Google Q3 Earnings Call Transcript

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The Internet search engine stated quarterly revenues rose 23% to $7.29 billion. Net income in the quarter soared 32% to $2.17 billion helped by improved economic conditions and increase in advertising budgets. Earnings grew to $6.72 per share, versus $5.13 per share in the prior-year quarter.

Jane Penner -- Senior Manager, Investor Relations

Good afternoon, everyone and welcome to today''s third quarter 2010 earnings conference call. With us are Patrick Pichette, Chief Financial Officer; Jonathan Rosenberg, Senior Vice President, Product Management and Nikesh Arora, President, Global Sales Operations and Business Development. First, Jonathan and Patrick will provide us with their thoughts on the quarter, then Nikesh will join Patrick and Jonathan to answer your questions.

Also, as you know, we recently began distributing our earnings release exclusively through our investor relations website located at investor.google.com. So please refer to our IR website for our earnings releases as well as supplementary slides that accompany the call. This call is also being webcast from investor.google.com. A replay of the call will be available on our website in a few hours.

Now, let me quickly cover the Safe Harbor. Some of the statements we make today may be considered forward-looking, including statements regarding Google''s future and investments in our long-term growth and innovation, the expected performance of our business and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause 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 for a more detailed description of the risk factors that may affect our results.

Please note that certain financial measures we use on this call such as operating income and operating margin are also expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based compensation. We have 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 reconciliations of non-GAAP to GAAP measures can be found in our earnings press release.

Question-And-Answer Session

Operator

The question-and-answer session will be conducted electronically today. If you’d 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’s star one for question and we’ll pause for just a moment to assemble the queue. And we’ll take our first question from James Mitchell from Goldman Sachs.

James Mitchell – Goldman Sachs

Great. Thank you. I'll ask two separate questions, if I may. First one, if I look at your paid lead growth, it's been remarkably consistent in not decelerating. I think it was 4% sequentially in the third quarter of 2008, 4% sequentially in the third quarter of 2009 and then 4% sequentially in the third quarter of 2010. Is that because your query growth is also fairly consistent or are you supplementing query growth with monetization initiatives that increase paid lead take-up?

And then, secondly and separately, thank you extremely much for disclosing the billions in terms of mobile and display advertising. But within the $2.5 billion-plus of display advertising, how do you account for advertisers spending through the DoubleClick Ad Exchange? Is that on a gross or net basis? Thank you.

Eric E. Schmidt

I'll try to take the first question. Certainly, the highest correlation between ad clicks and anything else is query growth. So, that's going to certainly by far dwarf any other factor. I think the other factors that we are seeing is that the new formats that we have, which I'd mentioned, certainly drive click growth as well. And I mentioned that those formats appear on 10% of the queries.

If you try some of those, like Halloween costumes, you'll see that they make the ads much more compelling, as do things like merchant ratings, if you type in laser printers. So, by improving the ad formats, we are increasing the relative number of clicks because the clickthrough rates go up.

Patrick Pichette

Great. On the other one, the Ad Exchange is included in -- so if you think of the elements, the Ad Exchange, the DoubleClick platforms, all these are included in display and it's done on a gross basis. Thank you for your question. Let's go to the next question, Courtney.

Operator

And I’ll take our next question from Spencer Wang from Credit Suisse.

Spencer Wang – Credit Suisse

Thanks and good afternoon. I guess, since you guys are sharing some numbers this time, I was just wondering if we could just delve into the YouTube numbers a little bit. Of the 2 billion views, Jonathan, I was wondering what -- roughly what percentage of total views is that currently? And then, you guys have talked in the past about getting closer and closer to profitability. I was wondering if you could, just give a sense of where you are with respect to profitability as well. Thank you.

Patrick Pichette

So on profitability, let me jump on that one first, which is we have not made any comments on it. You will remember we talked about it a long time ago because there was so much distortion in the market. We just thought it was okay to kind of set the clocks properly, but since then we have not and will not comment on it. On the billions….

Jonathan J. Rosenberg

This is Jonathan. So there is basically two points that we've given that you can use to connect those dots. We've said that traffic over -- that we have over 24 hours of video uploaded every minute and over 2 billion views per day. When you couple that with the 2 million monetized views per week, I think you can get to the answer that you're looking for.

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