Google Earnings Call: What You Need to Know

Google (Nasdaq: GOOG) reported second-quarter earnings last week and hosted an investor call. Here's a Foolish digest for current or prospective Google investors.

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Further Google news and analysis:

• Don't Bail on Google Now (Fool.com)
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• Google Announces Second-Quarter 2010 Financial Results (Google.com)

What follows is a lightly edited transcript of the conference call.

Jane Penner, Google, Senior Manager, Investor Relations
Good afternoon, everyone, and welcome to today's second-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 results on the quarter, and then Nikesh will join us to answer your questions. Also, as you know, last quarter we began distributing our earnings release exclusively through our investor website located at investor.google.com. So going forward, please refer to our IR website for our earnings releases, as well as supplementary slides for the company to 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 and our long-term growth and innovation, the expected performance in our business, and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause the 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. Also, please note that certain financial measures we use on this call, such as operating profit and operating margin are expressed on a non-GAAP basis and have been adjusted to include charges related 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 GAAP to non-GAAP reconciliation can be found in our earnings press release. With that, I will now turn the call over to Patrick.

Patrick Pichette, Google, Senior Vice President & Chief Financial Officer
Thank you, Jane. Good afternoon everyone, and thank you for joining us. As Jane mentioned, Jonathan and I will begin with the prepared remarks, but we also have Nikesh with us for the Q&A. So let me start you by giving you some high-level thoughts about the quarter, and then we'll get into our detailed financial performance. So overall, we are very pleased with our Q2 results. We experienced continued solid growth in our core, but also very strong growth in our emerging businesses year-over-year. Taking a step back actually, these results reflect a few really important trends in the digital advertising. First, we are really taking notice that more and more traditional brand advertisers are embracing search and search advertising as a way to build their brands online. A case in point: P&G (Procter & Gamble (NYSE: PG)). It's one of the largest brand advertisers in the world, and it's now one of our top advertisers in the U.S. Second, we see also a real trend in large advertising, focusing on highly measurable but also integrated campaigns across display, mobile, and search. So as a result, we saw strength in every major product in Q3.

Google.com was strong with strong performance across major geographies and most major verticals, including CPG, retail, travel, etc. Our growth in display was also very strong. Our continued focus in this product area is clearly generating results. Our display network, which includes YouTube, is growing very rapidly. The scale and quality of our network continues to increase, and we see increased demands from traditional brand advertisers in that space as well. In addition, we made yet another significant stride in display this week when we entered into a strategic agreement with Omnicom Media Group (NYSE: OMC). We'll be working together with Omnicom to co-develop their exchange trading desk for the double-click ad exchange in the coming years. YouTube, specifically, we continue to see very impressive growth, as brand advertisers also consider it a must-buy. For example, and as I mentioned a moment ago, in Q2 we ran World Cup advertising campaigns for major advertisers of the likes of Coke, Visa, Nike, Sony, etc. Finally, on YouTube, I think it's really worth noting that we're very pleased, of course, with the court's decision to rule in our favor in the Viacom (NYSE: VIA-B) case. But more important in this victory, it's not for us, but for the users and just the web in general, specifically for all the blogs in the community forums across the web that do rely on this user-generated content, for sharing information and also for free expression. Look, we were very passionate about this issue at Google, and so much so that we have made a significant investment of approximately $100 million to win this case. And once again, it just was the right thing to do, and we did it.

In Mobile, our revenue continues to grow as advertisers increasingly opt in to our mobile-specific campaigns. And with the successful completion of the AdMod transaction in Q2, our business is gaining momentum. And so we have a very competitive mobile advertising platform now. And of course, I'm depending on growth in the success of the Android platform itself, with over-as we announced a couple weeks ago, 160,000 devices activated daily. That's two every second. And it creates an even larger base of data-centric smartphone users.

Finally, Enterprise had another good quarter, with several high-profile deals, including, for example, Virgin America. The world is simply moving into the cloud. And successful products do require investment. And that's why we're focusing our resources on products that, as you all know, leverage computer science to solve our big problems, offer great ROIs and very large growth opportunities. For example, in Q2, we've added approximately 1,200 employees. That's obviously counting the acquisitions of AdMod and others. But the majority is done in engineering and sales and in the following product areas: search monetization, display, mobile, apps, all the next billion-dollar businesses that are growing incredibly rapidly. And that's why we're investing in them. Jonathan will give you more details about that in a moment. So now, let me turn to our financial results.

