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Google Inc (NASDAQ: GOOG)
2007 Q4 Earnings Conference Call
Thursday, January 31, 2008, 4:30 PM ET
Corporate Participants
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
George Reyes, Senior Vice President & Chief Financial Officer
Larry Page, Co-Founder & President, Products
Sergey Brin, Co-Founder & President, Technology
Jonathan Rosenberg, Senior Vice President, Product Management
Omid Kordestani, Senior Vice President, Global Sales & Business Development
Management Summary
Operator
Good day and welcome everyone to the Google Inc. Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Krista Bessinger. Please go ahead, ma’am.
Company Representative
Good afternoon everyone and welcome to today’s fourth quarter 2007 earnings conference call. With us are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of Product Management, and Omid Kordestani, Senior Vice President of Global Sales and Operations. Eric, George, Larry and Sergey will provide their thoughts on the quarter and then Jonathan and Omid will join us for Q&A.
Please note that this call is being webcast on our Investor Relations website. Our press release issued a few minutes few ago was also posted on the website along with the slides that accompanies today’s prepared remarks. A replay of this call will also be available on our Investor Relations website in a few hours.
Now let me quickly cover the Safe Harbor statement. Some of the statements we make today may be considered forward-looking, including statements regarding our investments, seasonality, traffic acquisition cost, increase in the cost of sales, international growth, operating margins, growth in headcount and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could 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 including our quarterly report on Form 10-Q for the quarter ended September 30th, 2007 as well as our earnings press release posted a few minutes ago for a more detailed description of the risk factors that may affect our results. Copies can be obtained from the SEC or by visiting the Investor Relations section of our website.
Also please note that certain financial measures we use on this call such as EPS, net income, operating margin and operating income are expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based compensation. We’ve 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 GAAP to non-GAAP reconciliation can be found in our earnings press release on our website.
With that, it’s my pleasure to turn the call over to EricDr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Well, thank you very much Krista, and in looking at 2007, we are very, very pleased with our year and also with the quarter which just ended. If you look at 2007, a strong financial performance across the board, reflecting a performance and a focus here at Google on both growth and profitability, with of course very strong revenue, operating income and earnings. I want to call out strong international growth. More than half of our search traffic is now outside the United States, more than 150 domains, still growing. The international market is still very nascent with a tremendous potential for what we can do over time. And of course, the model at Google about product improvements and innovation continues hundreds of search quality launches, greater advertiser control and transparency, obviously higher ROI as a result, lots of new ads formats, YouTube video ads, for example, contests, branded channels. We’re working hard by the way to promote open mobile and developer platforms and we’re completing an applications suite, Postini integration, Presentations, et cetera. And in concert with both product and an international focus, we have a global team. We now have offices in more than 20 countries. We’re working on having a local presence across global markets and this global local focus is reflected both in our organization and our products and the way we run the company.
Of course in Q4, solid quarter without a question. Pleased with traffic growth across the board, even in the relatively mature markets, which is always exciting. And obviously we’re very happy with gross revenue on both Google.com and on our AdSense Partners. I think we’re going to have Larry and Sergey take you through product highlights. My emphasis area is search, infrastructure investments, things we don’t talk that much about, leading to improved quality as seen by end-users that we can measure, as of course, giving advertisers more control as their product matures and obviously as a result improving their return on investment. The app strategy which we announced earlier in the year, now fully visible, more innovation, data portability, all of the apps now either in place or coming. And mobile, which we’re very excited about with Android, the My Location service is part of Maps, so many other new features that are both out and coming.
So, we are optimistic about 2008. We have growing revenue streams across a broad range of verticals and markets. As I mentioned, this international market, which is central to our global role, is still relatively nascent with tremendous potential, ad dollars continuing to move from off line to on line, a trend which is not going to reverse. And of course, our ability to use our strong position in markets in order to essentially offer more services to end users and get people even more to see the new benefits of the new Internet world. So, with that rather than me talking about more of the details, why don’t we hear from George and then Larry and Sergey on some of the amazing things that have been happening. George?
George Reyes, Senior Vice President & Chief Financial Officer
Thanks, Eric, and good afternoon, everyone.
At the high level, we had another strong quarter with gross revenue increasing 51% over Q4 of 2006 to $4.8 billion. Our google.com properties increased 58% year-over-year reflecting strong traffic growth during the holiday retail season and to a lesser extent monetization growth. AdSense revenue grew 37% over Q4 of 2006, driven by particularly solid performance among our AdSense for search partners, including e-commerce and search partners. Offsetting this growth was the impact of a quality improvement to AdSense for content. This changed the clickable area around the text-based ads to only the title and URL, reducing the number of accidental clicks and increasing advertiser ROI. Now let’s look at aggregate paid clicks growth. Aggregate paid clicks includes clicks related to ads served on Google properties as well as ads served on partner sites. Aggregate paid clicks grew approximately 30% over Q4 of 2006 and approximately 9% over Q3.
Let me now discuss our international performance. International revenue increased to $2.3 billion or 48% of revenue in Q4. Revenue in the U.K. grew 5% this quarter to $692 million reflecting the usual Q4 seasonal slowdown in the finance and travel verticals. Revenue growth in EMEA was primarily driven by a strong performance in France and Germany where gains were made in the retail, technology and finance verticals. We also saw solid gains in relatively smaller markets such as Canada, Ireland, Spain, and the Nordics. Asia and Latin America continued to show impressive growth rates as well with Brazil, Mexico, Argentina, and China being notable performers in the quarter.
