited about all that.
Nikesh Arora (SVP and Chief Business Officer)
Yeah. Thanks, Richard. As far as the emerging markets and Android, I mean, I think we're very excited about the fact that Android is becoming a very successful platform in many markets outside the U.S., not just the U.S. I think in terms of what drives I'm not sure if your question is about faster growth of Android or faster growth of monetization on Android platforms. But I think on both of them, we're seeing the adoption in various markets where OEMs are producing Android devices on the bleeding edge and doing a phenomenal job of working with operators in those markets and distributing them. So we think that will continue because Android is proving to be a great platform for innovation for all the OEMs.
In addition to that, as more and more people use mobile devices, I think we've talked a lot on this call about how, as mobile devices are being used, we're seeing an increase in query growth. And we're seeing our various new ad formats and ads where we bring context into account is actually helping us monetize. So I think both those trends are going in the right direction. Hopefully, that provides more opportunity for us.
Patrick Pichette (SVP and CFO)
Let me close on FX, so Richard, just two points. One is it's been interesting in Q3, the U.S. dollar has really weakened versus a whole host of currencies, so typically, you have one currency that goes down. Another one is more stable. We've really seen it across the board. It just happens with the macroeconomic trends. Again, something you can't predict, so it's been across the board, and without giving you the details of how it flows to margin, it is fair to say, and we've already talked in the past, that our operating expenses are skewed to the U.S. I mean, Mountain View is the headquarters. And so from that perspective, it has some effect as well. So I think you can navigate through this, so it was definitely a significant impact for this quarter.
Richard Kramer (Analyst)
Okay. Thanks.
Patrick Pichette (SVP and CFO)
Thanks, Richard. Jennifer, let's go to our next question.
Operator (participant)
Our next question comes from Justin Post with Merrill Lynch.
Patrick Pichette (SVP and CFO)
Justin, are you with us?
Justin Post (Analyst)
Can you hear me now?
Patrick Pichette (SVP and CFO)
We can. Thank you.
Justin Post (Analyst)
On a high level, I just want to know, is searches on mobile the same quality in your estimate as PC? Meaning, are you still getting good, high CPC travel and e-commerce searches on mobile? Second, maybe you could talk a little bit about the rollout of Google Product Search, seeing those ads definitely in core search results. And could that have an impact in Q4? And then maybe some detail on the hedging program. This is one of your worst year-over-year hedging. I'm sorry, one of your worst year-over-year FX impacts, down $500 million, and yet you get a $62 million benefit. And I think you disclosed the cost was $124 million. Is there something you can do to kind of improve the ratios there and not spend so much and get a better benefit when FX is this negative? Thanks.
Larry Page (CEO)
Yeah. Justin, thanks for the question. I don't know the details of particular queries on mobile versus desktop, but I can tell you I think, for example, on travel, we bought ITA Software for a sizable amount. So we thought it was important to provide a better experience there. When you type cities and you want an airline ticket, you actually need that detailed information. And so I think I'm not worried about any of that to the extent we provide a great and amazing user experience for people when they're looking for all types of different kinds of information. As long as we're providing, again, that very detailed, very organized set of results for people, I think that translates across all of your screens just fine. Nikesh or Patrick, do you want to?
Patrick Pichette (SVP and CFO)
I can jump in onto the FX issue if you don't mind. Look, I think that it's interesting, your question, Justin, but let's remind ourselves of a couple of points because I think our FX program has actually delivered amazing value to shareholders. One is we don't hedge revenue. We hedge profits. And we hedge a number of kind of major currencies like the euro, the pound, Canadian dollar, a few others, which is the core of our program. And not only that, but actually, our hedge program is set and designed for long-term, kind of 18 months as a risk reduction strategy and doesn't necessarily correlate in any way, shape, or form for a three-month kind of time frame in our financial results. And it's really also built to make sure that because you've got a cost-benefit ratio there of making sure that it's set for big dislocations.
So if it's a small variance in the short term, you're not going to get as much benefit as a big dislocation. So for all these reasons, and then what I mentioned a bit earlier, which is we've seen actually FX across a whole slew of currencies this quarter, which these smaller currencies just added up, and we don't hedge for them today. That's what kind of ended up in the puzzle. So we are constantly looking at our forecast, and if it makes sense, we'll actually throw in new currencies going forward. So that's been the story on FX, but I wouldn't read in any way, shape, or form that it hasn't performed well. It's performed very well. So why don't I turn it back over to Nikesh for the last question?