Growth revenue. Growth revenue grew 24% year-over-year to $6.8 billion. Our Google websites revenue was also up 23% year-over-year to $4.5 billion, with strength, as I mentioned, across most geographies and verticals. Our AdSense revenue was up 23% as well to $2.1 billion, reflecting our continuous trend specifically in the Google Display Network. Other revenue was up also, 39% year-over-year to $258 million, and it includes the last quarter of revenue from the sale of Nexus One. As announced, we're discontinuing the direct-to-consumer channel in Q3, and as a result, beyond Q3, we won't recognize any revenue or costs associated with the sale of Nexus Ones. They are still being sold through various carrier partners, both in the U.S. and Europe, however. Our global aggregate paid-click growth remained quite healthy, up 15% year-over-year, and down 3% quarter-over-quarter due to the typical summer seasonality. Aggregate cost per click growth was up 4% year-over-year and 2% quarter-over-quarter. Know that the FX had a positive impact on our CPC growth year-over-year and a negative one quarter-over-quarter. Remember, too, that this is an aggregate number and it includes both Google.com and our AdSense properties.

Turning now to our geographic performance, on a relative basis, the U.K. lagged a bit in the global economic recovery, certainly relative to the U.S. and the rest of the world, which were strong. Revenue from the U.S. was up 26% year-over-year to $3.3 billion. And in our earnings slides you'll find on our investor website, you'll see that we've broken down our revenue by U.S., U.K., and rest of the world to show you the impact of the FX and benefits from our hedging programs. So please refer to these slides for these calculations. International revenue accounted for 52% of our total revenue, or $3.5 billion, also up 21% year-over-year, which includes $79 million benefits from our hedging programs. This is compared to $124 million of benefits in Q2 of last year. If we used fixed exchange rates, our international revenue would have been roughly $24 million lower year-over-year. The U.K. was up 8% year-over-year to $770 million.

Let me now turn to expenses. Traffic acquisition costs were $1.7 billion, or 26% of our total advertising revenue. Our cost of revenue was $735 million, including stock-based compensation of $8 million and also expenses related to the sale of the Nexus One. And finally, all operating expenses totaled $2 billion. This also included $301 million of stock-based compensation. The increasing year-over-year OpEx is really primarily due to increases in payroll, professional services, and advertising and promotional spent. So the result of all this: our non-GAAP operating profit, which excludes stock-based compensation, increased to $2.7 billion in Q2, resulting in a non-GAAP operating margin of 39%, essentially the same as last year. As I mentioned already, our head count was up approximately 1,200 heads versus Q1, and end-of-quarter with 21,805 full-time employees. And again, that reflects the acquisitions as well.

Our effective tax rate was up to 24% in Q2 versus 22% in Q1, essentially due to the mix of earnings between domestic and international subsidiary and the impact of our hedging program.

Let me quickly turn to cash management. Other income and expense was 69% for Q2, $69 million -- sorry -- for Q2, which includes good progress in our portfolio management performance, although it was somewhat upset by the impact of our hedging expenses with FASB 133. For more detail on DOINE, again, please refer to the slides that accompany this call on our website. In addition, we've announced today a $3 billion commercial paper program in a related credit facility. This, to us, is an important step in establishing a more capital-efficient structure that'll provide us with lost-cost working capital availability and flexibility. And it's also an excellent time to do it, given the historical low interest rates. Operating cash flow was very strong at $2.1 billion. CapEx for the quarter was $476 million, again primarily related to our data center operations. And as a reminder, we continue to make significant CapEx investments, and they just turn out to be lumpy from quarter to quarter. Our free cash flow therefore stands at $1.6 billion, in a very good position.

So if you take a step back from all these numbers, here's where we stand: We are very pleased with our Q2 performance, seeing growth across revenue, margin, and cash flow. And it really paints a picture of where we are, very confident of our future. And that's why we continue to attract and hire among the best talent in the world to further invest in our growth agenda. So with that, and before we open it up to questions, let me turn it to Jonathan for his comments. Jonathan.

Jonathan Rosenberg, Google, Senior Vice President, Product Management
OK, well thanks, Patrick. So let me start with search. Search used to be pretty simple. You'd enter a query, and we'd return a bunch of links to websites. But now the Web is much, much more complicated. There's videos. There's books. There's music. There's news. Just about any type of media you can name is online. So the scale of the Web now is grand, and it isn't slowing down. To keep pace, we migrated a whole lot of our index to a new infrastructure which we call "Caffeine." And Caffeine is basically a new way of updating our index. So now when we find a new Web page or new information, like a video or an image, we add them straight to the index without a delay. This means that the results that you get are a lot fresher, and in fact, they're about 50% fresher than before. But then, once you get your results, you need tools to work with them to get to the right answer. And we've launched a new UI that has a bunch of options on the left-hand side to help you filter those results. I especially like the timeline feature, which I think is great when you're doing research and you want to see results from a particular time. So you can enter, say, "oil spill," and click on "timeline" and "1969," and you can read all about the big Santa Barbara spill that led to the ban on offshore drilling in California. On the other hand, sometimes you just want an answer. The query is effectively the result. And we're getting much better at knowing when that's the case and giving you what you need. So enter, for example, "Barack Obama birthday," and you'll see what I mean. You'll see his birthday listed, August 4, 1961, and citations for the different sources where we got that information. All this works in Suggest, too. Try typing "capital South Africa." By the time you get to the first A in Africa, we tell you it's Pretoria.

