Analyst Conference Summary

conference date: July 19, 2007, @ 1:30 PM
for quarter ending: June 30, 2007 (2nd quarter 2007)

Forward-looking statements

Overview: Slower than expected (by investors) growth and sequential profit decline due to high rate of investment.

Basic data:

Revenues were $3.87 billion, up 6% from Q1 and up 58% from year-earlier.

Net income was $925 million, sequentially down from $1.0 billion in Q1. Non-GAAP net income was given as $1.12 billion, down 3% from $1.16 billion in Q1 2007.

EPS was $2.93, down from $3.18 in Q1. Non-GAAP EPS was stated as $3.56, also down compared to $3.68 in Q1 2007.

Cash, equivalents, and marketable securities were $12.5 billion end-of-quarter.

Guidance:

Does not give guidance.

Conference Highlights:

Pace of ad quality innovation is strong. Network effects are driven by scale and Google is the beneficiary of that. Building products for local (national) markets. Hiring on a large scale internationally. But did hire more people that plan and will be more careful going forward. 2nd and 3rd quarter are seasonally weaker in traffic than 1 and 4.

TAC (traffic acquisition costs) were $1.15 billion, up from $1.13 billion in Q1.

Google-owned site revenue was $2.49 billion, 65% of total revenues. This was up 74% from Q2 2006 and 9% from Q1 2007. Driven by global market.

Google Network (partner sites - AdSense) revenue was $1.35 billion, 35% of total revenue. This was flat sequentially but up 36% from year-earlier. In addition to seasonality some research partners had AdSense changes. Terminated some partners who were not meeting quality goals.

International revenues were $1.84 billion. Of that $600 million was from the U.K.

Paid clicks overall increased 47% from year-earlier but were flat sequentially.

On the expense side, other cost of revenues was $412 million, up from $345 million in Q1. Operating expenses were $1.21 billion. That included $625 million in payroll and facilities expenses. Stock based compensation was $242 million.

Operating income was $1.10 billion, down from $1.22 billion in Q1.

Income tax effective rate was 25.5%.

Operating activities provided $1.23 billion cash. Capital expenditures were $575 million, mostly for IT infrastructure. Free cash flow was $655 million. They expect to continue to make significant capital expenditures in 2007.

Employees numbered 13,786.

Google analytics is growing rapidly and added 10 languages. Pay for action is now available for all advertisers. Continue to develop Web applications including YouTube.

Q&A:

Reason Operating Income was sequentially down? Incremental bonus accrual yes, but more because we hired faster than planned. We brought in really good people, so we are happy with this. Sales headcount ads become productive very quickly.

Flat clicks if you eliminate entry into new countries? Typically a slow quarter for clicks. Year-over-year was very healthy. Sometimes shows less ads to improve user experience.

Will this lead to better quality and higher rates for advertisers? Advertisers are seeing a very good return on their investment. There is plenty of room to grow pricing.

Bonus accrual going forward? This quarter was a one-time deal of "truing up" the bonus. Should be more normalized going forward.

Litigation? Book area and Viacom. Both are very important because of principle. Always worried more about actions of governments, but optimistic governments will open up.

Monetization on non-search? Moved from beta phase to actual adoption. Too early for material impact mainly because of scale of search business.

Display and video revenues? Eventually will be significant, but early now.

EBay effects? Adjusted mix, but still a very significant advertiser. Saw no impact.

Telecom strategy? Looked at wireless and thinking about what we want to do. Mainly interested in an open network, which we are arguing for in FCC filings.

China? Entered China under set of restrictions, but still invested heavily. Good Chinese language products seem to be accelerating market share, though we are not yet number 1 in market.

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