Now turning to the expenses, traffic acquisition costs were $1.4 billion or roughly 30.3% of total advertising revenue, down 40 basis points year over year, but up from 29.1% in Q3. The increase in overall TAC rate was primarily related to the performance of a few AdSense partner sites by which we are required to make guaranteed payments. We have found that social networking inventory is not monetizing as well as expected. AdSense TAC was $1.3 billion while TAC related to distribution partners and others who direct traffic to our websites totaled 125 million in the quarter.
Turning to other cost of revenue, which includes $6 million in stock-based compensation increased $75 million over Q3 to $516 million. The largest driver of the increase was the increase in the cost related to our data centers including depreciation, equipment, and operations. We continue to anticipate that other cost of sales could increase going forward. Other than cost of revenues, operating expenses in Q4 totaled $1.4 billion, including approximately $239 million stock-based compensation. Expenses related to payroll and facilities increased $97 million to $756 million. At the end of the quarter, we had a full time employee base of 16,805 employees. We added 889 employees in Q4 with over half the new hires being in engineering followed by sales and marketing. We have implemented and continue to follow a disciplined hiring process in all areas of our organization. Hiring in Q4 tends to be slower due to the holidays, but as we’ve indicated in the past, we will continue to invest in our core business within the US and internationally.
Turning to non-GAAP operating income, which excludes stock-based compensation, increased to $1.7 billion in Q4 with non-GAAP operating margins of 35% compared to 36% in Q3. The sequential decrease in margins was driven primarily by the increase in overall TAC, as discussed earlier. As we have said before, margins may decline in the future as we continue to make ongoing investments in our business.
Turning to tax, our effective tax rate for Q4 was 25%. Our Q4 rate was more favorably impacted by an R&D tax credit in Q4 compared to Q3 as a result of stock option activity. This was the primary driver of the difference in tax rates between Q3 and Q4. And finally, turning to cash, operating cash flow remain strong at $1.7 billion, with CapEx for the quarter of $678 million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments, including data center construction, production of servers and networking equipment. We expect to continue to make these significant investments in CapEx in future quarters. Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx was also strong at $1 billion.
So, in summary, we believe our results reflect the strength of our core business across our three primary initiatives, search, ads, and apps, with disciplined investments that position us very well to capitalize on the long-term opportunities we see for Goggle. With that, I’d like to turn the conversation over to Larry.
Larry Page, Co-Founder & President, Products
Thank you, George.
I am really excited to tell you about some key new things that we did in both search and advertising. To begin with in search, we had over a 100 launches in Q4 with focus on our internationalization and investing in our quality. One of those was universal search, which is now available in 15 languages, up 6 in Q4. We also launched the universal navigation bar in all languages, which gives our users easier access to all of our Google properties. And book results are now blended in all domains.
We also made some behind the scenes infrastructure improvements to improve our quality and the biggest of those was increased index size, which really improved relevancy especially for non-English results. We also had substantial improvements in latency and freshness, particularly in Europe, Middle East and Asia-Pacific. We also made it easier for webmasters to make their sites searchable. There’re two things there. The first was webmaster tools. We have several million sites now using and actually doubled our user base over last year. And that basically let’s webmasters easily tell what’s being crawled from their site and what’s being indexed and so forth, and we added a bunch of new features to that in Q4. We also have our Sitemaps products which is another tool Webmasters make their sites easier to crawl and we added Florida District, Columbia and UK National Archives among many other sites and added many, many thousands of pages there.
Now on ads. That is obviously where we get a large portion of our revenue. We launched some key features that really draw performance for advertisers and really help us gain traction. First of those in AdWords, what’s called the AdWords Conversion Optimizer, which we launched in early January, and that allows customers bid by specifying a cost per acquisition rather than a cost per click. So, for example, you could play only when someone actually buys something rather than just when someone clicks on your ad. And AdWord is actually - the system actually optimizes their click based bids to approximate the cost for acquisition for each auction. Now, it has fully gotten strong adoption, particularly among our larger clients, and we’re really excited about that. It really improves the advertiser return on investments, that gives them more conversions which is really what they care about when they actually make money at a lower cost per conversion. In AdSense, we also launched cost per click on placement targeted campaigns, such as campaigns that are on a particular web site, and this got really strong adoption, and it really help drive better performance and increased spend for our direct response advertisers, and we are really excited about that too.
Now, I’m going to turn it over to Sergey.
Sergey Brin, Co-Founder & President, Technology
Thanks, Larry.
I want to talk to you about some of our relatively newer initiatives. I want to start with Google Apps and related products. Gmail launched important new infrastructure in Q4, and this has really increased performance. For those of you who are Gmail users, you may have noticed how it’s a little bit snappier, you can switch between conversations a little bit faster. It has really improved my productivity and I hope you see that as well.
In addition to that, this new infrastructure has really made development easier, and in fact we were able after that to launch eight new features within a span of eight weeks. A couple new features that also make Gmail more open, we have added IMAP support, so you can use all of your favorite e-mail clients, including, of course, devices like the iPhone, and you don’t have to use POP3 anymore, you can now use IMAP, which is the better way to go if you have the choice. You can also now chat with AOL Instant Messaging users. So, this is great now in the Google chat screen in Gmail, you can connect not just to other Google Talk users, but also AIM users, which is a really large population.
