Google reported Q4 2010 earnings that beat most analysts’ expectations, but the results were overshadowed by the bigger news of the day: Eric Schmidt is out as CEO, taking on a new role as Executive Chairman, focusing on deals, partnerships, and government outreach. Cofounder Larry Page becomes the new CEO on April 4.The other cofounder, Sergey Brin, will devote his energy to working on “strategic projects.”
Google gave no clear reason in the press release for the change in leadership, saying only that Schmidt had done an outstanding job for the last decade. Schmidt explained in a blog post that the company needed “to speed up decision making.” Reading between the lines, that sounds like the founders disagreed with Schmidt on some point, and made the change so they could stop arguing about it.
Q4 2010 results were as follows:
- Revenue minus TAC: $6.37 billion vs. $6.05 billion consensus, $6.24 billion high estimate.
- Non-GAAP operating income: $3.38 billion vs. $3.31 billion consensus.
- Non-GAAP EPS: $8.75 vs. $8.07 consensus, $8.42 high estimate.
Paid clicks were up 11% from the previous quarter, which was in line or slightly ahead of most analysts’ expectations. Capex was $2.55 billion, mainly because the company purchased its headquarters building in New York during the quarter.
Here are the notes from today’s earnings call (not a direct transcript unless in quotes):
4:30ET: The call is starting right on time. Everybody’s on it: Page, Schmidt, Brin, plus a lot of product chiefs like Jonathan Rosenberg.
4:32: Eric Schmidt is conducting the call. “We jumped on the call to talk about the other announcement.”
4:33: “How can we run the company even better?” Historically, they made decisions together, but this adds delay. The proposal, which the board has approved, is to have Larry running things day to day, Sergey focusing on future products.
4:33: Now Larry Page is talking, congratulating Eric Schmidt for his success over the last decade. “Eric’s a tremendous leader, I’ve learned a ton from him.”
4:34: “When we started Google, people thought we were coming in too late.” Other parts of computing are still at the early stages.
4:35: Sergey Brin is reminiscing about the last decade and a half, and says he wants to focus on his personal passions. He doesn’t want to say anything now because he’s been criticised by the press for showing some things too early — probably talking about Chrome OS.
4:36: Schmidt is back now. He’s focusing on strategic things that he really likes to focus on, like partners. “I believe Larry is ready. His ideas are very interesting and clever, and it’s time for him to have a shot at running this.” Schmidt doesn’t expect any material change in strategies, “we tend to agree on pretty much everything.”
4:40: Schmidt is talking about regulators. They try to stay away from getting too close to the line in legal issues, but they argue very strongly that things are pro-competitive.
4:41: Question about social networking, and the traffic coming more from social sites. Page says there are two important trends now: real time, and social. Both are very important to search. He points to real-time updates like Twitter, also social search, which allows users to find search results related to people they know right in main search results. “Just the tip of the iceberg.”
4:42: What about changes in search ad results, are they driving in revenues, and how are you dealing with regulators?
4:43: Schmidt says the basic strategy is to have the right ad in the right spot every time. They’re looking carefully at which ads go where, they’re happy with the choice of ranking ads. Competitor complaints, “we’ve done a fairly thorough review.”
4:44: Schmidt is giving final words, saying that a decade has been a long time.
4:44: OK, now we’re switching back to a more traditional earnings call, led by CFO Patrick Pichette.
4:45: Trends: shift from advertising offline to advertising online. It’s showing up across the board. Revenue growth in the core has accelerated in the second half of 2010. Particularly impressive given that Q4’09 was a fast quarter.
4:47: More and more holiday shopping happening online. Aggregate cost per click was up 5% year over year, 4% quarter over quarter. Foreign exchange had a negative effect year over year.
4:48. US and rest of world both growing at healthy pace. US revenue up almost 30%. They broke down by US, UK, and rest of world to show impact of foreign exchange and hedging. International accounted for 52% of Google’s revenue. That’s up 25% year to year.
