Analyst Conference Summary

conference date: January 31, 2008 @ 1:30 PM Pacific Time
for quarter ending: December 31, 2007 (4th quarter 2007)

Forward-looking statements

Overview: Would not be a bad quarter if expectations and hence PE ratio of stock had not been so high. It looks to me like they did not get all the seasonal boost they would normally get in the December quarter. Profits grew slower than revenues year over year.

Basic data:

Revenues were $4.83 billion, up 14% sequentially from $4.23 billion and up 51% from $3.21 billion year-earlier.

Net income was $1.21 billion, up 13% sequentially from $1.07 billion and up 17% from $1.03 billion year-earlier.

EPS (earnings per share) were $3.79, up 12% sequentially from $3.38, and up 15% from $3.29 year-earlier.

Guidance:

Does not give guidance, but optimistic about 2008.

Conference Highlights:

They stated they were pleased with themselves.

TAC (traffic acquisition cots) totaled $1.44 billion, or 30.3% of ad revenues, a sequential increase. This was due to a few AdSense partner sites; social networking ads are not working as well as we had expected.

GAAP operating income was $1.44 billion. Non-GAAP operating income was $1.52 billion or 36% of revenues. Non-GAAP net income was $1.41 billion. Non-GAAP EPS was $4.43. Stock-based compensation expense was $245 million, and the tax benefit from that was $42 million.

Google-owned site revenues were $3.12 billion, 65% of total revenues, up 58% from year-earlier.

Google AdSense partner site revenues were $1.64 billion, 34% of total revenues, up 37% from year-earlier. Quality improvement decreased accidental clicks, reducing revenue, but that increases ROI for advertisers.

Aggregate paid clicks grew 30% y/y and 9% sequentially.

International component of revenue was $2.32 billion, 48% of the total, and benefited from exchange rate changes. This is our strongest growth area with lots of room for further growth.

Other costs of revenues increased to $516 million, or 11% of revenue. Operating expenses were $1.43 billion. Effective tax rate was 25%.

Cash and equivalents ended at $14.2 billion. Net cash from operating activities was $1.69 billion. Capital expenditures were $678 million, mainly for computing and network hardware. Free cash flow was $1.02 billion.

Employees numbered 16,805, up 889 sequentially. Following a disciplined hiring process.

Android launch was significant milestone. Maps for mobile was improved, iPhone support added.

App strategy is now fully visible, is in place or coming.

Over 100 search launches, including Universal and many national launches. Now allows cost-for-acquisition ads. Lots of other incremental improvements in search.

YouTube continues to have strong user growth.

Q&A:

Paid click growth rate declined 15%, why? That tracks traffic growth rate, which did decelerate. Also we cut back on low quality clicks. Also some impact from holidays falling on week days.

Social network monitization issue? Inventory issue in Q4 but we are continuing with our efforts and hope for better future quarters.

UK growth rate also slowing? Generally very pleased with European performance. In UK some auction is effectively sold out; partners need education on how to spend more effectively. Finance and travel were weak.

YouTube feedback? Trying different formats and campaigns. Growth is international. Need to standardize ad formats for industries. Some things we tried in Q4 did not work well.

Mobile quantification? Difficult to estimate where it will be in a few years, but it is currently growing faster than other categories. Doubled iPhone results in less than a month by doing an optimization. We offer a great ROI for advertisers.

Direct marketing is less affected by economic downturns than general ads, so "search-based efforts will fare pretty well."

No comment on spectrum auction.

Checkout impact? Was immaterial. But is getting traction.

DoubleClick? Got a European clearance and working on getting a U.S. clearance.

Is 9% sequential growth the kind to think about going forward? We are not projecting any guidance. The particular metric is a result of complex variables. Lots of trade offs. We believe the trend is still a gain in market share. Growth beat our internal forecast.

Have not yet seen any negative impact from the rumors of future recessions.

Revenues beyond search? Apps gives ad revenue plus service revenue. YouTube is a huge opportunity because of size of audience, but exactly when is hard to predict.

Maps revenue? Local plus box launched for buying ads. We don't break numbers out yet.

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