I want to jump now from Gmail to YouTube. YouTube has continued to have really strong user growth. In fact, we had a few special events that just demonstrate this. We hosted the CNN Republican debate together with CNN, and in fact, almost as many people saw it on YouTube as did on CNN. We consider this a great milestone and we hope to continue to do great partnerships with CNN and others to jointly grow audience for that. We also, I should mention that YouTube is now also available in 17 languages, eight more than last quarter, and so we’re seeing a lot of international growth. We’re really excited about that.
In enterprise, we’ve gotten a lot of increased interest trial and adoption of Google Apps in larger companies. First of all, we signed an agreement with Taylor Woodrow, which is the construction services division of Taylor Wimpy, FTSE 100 company in the UK. We are also finalizing the agreement to deploy Google Apps at Genentech. And those are just a couple of the really big ones, so we have — we’re talking to many, many companies and many are adopting it all the time. In addition, the universities that have deployed this quarter include the University of Southern California, the University of North Carolina, Greensboro, Florida International and Clemson.
Now jumping a little bit aside in mobile. We really have been revving the Google Maps for mobile among other applications, and Google Maps is just really useful on your cellphone now. Some of you might have seen our launch of My Location, which allows you to see where you are on your cellphone, even if you do not have a GPS-enabled phone, and that is really amazing. In fact, even if you have a GPS in your phone, My Location can give you a first cut much faster than you can usually get a GPS signal, and it will work indoors. I was just using this at a conference in Switzerland, I was able to find like really small hotel and then even switch over to a satellite view on my phone to figure out that I need to take a funicular to get up there. It was just a really amazing experience and we continue to add features and reliability to it all the time. I should mention, My Location is available now in 21 countries and it works on four different platforms altogether.
We also launched a new rev of apps for the iPhone; we call it Grand Prix internally. But basically you get access that’s really fast and integrated to the major group of products including Search, Gmail, Calendar, Reader and others, and it’s really had great uptake. I use to press it by myself. Many people have really been enjoying this product. It’s growing very rapidly.
Last but not least, I just wanted to shout out [ph] to Android, which is the operating system that we’re developing for mobile phones, and it’s completely open of course. It’s going to really solve a lot of the challenges that companies in the mobile industry have. We’ve released the SDK for it. We’ve formed the open handset alliance, which has now 34 industry leaders in it. And we really think that this is going to make Internet on mobile hopefully as frictionless as it is on your desktop, normal Internet experience. This is going to spawn lots more activity and what we love is to see lots of great open access through Internet, wherever and whenever you are. Anyway that’s what we’ve been doing on those fronts and now back to Eric.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Thanks very much George, Larry, and Sergey. As you can see, not only we had a very good 2007, but we are quite optimistic about ‘08 and our model continues to work very well. Why don’t we go ahead and move to your questions. And I’d also like to bring in Omid and Jonathan, previously introduced, to help us answer your questions on this or anything else. So, could we go ahead and get our first question?
Q&A
Operator
Thank you. The question-and-answer session will be conducted electronically today. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your touchtone telephone. If you are using a speakerphone, please make sure your mute button is turned off to allow your signal to reach our equipment. Once again, it is star one for questions, and we will pause for just a moment to assemble the roster. And we’ll take our first question from Imran Khan from J.P. Morgan.
Imran Khan, J.P. Morgan
Thank you for taking my questions. Two questions. First, paid click growth rate declined 15 percentage point sequentially, year-over-year growth rate out, so trying to understand that how much of that growth rate decline was due to the changes you made, and if you see any improvement in the price per click because it increased customers’ return on investment because your year-over-year rate decelerated 10 points as well on your website. So, I want to understand the relationship between price per click and paid clicks growth rate? And secondly, social network monetization is difficult. You’ve talked about that, and I believe it’s with News Corp that you signed a long-term contract. So, how should we think about that contract and what does that mean for your TAC rate going forward? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Why don’t we start with Jonathan? Why don’t you take the first part of Imran’s question.
Jonathan Rosenberg, Senior Vice President, Product Management
Yeah, sure Imran. Basically paid click growth which you refer to the traffic growth rate and the traffic growth rate did decelerate. The number of search ads basically grew faster than number of content ads. So, I think one of the things that you have to look at there is what is the mix issue. And then I think there were probably some secondary factors there. Some factors would include things like the focus that we’d had on reading out below CTC, high click through rate, low quality advertisers. So, that’s probably a component. The other thing that we did was, there was probably some impact on the non-clickable background, which we launched on AdSense for content. So, those were probably the biggest things. I think there was also a little bit of an issue with the timing of the holiday. Monday and Tuesday were Christmas and Christmas Eve, which are conventionally our biggest days, so that was probably a component. On the CTC side, generally CTCs have been going up, click-through rates have been going up and coverage has been going down. I’m not sure if I could add much more there.
Sergey Brin, Co-Founder & President, Technology
Yeah, this is Sergey. I just wanted to follow up on the social networking question. We don’t talk about individual partner’s performance or anything like that. Now, I do want to highlight though we have had a challenge in Q4 with social networking inventory as a whole and some of the monetization work we were doing there didn’t pan out as well as we had hoped. But, we’re continuing with the efforts and we’re still optimistic about future quarters.
Imran Khan, J.P. Morgan
Okay. Thank you.
Company Representative
Next question?
Operator
And we’ll take our next question from Doug Anmuth from Lehman Brothers.