4:49: UK was a little slower, up only 14% year over year.
4:50: Traffic acquisition costs were 2.1 billion, 25% of ad revenue. Increase in operating expenses was mainly payroll. Non-GAAP operating profit, which excludes stock, increased to $3.4 billion.
4:51: Total headcount 24,400 at the end of the year. That’s about 1,100 more than headcount at the end of September.
4:51: The “majority” of cap ex was the purchase of the New York building.
4:52: Here’s where they’re investing. Intense competition in the valley. A compensation change to attract and retain best talent. (1) Raised all salaries 10% across the board. (2) Shifted some compensation from bonus into base salary for non-execs. That results in more stable income for employees. All those changes are becoming effective on Jan 1, 2011, so not included in Q4 results. Ripple effects that might effect earnings include 401(k)s, taxes, and so on.
4:54: “Chrome and Chrome OS” a core part of their future, all about open platforms on the Web “we’ll continue to push on those.” Acquiring advertisers is a priority. Facilities and infrastructure will be an area of investment. The New York building purchase is a reflection of confidence.
4:55: Closed products that didn’t work like Wave, consumer channel for Nexus. Also many other smaller projects that we wouldn’t talk, like Goog-411. Concentrating on the hockey stick businesses, will continue to show the discipline they showed this year.
4:56: Product Management Sr. VP Jonathan Rosenberg is on the call now. At the beginning of 2010, they got concerned that the approach of “try and fail” would result in having “too much wood behind too many arrows.”
4:57: They decided to double down on the core — search and search ads. Also product innovations — Google Instant making search more interactive. Instant previews as well. New UIs for Web and image search.
4:58: (Interesting contrast with last quarter’s earnings call, where they focused mostly on non-search businesses.)
4:59: Putting a lot of information in search results. Place results — map, photo, other information all in one place.
5:00: More information in the ads. But the biggest boost of all came from ad quality improvements. Q4 was our best quarter in years from a quality standpoint. More than 20 updates, which led to gains that are nearly double what we’d normally see in a strong quarter.
5:01: Ah, he’s talking new businesses. “Feed the winners, starve the losers.” Creates a Darwininan environment. It’s really clear that some new winners started to emerge. Display: more than 2m publisher partners. Transactions on DoubleClick Exchange tripled, publishers are nearly tripling when DoubleClick Exchange wins the auction.
5:01: Enterprise had some good wins. Android 300,000 phones per day, drove 10x increase in mobile searches.
5:02: Coordination. Helped cancel some products that weren’t achieving. In 2011, expect more of the same — doubling down on core search and search ads, feed the winners — display, YouTube, Android, and enterprise. Also excited about local and commerce.
5:03: Google Boost — quick way for businesses to promote themselves. Mobile commerce — I’ve said four times that the key is to help users search and buy from their mobile devices. “This is the year that phones will play the big role in commerce that I predicted.”
5:04: We’re hiring more engineers and product managers, giving them greater autonomy, and pushing them to do more, faster. (Sounds like Google wants to be more like its old self…or more like Facebook.)
Q&A: Local? They’ve been in it for years. GPS and smartphones help understand where users are. Contextual search is better with location. What’s changed this year, it’s easier for local businesses to identify themselves in context on Google.
5:09: NY headquarters? What’s your philosophy, why do you need to own? Following up on local, are you really building more of a local sales force?
2,000 employees in NY today. Big engineering centre — not just sales. It’s actually very difficult to find in NY a place that would accommodate a fast growing large workforce in an environment that fits Google standards and needs. “Living in a tower with a very small footprint on each floor” is terrible for Google’s culture. (Google’s offices in NY has large floors and an unusually open floor plan.) Its not about real estate, it’s about “Googlyness.”
As far as local, Google has always targeted ads to local advertisers. Partners will call on smaller advertisers.