Nikesh Arora (SVP and Chief Business Officer)
Yeah. In terms of the Product Listing Ads, as we talked about, we're really excited that we actually went on a full rollout for Product Listing Ads. And as we said, we have a billion products that are in there. So as we evolve search, as Larry talked about getting more precise information, we believe that users, when they search, they come exploring on the web. When they have a better idea of what they're trying to buy, they start expressing intent by being more precise of what they ask for. And we believe being able to show Product Listing Ads gets us closer to intent because when somebody types a Nikon D800, then we know they're looking to buy or looking to get more information about a specific product. And the fact that we can show them reviews, pictures, and pricing information gets us closer to action.
And we believe in the medium term, that's going to create more monetization and a better monetization for us as opposed to having just 10 blue links or ads that send them to other websites. So I think that's going to have a good impact in the medium term. I don't think I'm going to comment on whether that has an impact in Q4 or not.
Justin Post (Analyst)
Thank you.
Patrick Pichette (SVP and CFO)
Thanks, Justin, for your question. We'll go for one last question. Jennifer, please.
Operator (participant)
We'll take our last question from Brian Pitz with Jefferies.
Brian Pitz (Analyst)
Great. Thanks. Larry, a bigger picture question on your mobile comments. Would you give us a rough sense of how long it could take to close the bulk of the gap between desktop and mobile monetization? Is this a matter of quarters or years that we'll see that come together? And then maybe just you made a quick comment on travel weakness. Last quarter, I think you said travel was strong across the board. And then you came back today and said it sounds like that was a weaker category. Just any more color on the weakness in travel. Thanks.
Larry Page (CEO)
Yeah. Thanks, Brian, for the question. We have a kind of policy. I'm not talking about the future. So I think it's been generally a good policy. I tend to be very impatient, and I think I'll kind of reiterate what I said. I think that we're positioned well, very, very well, and uniquely well because we have already a very significant fraction of monetization on mobile. That's a great start, and we're working on changing how we do things. We've been investing in the space for a long, long time, right? So our mobile monetization is not zero. It's a very significant number as we tried to hint also with the $8 billion number, and I think that, so we've got a good base there.
I don't think the things we need to do are that huge to get us into a very good spot. I think we have opportunity to be higher monetization than we are now with some innovation, which we're good at doing. Like I said, I'm very impatient. I think that the other point I make, I guess, that I had made already, is I think that advertising advertisers, our ad system requires they spend some effort to deal with mobile in general. I think advertisers mobile until very recently has been a relatively small percentage of advertising spent for most advertisers. I think that's starting to be no longer the case, right? That's happening relatively quickly. I think advertisers will also react to that.
And you'll see them invest more effort in targeting those users, running ads for them, and so on, which will obviously benefit our monetization there. So I think we have a lot of trends working for us. So I am not worried about this in terms of our business at all. I think it's more of an opportunity for us because we're better positioned than most other companies. I guess it's your all's job to estimate short-term impact. But like I said, I'm quite impatient.
Patrick Pichette (SVP and CFO)
If I can just close on just travel. I mean, obviously, there's a couple of factors in there. One of them is clearly there is seasonality in travel, so obviously, that's always an impact quarter over quarter, and then as we read the same news you read about Europe or other parts of the world that are in different economic situations, you will notice that if you kind of track Google Trends and you go and mine into the data, you'll see that some sectors are performing better, others are not, and as I mentioned in my commentary at the very beginning, travel and retail has been somewhat weak in Europe just given their situation, so no real surprises there, Brian. Thank you for your question.
Just before we close, I just want to take 10 seconds on behalf of Nikesh, Larry, and myself, thanking again the amazing work of our Googlers, all of our employees, all our partners. What an amazing last 90 days it's been, both at Motorola and Google. And I'll let Larry close with the last words before we turn it over to Jennifer to close the call.
Larry Page (CEO)
Yeah. I just wanted to thank all of you also for spending so much time with us and following us and doing your analysis. With that, we'll close the call.
Patrick Pichette (SVP and CFO)
Jennifer, we'll let you close the call.
Operator (participant)
All right. Thank you. And that does conclude today's presentation. Thank you for your participation.