Douglas Anmuth, Lehman Brothers
Thank you. My question is regarding the UK. It looks like your growth QtoQ is about 5% in the UK and that compares to about 11% in the fourth quarter of last year. Can you talk about what you’re seeing there beyond the usual categories that you may see weakness in typically during 4Q and if there is… and what you are seeing there from a macro perspective as well? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Omid, do you want to go ahead and handle that?
Omid Kordestani, Senior Vice President, Global Sales & Business Development
Sure. Hi, Doug, this is Omid. In general, we are very pleased with our performance in Europe and actually, yes, but you gave it very quickly. We are seeing great results in France and Germany as well in the retail category. And I think in UK we saw the typical seasonal patterns but we are… and there are certain categories that we believe the auction is in effect fully sold out and we are working on clever ideas and convergent analysis for our partners to really improve their understanding of how they should spend and how they should price their bids. But, overall, we are very satisfied with the penetration we have with major accounts. We are at the CEO/CMO tables, I was there throughout Q4. And overall, we are seeing a lot strength in the market.
Douglas Anmuth, Lehman Brothers
And other two categories, travel and financial, that are typically seasonally weak, I mean do you feel like there is an additional macro impact there?
Omid Kordestani, Senior Vice President, Global Sales & Business Development
No, those two were the primary ones.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan, do you want to add anything?
Jonathan Rosenberg, Senior Vice President, Product Management
I am just going to add that it was finance and travel. The only other point to look at there is if you look at the total percentage of advertising spend in the UK, some of the public data says that it’s roughly 15%, 16%, 17% on search whereas in the United States, it’s more like 6%. So, one of the things that you see there is that the seasonality, particularly in those two verticals is much more marked because they are spending disproportionately greater amount of money in total on search engine efforts.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Lets go to our next question.
Operator
And we will go next to Jennifer Watson from Goldman Sachs.
Jennifer Watson, Goldman Sachs
Hi, thank you. Can you give us a little bit more detail on the feedback that you are getting from both advertisers and consumers on the YouTube advertisements that you guys rolled out?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Omid?
Omid Kordestani, Senior Vice President, Global Sales & Business Development
Yes, hi. Jennifer, we are doing what I can best characterize as just a lot of touch points there with our publisher partners as well as advertisers. We are trying different formats, the in-video ads have been very successful. We’ve had a number of campaigns and the way we are also approaching this, which I think is unique for Google, is really from an integrated and scalable fashion. And in the case of, for example, if I may name some clients, General Motors for example, Chevrolet Europe, we did what I think is really, truly possible with the advantage that Google, running good campaigns across multiple countries, delivering large numbers of impression from YouTube to the content network to the search campaigns. And Adobe, for example, run one of the biggest homepage campaigns we’ve had in the history of YouTube. So, all in all, we are doing a lot of experimentation, we are starting to do it globally, and we are doing that in a very integrated fashion by adding the other key assets that we have.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Let me add a couple of other things. YouTube is doing extremely well, growing very, very quickly, and doing so internationally as well as in the United States. There is an issue around standardizing ad formats for advertisers who would like to be able to do industry buys and so forth. So, as these ad formats are being developed, we’re also looking to make sure they get standardized into a common buying pool and pattern so that people feel comfortable that they can get real value. The next generation of projects are actually very sophisticated ad products, and looks like they are going to do extremely well. Next question.
Operator
And will go next –
Company Representative
Operator?
Operator
And will go next to Mark Mahaney from Citi.
Mark Mahaney, Citigroup
Thank you. I wanted to ask a question about mobile, particularly for you, Eric. You’ve got a very interesting perspective from two companies on what’s happening with mobile Internet usage, particularly after iPhone’s. How much of a ramp are you seeing? Is there anyway you could quantify and is there a way you think about how mobile search as a percentage of overall search could be in 2 to 3 years? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
It is very difficult to estimate the percentage in a few years. We have already said in a number of public statements that it’s growing significantly faster on a percentage basis than other categories. And as you mentioned, the iPhone is the first of a whole generation of products that will be much more search intensive and so there is much more likely to be many more search opportunities and with that search opportunities comes ad monetization. We have done a number of deals for mobile devices already, KDDI and DoCoMo, for example, DoCoMo just announced by me in Japan, which are very, very strategic for us. It is difficult to estimate what percentage it could ultimately be long-term. And when I say long-term I mean perhaps 10 or 20 years. It is reasonable to assume that a majority of searches would be on mobile or personnel devices simply because over a long enough period of time, they will take on the tremendous power that’s represented in the PC and Mac platform. And the wireless networks are getting to the point where they can offer a performance similar to the wire line. Jonathan, do you want to add anything?
Jonathan Rosenberg, Senior Vice President, Product Management
We tracked… we’ve been tracking the data very carefully. We are particularly interested in looking at the iPhone, particularly because the experience on web browsing is so good and because of the optimization efforts which we did. We say a very significant spike in December with the optimization that we did on both the iPhone and it was well over double I think within about a month in terms of increased usage.
Mark Mahaney, Citigroup
If I could do a quick follow up on macro trends, to the extent that you see — would see weakness related to a softening consumer, do you think you’d see it more on the supply or the demand side i.e. ad budgets being trimmed or less consumer commercially owning searches? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Sergey?
Sergey Brin, Co-Founder & President, Technology
Yes, this is Sergey. We couldn’t really study these questions really in depth. And nearest we can tell, we just offer such a great ROI for advertisers that they can directly see and measure that advertisers in may be even difficult markets and what not just have great incentives to get as much profitable inventory as they can from Google and the other different kinds of ROI advertising that we offer. So, we have not been able to detect any such effects macro economic trends.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan?