5:12: Organic growth excluding acquisitions? What about ad share shift to other social platforms.
Growth — we don’t provide the breakdown. “All of our core properties are growing very well.” Also new growth businesses. Google.com growing year over year, 28%. Very pleased.
Ad share — Bigger trend is shift from online to offline. Less of an allocation shift within the online world. All these means are measurable, you’re seeing better ROI in both performance/search and display.
5:14: Ad networks, operating margins seem to peak in 20% to 25% range. Is there anything in Google’s display approach that can achieve higher margins? And is the international growth being driven by search, or display as well?
Regarding ad networks, depends on if it’s your own property — like YouTube. One has higher margin. Us in display, we have suite of services, then have mix of our own properties. The ad exchange brings buyers and sellers together, serious uplift.
Geographic split and performance: US strong. Germany maintained its strength because of its economic development. Turnaround in Japan, concerted effort over many months, more partners, more advertisers. Brazil, Australia, places where commodities are strong have been strong for us. UK has been weak, as you noticed. If you move the whole world into constant foreign exchange rates, growth outside the US has been over 30%.
5:18: Click growth as %age was the highest it’s been in two years. How did Google Instant affect this? What about smartphone and tablet queries?
Debunking a myth that Google Instant is driving revenue growth. “In fact, Google Instant is neutral.” Not making any significant contribution to revenue. Rather, it’s three interdependent drivers. (1) Strength of economy and shift online. (2) Platforms are changing — mobile phones, “iPads”, instant search, geography, coupons. (3) Making great ads, tuning them, and monetization.
“Instant Search is about the user.” Not about increasing clickthroughs or rates.
One other area: new ad formats boosting clickthrough rates. Product listing ads, offer ads, coupon-based ads. Seller ratings significant impact in clickthrough rates. Sitelink.
Visible URL. On top ads, we moved advertiser’s URL down to its own separate line rather than having it be part of the creative. That makes it easier for users to see where they’ll lgo when thy click. Huge change in ad quality.
Engineers in Japan noticed that ad URL in Latin characters was mixed in with the ad which was in Japanese Kanji. Didn’t take brilliant research.
5:23: How’s strength in large advertisers versus small and mid-size? Are you going after all sizes?
Larger advertisers really gotten their act together. Also effort in small and midmarket over last 6 months. Higher touch strategy with mid-size. And small advertisers, working closely to look at systemic and algorithmic improvements, reduce churn, acquire more.
Creating simpler product for smaller advertisers — keywordless ads. On display side we have contextual targeting. Product improvements make things more simple. Advertisers can do their daily business instead of spending their time worrying about our site.
5:25: Mobile advertising? How about near-field communications?
Mobile search grew 4x in the last year. No doubt “this market is absolutely cranking.” Ad formats still nascent and building. Lot of upside.
Look at DirecTV — we launched call-only ad that only included phone number, increased clickthrough rates. Extended some desktop ad formats as well. Advertisers are engaged. No comment on NFC — when people are completing transactions with these devices, becomes more trackable and more valuable.
5:28: Compensation shift? What was the ratio of base to bonus, and what’s it now? Also, acceleration in metrics is exciting. How much is in core, and how much is in some of the newer businesses getting scale and tipping overall?
We raised all salaries 10% on Jan. 1. Ripple effect on other expenses. It will also impact everybody we bring on this year, as we bring new people on, they’re costing us more.
Bonus calculated on two factors: company multiplier, and individual multiplier. We shifted that company multiplier over to base pay because non-execs didn’t have that much influence. But individual multiplier still very much involved in their bonus. More predictable cash flow.
Growth, each of our growth areas, enterprise, mobile, YouTube — YouTube’s revenue more than doubled in 2010. That’s why we’re optimistic across the board. If you have a digital economy in high gear, invest now.
5:31: “I hope I got your attention back.” He thanks employees, “our Googlers do an amazing job all around the world, and so do our partners.”
That’s a wrap.
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