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1/31/2007
  Google Q4 2006 Earnings Call

Very, very solid numbers from Google.

Google's Numbers for the Quarter

Google's quarter looks good numerically, especially compared to Yahoo and MSFT

Revenue breakout:

Germany, France were strong. UK declined modestly as percent $469M - similar softness in travel & finance as was last year. Happy with growth pretty much world wide (no mention of Africa, though.)

TAC costs : declined slightly to 30.7% from Q3, but may increase with audio & video ads

$1.2B non-gaap operating profit, non-gaap operating margins 37% down from 38% in Q3.

CAPEX - "A favorite topic" - $367M for Q4, $1.9B for 2006 - mostly spent on IT infrastructure, datacenters, servers, networking equipment. Expect to make significant investments in 2007.

Operating Cash Flow (OCF) was $911M, Free Cash Flow (FCF) was $544M.

The Conference Call

A rather boring call (transcript here), really. Here's a handy guide to interpreting Eric Schmidt's prepared remarks: Eric likes to say "very, very good" when he means "good".

Eric Schmidt Says:Really He Means:
GoodNot so hot.
Very goodOK
Very, very goodGood
Very, very, very goodPretty good.

Most of the stuff this quarter fell into the Very, very good category. An example of very, very good was mobile search. YouTube was very, very pleasing. Merely good to very good was Google Checkout, although it's still early on that.

The prepared statements were bland. Mostly they are happy with the growth and dominance of their industry. Yahoo and Microsoft seem very, very, very far from their minds right now.

Eric: "Gaining share in almost every country"
Eric: What is the key to our success? "I think it's search"
Eric: "Showing fewer ads per search, much better quality, much higher monetization"
Sergey: Sees Google as: "Complete sales and marketing platform for all advertisers"

Jonathan Rosenberg brought up some interesting points in response to the first question about the revenue growth in paid clicks (22%) vs gross revenue growth (19%). Comparisons are hard, due to growth in clicks from international, which is less profitable than clicks in mature markets.

Did you notice that comment about MySpace? Social network clicks are obviously less profitable than search clicks, and Google is increasing their presence on social networks.

The Google Checkout promotion costs also counted against revenue from the search site, which dragged the gross down.

Another suprising point was Eric saying that mobile ads have better monetization per ad.

Eric: It's clear 2007 will be the year that mobile search query traffic. Advertising RPS is gonna be higher on mobile. Not material today. Still emerging. They are making significant investment around mobile.

The analysts had a lot of questions about YouTube. They were mostly deflected and ignored. However, one of the odd things was how Eric believes that content owners should submit their copyrighted works to Google, mainly because Google "knows who their fans are".

Odd, because, Google's basically saying: give us your content, your copyrighted properties, and we'll tell you how many people watched it. I'm not sure why large content producers would do that, but if Google can monetize it in new ways, and return more money back to the producers than other channels, I guess they will...

Most of the analysts don't ask good questions, and Eric moderates nicely, waving his hand and brushing them off. Here are a couple examples from my notes:

Q: Did YouTube cut deals before you bought them, how are those accounted for? What about the $50m in total amount for the payoff.
Eric: Not gonna comment. Deals were accounted for in acquisition. YouTube doing a bunch of interesting deals. Next question.

Q: Asia performance questions. % of mix? YouTube vs Google video? Is Youtube the brand in video?
A: We won't break Asia share out. Pay attention dammit! They want to keep the Youtube brand. Taking time to do integration to preserve value for both (YouTube and Google Video). Probably keep both brands as long as Larry's in charge.

Google Still Has Big Advertisers to Conquer

One interesting observation about Google's ability to keep growing came to mind as Omid Kordestani emphasized that "Google has 20% of the TOP 500 advertisers" in their display business. That means there is lebensraum for Google to grow.

In other words, the area that Yahoo is strongest in - brand advertising and big advertisers, is Google's weakest area. Eventually, Google will get serious about that. They seem to think they are already, but clearly it will really come together when all the initiatives across all channels (radio, tv, print, internet, search) start to work together.

In summary, Eric's closing remarks:

We are very, very, very pleased with what's going on with Google.

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