Jonathan Rosenberg, Senior Vice President, Product Management
Yeah, I think some of you have observed that direct marketing tends to less affected by economic downturns than brand marketing given the time measurability. I think that’s been true in past recessions. I think we will probably see that again. I think one thing we may see is consumers comparison shopping more and that would certainly create more clicks, it might create modestly lower conversion rates, but we think overall the people are doing more comparison shopping and looking for bargains that’s probably positive. Clearly if there is overall commerce in the economy in general then that can adversely impact overall demand, but we really think that relative to most organizations, we are pretty much tracking the diversity of the overall economy and search based efforts there pretty well.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Let’s move to our next question.
Operator
And we’ll go next to Christa Quarles from Thomas Weisel Partners.
Christa Sober Quarles, Thomas Weisel Partners
Hi. Main question I guess is on the C Block I guess passed the reserve price today. Obviously, you can’t mention whether or not you are bidding, but can you just talk about what those open-access measures ultimately mean for you and especially with Verizon moving toward open access towards the end of 2008? And also if you could kind of highlight your WiMAX stance? And then a total server quick question, I was just wondering if you could give the impact on checkout to COGS in Q4? Thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
So, on the first part of the question, we have sort of included we cannot answer any questions in that category because of the legislative rules with respect to how the auction is working. So, I’m afraid we are going only be able to answer the second question. So could you repeat it again?
Christa Sober Quarles, Thomas Weisel Partners
Yes, well, can you make any comment on WiMAX at all?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
As I indicated, I think it’s best practice for us just to move to the second question.
Christa Sober Quarles, Thomas Weisel Partners
The second question was just on checkout and whether it had a big impact on the COGS in Q4?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan?
Jonathan Rosenberg, Senior Vice President, Product Management
This is Jonathan. I think it’s the same answer that we’ve given in the previous calls. The impact was immaterial. I think one of the strongest observations that I could give you there is that the organic growth in terms of checkout overtook the promotion efforts this quarter. So, I think that’s a good sign in terms of the general traction that we are getting. The other things that we are seeing there is that the click through rates on the badged ads are up as much as 10%, and so I think that’s going pretty well.
Sergey Brin, Co-Founder & President, Technology
Yes, this is Sergey. If I may, also in addition to the click-through rates, I think we are starting to get some anecdotal and some actual real studies that demonstrate that the conversions are also up very substantially, and hopefully we will be able to share more of that with you in the coming weeks, but there is really good evidence now that chuck out is able to kept consumers through the process more quickly and more lively.
Christa Sober Quarles, Thomas Weisel Partners
Okay, thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Why don’t we go to our next question?
Operator
And we will go next to Robert Peck from Bear, Stearns & Co.
Robert Peck, Bear, Stearns & Co.
Hi, George, as we think about the margin levels this quarter, should analyst be sort of thinking that, based on what you are seeing as far as the social networking side, there is more of a new run rate level or do you think the margins were somewhat suppressed by the MySpace relationship in Q4. And then number two, could you also talk to us about timing of DoubleClick closing, any sort of an impact you can see to the numbers for 2008? Thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Let me do the DoubleClick question. As everybody knows, we had FTC clearance in let’s say it’s in December, which is great, and we are working with European Commission. We are obviously very hopeful that they will clear us well and that’s probably all we can really say of DoubleClick at this time, but we are certainly hopeful that it will cleared. We are working with them pretty closely. George, do you want to answer the first question?
George Reyes, Senior Vice President & Chief Financial Officer
Yes, Bob, could you repeat the question again?
Robert Peck, Bear, Stearns & Co.
Yes, it’s really more of with the impact from social, a one time impact in 4Q, or should we think about it being more of normalized EBITDA margin run rate going forward particularly as other projects continue to build?
George Reyes, Senior Vice President & Chief Financial Officer
Yes, we are still in the learning stages of how we monetize social networking, so — and this is going to evolve over a period of months. So, this is sort of early stage at this point.
George Reyes, Senior Vice President & Chief Financial Officer
Any idea on a replacement for CFO?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
May be. We’ve got a number of very good candidates and we are very happy to have George. He is still doing the job here and has agreed to continue to do this until we find the right replacement and it’s a hard position to replace given George’s incredible performance. Let’s go to our next question.
Operator
And we will go next to Ben Schachter from UBS.
Benjamin Schachter, UBS
Hi, guys. A few questions. I was wondering if you can go into a little more detail on the social networking issue, then specifically may be talk about differences that you are seeing with your non-text based ads versus your text based ads on social networking. And another question on TAC associated with goggle.com revenue continues to move higher to about 4% now, wondered if you could talk about the key drivers for that and if there is a target rate internally for where that may go? And then finally on healthcare, in the past, Sergey, I think you specifically said that you don’t really think about Google’s efforts in healthcare as really a driver for P&L, and Eric, I know you are speaking at a healthcare conference later in February. Any update to that, any change in how you are thinking about healthcare, how it might be a business opportunity? Thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
On the healthcare side, we don’t have any products to match this time. So, why don’t we answer the first part of your question, Jonathan and Sergey, social networking and -
Sergey Brin, Co-Founder & President, Technology
Yeah. I’m afraid I am not sure of the bat what the steps were on the image versus text ads. We did have some changes relating to allowing certain kinds of CPC ads which were only allowed to be bit on CPM previously, which may have contributed to some cannibalization at least for now. But, as I said, on the whole, I’m not sure what the data is for image versus text.