I point all these things out because the great things about features like these is most people, I think, don't even notice the changes. They just notice that they get their answers fast. I think I mentioned on the earnings call back in January that we're working on putting more wood behind fewer arrows, and Search innovation is definitely one of those arrows. Our pace here is actually accelerating. Voice Search added six languages. We launched spelling full-page replacement, Suggest with spell correction, and over a hundred quality enhancements. There's lots of stuff going on. In fact, there's so much that we're putting out a weekly blog post to document all the Search improvements. But interestingly, as Search gets better, it actually creates another huge challenge for us. The ads need to keep pace and get better, too. Otherwise, what would happen is people will click on relatively fewer ads, and that -- well, that would be bad.

So this dynamic where consumers are in control holds for all types of media and not just Search. It used to be consumers had to watch, see, or listen to whatever the advertiser wanted to show, but now they don't. I think this is a fundamental shift for the advertising industry. When people don't have to watch your ads, what do you do? Well, you have to make ads people actually want to watch. I was in Piazza San Marco in Venice a couple weeks ago, and there was this huge billboard advertising a ski jacket. It was like 90 degrees, and we were sweating in shorts and T-shirts. And I looked, and I thought, "What a waste of money." So I took a photo of the ad with my smartphone, and I sent it to my team as proof there's lots of upside in improving ads. 

And this quarter we made great progress on that upside. We added new ad formats, and we focused even more on quality. The new formats let advertisers put more useful information into their ads, such as pictures of a product or a local address or a phone number. It turns out that when you're searching for something from your phone, you're much more likely to click on the ad when it has a phone address in it. This seems obvious, but now we actually know from the data that it's true. One of our customers, Carnival Cruises, increased bookings from mobile phones by 175% when they included click-to-call ads. Lastly on ads, I know you often ask about headroom and ads quality, and I'm thrilled to say we had one of our most productive quarters there in the last couple of years, over a dozen launches on Search with a strong impact on revenue. We did things like put better ads on the second page of results when we realized that the ads weren't as good.

And we also had over 20 quality improvements on the Google Display Network. Display, by the way, is going very well. One recent development is that we're working closely with our agency partners to help them move to what they call an "audience-buying model." And I think this is another fundamental shift in advertising, where the ultimate goal is to designate a particular audience on our network, like, say, women between 18 and 35 who like basketball, and then we automatically target that audience for you. We're also making progress with features like Remarketing, which we launched last quarter. Advertisers can reach people who've already visited their sites. Interest-Based Advertising, which we launched last year, is also working very well, and so is the Double-Click Ad Exchange, which we launched in Q3. We've got several of the top ad networks on it, and we're attracting some big buyers, like agency holding companies. Advertisers really like the technology, which is real-time bidding, and publishers like that it's open to all advertisers and ad networks who they want to work with.

We want to be open in everything we do. We believe open systems are better for the Web. They're better for competition. They're better for the user. This is not philanthropy. When the Web is better, more people use it more often, and that means they search more often. Android is a leading example of this. As Patrick mentioned, we're now activating over 160,000 Android devices every day. This is up from 65,000 last quarter. What's even more interesting there is that most of these devices are developed completely independently of Google. One of those is the Sprint Evo, which is actually my favorite phone right now. It has a big screen. It's got great video. It accesses a Wi-Fi hot spot for me. It has 4G bandwidth, at least when you're around Mountainview. The Android market is also open, of course, and now has over 70,000 apps. That was around 30,000 in April. As you look at all these new apps being created, you also realize that your mobile phone isn't alone anymore. It's actually connected to several million computers 24 by 7. This is letting us do things that we used to think were impossible.

We just released a new version of Goggles that lets you take a picture of something in another language with your phone, and it translates it for you. I actually used this a lot to read menus on my vacation in Italy. You literally don't have to guess what you're going to eat anymore. Or say you want to read about how the locals are celebrating their World Cup victory. Congratulations to Spain, by the way. Anyway, you just go to elpais.com, and Chrome or Toolbar automatically translates it for you in a second. So cloud computing also means that enterprises can take advantage of these innovations. We just launches this feature where if you have, say, a .pdf or the image of a scanned document, you can upload it to Docs, and we'll convert it to text, so you can edit it. You don't have to install any special software or anything. If you're a Google Apps customer, it's just there and it works. Of course, the cloud is pretty good for wasting time, too. I hope you played with our special Pac-Man Doodle. We put it up on May 22nd to celebrate Pac-Man's 30th birthday, and we estimate people spent 4.8 million hours playing it. If you missed it, go to google.com/pacman. Bloop, bloop, bloop. Thank you for your time. Back to Patrick.