Jonathan Rosenberg, Senior Vice President, Product Management
Yeah, this is Jonathan, I don’t have too much to add. We’ve certainly seen adoption in both the text and the image ads on social. I think the thing we have a figure out there is how to optimize the look and feel of the ads against the inventory that we have, how to slice the inventory up in alternative ways, to try to figure out how to make it work. And we’ve got some demo’s that we’ve just developed that are going to change the way we are doing some of the targeting. So, I think we are basically going to have to look at that, try to figure out how do you find people of particular demographics that are comparable to what you might find in the New York Times or in a particular that you might have been previously familiar with.
Sergey Brin, Co-Founder & President, Technology
Yeah. If I may summarize on the whole, we have a huge amount of social networking inventory including the MySpace relationship, including of course, Orkut, our own network which is very, very successful, and probably like 20 others or something like that, I don’t know the exact number. But we have an incredible amount of this inventory. And in fact, it varies quite a bit in how well it monetizes based on a number of factors, some which we understand, some which we don’t. I don’t think we have sort of the killer best way to advertise and monetize social networks yet. We are running lots of experiments, we had some significant improvements. But as I said, some of the things we worked on in Q4 didn’t really pan out. There were some disappointing there, and I hope to be able to be put more progress in the future, but its is a big opportunity because its so much inventory.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
I think we will go got to our next question.
Operator
And we will go next to Mary Meeker from Morgan Stanley.
Mary Meeker, Morgan Stanley
Thanks. Dave and I wanted to sort of revisit Imran’s question from the beginning of the call, so our worry going into the fourth quarter about Google was related to monetization levels across the click growth, given what was going on in financial services, retail and travel. We were worried about query growth, now you’ve reported your numbers, and by our math, the cost per click growth was about 16%, so very robust, the highest we’ve seen in a long time. But by your math, the paid click growth was only about 9% sequentially in what is typically a seasonally strong quarter. And as we were thinking about it, just as we read the press release before the call started, we thought issues might relate to the fact that it is tougher to gain share given how high your share already is, given there might be some share loss issues about recession, something geographic or much slower market growth. And George mentioned the changes in the algorithm impact reduced accidental clicks. So, our question and maybe for George is, is 9% sequential growth the kind of growth to potentially think about in the December quarter, or did the algorithm have a really material effect on the sequential query growth, or was it something else?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Again, we have to be very careful here not to project any guidance here with all of the math. So, Sergey, do you want to try to describe what you thought components for all these were?
Sergey Brin, Co-Founder & President, Technology
I should mention, we were reluctant to even start reporting that particular measure again because unfortunately there is just a lot of complexity in our business. And as we try to get the best possible, most useful ads to our end users and hence get the most promising customers to our advertisers, we tried awful lot of things. So, one example, the one that George mentioned, the one that you just talked about, for example, getting rid of the clickable backgrounds. But there are also factors like we might want to reduce the number of low-cost clicks or perhaps low likelihood to convert clicks in favor of a smaller number of higher quality clicks. There are many, many tradeoffs that we make. So, I just — I would hesitate in inferring too much from just that one metric alone.
Mary Meeker, Morgan Stanley
Well, some of that was the change that or some of the unusual things that happened that related to what you just mentioned and what George mentioned, were they global and did they take place through most of the quarter, were they US based? And then I am done, thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan?
Jonathan Rosenberg, Senior Vice President, Product Management
I am not sure to what degree I can separate out the international component. It’s certainly through the prices rise as advertisers get higher conversion rates, particularly over holidays and [indiscernible] blog that sort of takes you through some of that. The other thing which I think you said which I am pretty clear is not the case. We are generally doing very well from a market share perspective, domestically and internationally. So, the trend there is almost uniformly a gain in market share.
Mary Meeker, Morgan Stanley
Yeah. I guess the one last observation is, given that the changes probably had impact throughout most of the quarter and for perhaps global that potential slowdown could be — it could be a blip.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Again you are using the term potential slowdown which is not a term we have used on this call. So, again you are - that’s your view, not necessarily ours.
Jonathan Rosenberg, Senior Vice President, Product Management
Mary, the click growth in the quarter beat our internal forecasts.
Mary Meeker, Morgan Stanley
It was certainly strong.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
So, why don’t we move on? Thank you very much. Next question.
Operator
And we will next to Sandeep Aggarwal from Oppenheimer.
Sandeep Aggarwal, Oppenheimer & Co.
Thanks. Yes, two questions. One is that, can you talk about; how you are doing the partnerships you have with some of the big AdSense partners? And basically, it was clear that you did see some impact in the raised traffic acquisition costs because of the minimum guarantees. I just wanted to know how would you hedge that kind of situation going forward. And secondly, George mentioned about investments which may drive down the margins, just wanted to hear from you which — some sense of where these investments will be made? Will this be more of enhancing your existing products and then infrastructure or some new initiatives? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Omid?
Omid Kordestani, Senior Vice President, Global Sales & Business Development
I’ll take the first part of the question. I think in relation to partnerships, we enter all of these with a view to having very successful relationships for both the partner as well as ourselves who will like to have very profitable deals. I think in certain areas, as we’ve been talking about social networking, we make bigger bets to be able to understand that space. We think it is an important category. We have our own products in that space and we want to understand the monetization, which is again more challenging area for us to figure out. But we are confident given the innovation model that we have and the road map that we have that will be able to perform better there. So our goal in all of these deals is to again make the proper levels of investment, proper levels of guarantees and over time in areas that we are newer to us to understand and better — and have better products.
Larry Page, Co-Founder & President, Products
Yes. This is Larry. I was going to add, we’ve had — I think in many of these areas where with great partners, we’ve had very significant improvements in monetization in social networking in different areas. And like Sergey mentioned, there is large opportunities still there. There is tremendous amounts of inventory and the monetization levels are relatively low compared to other things, and we’ve seen the ability to make significant gains. So, we are very optimistic about those areas still.
Sandeep Aggarwal, Oppenheimer & Co.
And so what about the investments, future investments?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
You might want to repeat your question as I am not sure I agreed with the premises of your question? Go ahead.
Sandeep Aggarwal, Oppenheimer & Co.
Just wanted to hear basically in terms of if I basically if you can provide some color in terms the future investments. Are they going to be more focused in terms of the enhancements of the existing product portfolio and improving your infrastructure versus some of the new initiatives?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Well, the general answer is that that we invest where we see big opportunities. And our primary focus on investments is in, in fact in our core business, and you see the success we had in 2007 and in Q4. The vast majority of that was actually not in all the things that generates all the exciting new announcements that we’re happy to talk about, but in investments in core search, in core advertising globally, which we are incredibly proud of. George, do you want to add anything on this?
George Reyes, Senior Vice President & Chief Financial Officer
Yes. So in terms of your comments around margins going forward, as you know, we don’t give guidance. We are going to continue to hire the talent and people that we always have, we are going to continue our investments in CapEx, and we are going to be very careful around how we proceed with making investments.
Sandeep Aggarwal, Oppenheimer & Co.
Thank you.
Company Representative
Next question please.
Operator
And we’ll take our next question from Brian Pitz from Banc of America.
Brian Pitz, Bank of America
Great. Thanks. Can you provide some additional color on why we observe more of a acceleration in Google AdWords versus AdSense? And may be this is a point of clarification but I think we heard you say that all these changes were made to AdSense and in addition our assumption is that the social networking revenue also falls in the AdSense bucket. And than just a quick second question to Larry, on licensing revenue, should we assume most of the increase is due to the Postini acquisition? And that’s it, thanks.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan? AdSense and AdWords?
Jonathan Rosenberg, Senior Vice President, Product Management
Yeah. I think we’ve pretty much answered that with the discussion that we had earlier on the mix issues. I am not sure I can actually offer you any more color. We said that the google.com traffic was stronger than our own internal expectations. We also, if you look back at Q3, which we had talked about the call than, Q3 was a very, very good quarter. So, if you are looking at the sequential growth rate, your comparing it to a quarter in which we did disproportionately well relative to what we’ve done in the past, but that I am not sure how much more color I can really give you there?
Sergey Brin, Co-Founder & President, Technology
Perhaps, it is worth mentioning, I do believe that we include the social networking revenue within the AdSense for content bucket, which is within AdSense as a whole. And perhaps it’s worth also I know it’s an aside, it’s not necessarily financial metric, but we had great partnerships with be social networks now. We’ve now launched OpenSocial and we have now at least 20 partners on that. We have applications being developed, we have networks who are participating, so we are really excited about all the progress we’ve seen there, and even though Q4 for us was a little bit of a disappointment in terms of the kinds of improvements in monetization we were able to generate, Q3 was fine for us in that light, as was Q2 , and we are optimistic about the future.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
And remember that the Google model is one of experimentation. We keep trying and we keep trying new ideas until we find the ones that really generate phenomenal ROI, and not only do we grow with them, but they grow very quickly.
Jonathan Rosenberg, Senior Vice President, Product Management
[indiscernible] this is Jonathan, I didn’t want to miss your second question which was about enterprise growth and Postini?
Brian Pitz, Bank of America
Yeah.
Jonathan Rosenberg, Senior Vice President, Product Management\
And what specifically were your looking for?
Brian Pitz, Bank of America
Should we assume that most of the growth in licensing was due to the Postini acquisition in the quarter?
Jonathan Rosenberg, Senior Vice President, Product Management
I think we’ve got a lot of success to date with small business. We added a lot of ISP’s with tend to drive a lot of traffic. We also pushed a lot of the education efforts, which I think had a pretty significant component. Beyond that, it’s hard to -
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
The answer to your question is yes. [indiscernible] Why don’t we go to our next question?
Operator
And will go next to Marianne Wolk from Susquehanna.
Marianne Wolk, Susquehanna Financial Group
Thanks. I want to focus back on the economy. Can I confirm that when you call the weakness in the UK related to travel and finance seasonal that you have already seen the normal seasonal rebound here in January? And then as a follow up, a few retailers we actually spoke to Q4 said that the increase that they are spending on online advertising as a way to bolster the slower off-line sales, have you noticed any countercyclicality in the business. Could a weaker economy actually accelerate a shift in ad dollars online?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Again, you have a thesis here which we don’t necessarily agree with. And in any case, we are not going to talk about the current quarter. We are talking about that ended in December. I am happy to say that we have not yet seen any negative impact from the rumors of future recessions. We will see what happens.
Sergey Brin, Co-Founder & President, Technology
But if I may add, I do think certainly like you’ve seen from several of your contacts, it makes a lot of sense for advertisers if they want to be careful about their spending. They want to make sure they are getting good ROI to use the exact kind of advertising they were offering. I think that makes a lot of sense, and I think lots of advertisers recognize that.
Company Representative
Next question please.
Operator
And will go next to Justin Post from Merrill Lynch.
Justin Post, Merrill Lynch
Thank you. Most of my question were asked but one about your feature. When you think about revenue sources beyond search, what do you think
your biggest opportunity is among software as a service, video or display? Do you priorities those and do you think any of them could be material within the next two years?
Larry Page, Co-Founder & President, Products
I think it is hard - this is Larry. I think it is hard to prioritize the exact ones. I think we are making tremendous strides in apps as we talked about, and there is tremendous - those are of tremendous importance to people and we are also getting revenue from multiple sources there, from advertising and from people paying for the service itself. And we’ve obviously seen tremendous growth in YouTube which we already mentioned, which is great. I think there is going to be significant amounts of advertising there also. So, I am pretty optimistic about all the new areas, we are pursuing the opportunities. We will take — you tend to underestimate the long term and overestimate the short term for any new thing, and you want to be careful about that, but I’m very optimistic long-term.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
There is reasons to be optimistic about all the categories that you described. The display business is literally right in front of us and the DoubleClick acquisition is a central part of that strategy. So, we will see. But of course, we have a sales force that’s perfectly capable of selling those. Customers are purchasing those already and it’s a market that would benefit from the kind of technology that Google could bring to market. In the case of YouTube, you have a huge forward opportunity just because of the scale of the audience, globalization and so forth. So, to the degree that we can develop the ad formats that we describe, it again should become very significant, exactly when is very difficult to predict.
Justin Post, Merrill Lynch
Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Some more questions?
Operator
And we’ll take our next question from Heath Terry from Credit Suisse.
Heath Terry, Credit Suisse
Great. Thank you. I was wondering if first you could update us on the local business and exactly where you are in continuing to try and attract advertisers to monetize he tremendous traffic that you have built within Google Maps, particularly what kind of progress that you have seen out of the local business referral model?
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
Jonathan?
Jonathan Rosenberg, Senior Vice President, Product Management
I guess the biggest thing that happened this last quarter was Local Plus Box which we launched I think in late November. Basically, that was an improvement to the local ads on google.com. I think it’s only available for the top ads, but basically what happens is we show a plus box for the local ads, and it expands and basically gives you the advertiser’s address, the phone number, a map. And this is the kind of thing that you will see us moving more towards as we try to make our efforts there and our ads more consistent with what’s going on with universal search, convey as much information as we possibly can in the ad related to what happens if you click through to it and try to figure out how to capture the local opportunity.
Heath Terry, Credit Suisse
Great, and on the local business referral program?
Omid Kordestani, Senior Vice President, Global Sales & Business Development
This is Omid. We’re not breaking any of those components out now. We’re right now really focused on getting the right content. As Jonathan mentioned, a lot of the success of these areas will depend on having the most comprehensive listings and the right formats. And we are experimenting with all that, building the right relationships, and it’s still kind of early for us to break it out and really talk about the revenue performance.
Jonathan Rosenberg, Senior Vice President, Product Management
Heath, this is Jonathan. The one other thing that you could look at is, I also believe that we pretty much completely revamped the regional targeting system and how that works for the advertisers, and I would expect that there will be significant improvement from that as well.
Company Representative
We have time for just one more question.
Operator
And we’ll go next to Jeff Lindsay from Sanford Bernstein.
Jeff Lindsay, Sanford Bernstein
Hello. We would like ask two things. First of all, could you give us any breakdown of the 889 new staff geographically and/or by function? And then second, it looks like the TAC rate increased in the fourth quarter to 88%, why did the TAC rate go up? What were the drivers behind this, and were they one-off factors or were they factors that you expect would continue? Thank you.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
On the hiring question, the first part of your question, we — you will remember that we hired a little ahead of ourselves, maybe six months ago. So, we’ve returned to our normal hiring process, more international over time, balance maybe 50/50 or close to it technical and non-technical. We are a very difficult place to get a job at, and so we continue to look to the very, very top talent at each and every position and we do that worldwide and it’s working very well. I don’t think any of that’s going to change. I think that model for hiring and building the organization has worked for us for many years and I think it will continue.
George Reyes, Senior Vice President & Chief Financial Officer
Yeah. So, this is George. Our TAC rate is not 88%. We’re looking at TAC as if it were a percentage of advertising revenue, which is roughly 30%. So, as we said, primarily this is all related to our AdSense partner sites, and that is which is where we are required to make the guaranteed payments and social networking is also something that is coming online pretty strongly.
Dr. Eric Schmidt, Chairman of the Board and Chief Executive Officer
So, with that, I want to thank everybody. Thank you, Krista. Thanks you operator, and thank all of you for spending so much time once again on your afternoon/ evening covering Google, and we look forward to talking to you in our next quarterly earnings call. Thank you very much.
Operator
And this concludes today’s conference. We thank you for your participation. You may now disconnect.
Analysts
Imran Khan, J.P. Morgan
Douglas Anmuth, Lehman Brothers
Jennifer Watson, Goldman Sachs
Mark Mahaney, Citigroup
Christa Sober Quarles, Thomas Weisel Partners
Robert Peck, Bear, Stearns & Co.
Benjamin Schachter, UBS
Mary Meeker, Morgan Stanley
Sandeep Aggarwal, Oppenheimer & Co.
Brian Pitz, Bank of America
Marianne Wolk, Susquehanna Financial Group
Justin Post, Merrill Lynch
Heath Terry, Credit Suisse
Jeff Lindsay, Sanford Bernstein
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