Patrick Pichette
Thank you, Jonathan. And yeah, there was these great reports of billions and billions of kind of productivity lost over that little Pac-Man, so obviously we did something right somewhere. Connie, can you actually turn on the Q&A process, and I'm going to invite Nikesh to also join us at this time.

James Mitchell, Goldman Sachs
Thank you very much. And thank you for the Pac-Man distraction a few weeks ago. My question was about the sequential increase in operating expenses. I was wondering if there was any adjustment to bonus accruals that went into that sequential increase, or was it entirely due to headcount additions and acquisitions in marketing?

Patrick Pichette
The bonus accrual would have a small impact on it. So it is really about headcount, about TVCs, about marketing.

Spencer Huang, Credit Suisse
Thanks. Good afternoon. Two quick questions. First, in terms of the paid-click growth of 15%, I was wondering if you could just give us a sense of how much of that is coming from mobile today currently versus, say, last quarter. And then the second question, maybe for Patrick, just on TAC, it was down a little bit -- your thoughts sequentially. Can you just give a sense of where you think, on a percentage basis, that's trending, especially with the MySpace deal coming up shortly? Thank you.

Jonathan Rosenberg
Yeah, this is Jonathan, on the mobile question. Mobile is certainly growing faster than other clicks. So everything else being constant, there is a disproportionately larger group of mobile clicks this quarter than in quarters in the past. But we don't really have any more detail than that.

Patrick Pichette
In the case of TAC, it's been -- I mean, most of the TAC that we have today, because, as you said so, rightly, that MySpace deal is ending now. I mean, we shouldn't see any-There's no big jump anywhere in the TAC going forward, and it's been pretty stable, actually, around-I think he said 27% or -- and so there's very little variability.

Spencer Huang
Great. Thank you.

Imran Khan, JPMorgan
Yes, hi. Thank you so much for taking my questions. Two quick questions. One, on the 1,200 or so headcount increase, could you give us some sense, like where are you allocating those headcount? Is it in Search or in a new-Most of the headcounts are going through new initiatives? And also, secondly, in terms of the cost-per-click, can you give us some sense of the differences of cost-per-click mobile versus desktop, and how quickly you think it can narrow? Thank you.

Patrick Pichette
Great. So why don't I start with the 1,200? So remember, 1,200, just to give a bit of clarification, there is probably around 300 of those 1,200 that, in estimate, that come from M&A. So really, kind of organically, if you think about it, more like 900, which was not unlike last quarter. As I mentioned in my core notes, Imran, most of the headcount is in engineering and sales, and most of the headcount, like the vast majority is going to the four core areas of focus of the company. So they are about Search and Search Monetization. They are going to Mobile and Android. They are going to Apps, and they are going to Display. We see so much momentum in each of these right now that that's where the bulk of the resources are going, because that's where the focus of the company is. On the CPC, Nikesh?

Nikesh Arora, Google, President Global Sales Operations and Business Development
Hi, this is Nikesh. On the CPC, I don't think there's enough data for us to actually look at the trend in terms of whether it's closing or not, but you have to understand, the mobile advertiser sees mobile as a very different platform vis-a-vis the desktop advertiser. You know, you see high CPCs where there are transactions that can be consummated on the mobile, i.e., in digital entertainment. You don't see as high CPCs as when you're trying to give directions to a certain restaurant or a place where they might conduct commerce. So there's still some disparity between the CPCs on the desktop and mobile, and within Mobile, depending on the verticals, there's disparity depending on the type of advertiser.

Justin Post, Bank of America
OK, my questions are about Android. Can you talk about how much investment is going into that platform, and then, how do you think about it? Is this an investment that just need to keep going just so you can compete in the mobile market? Or, you know, you're not charging for it. Is this a real installed-base revenue opportunity, and we're going to start hearing more communication about how you're going to monetize it down the road? Thank you.

Patrick Pichette
OK, so let me give you a high-level answer to kind of give everybody comfort; right? Android is not-in terms of cost, it's not material to the company. And not only that, but let me give you a further kind of proof point of the value of Android-is some of the key products that have been launched over the last few weeks and few months have not been developed by Google at all. I think that the last Android X or the Motorola -- what is it? -- Droid X has been developed by Motorola directly with Verizon and not involved any of the Google resources. So it's not a huge resource investment. It's a formidable return, in that what you have is the entire ecosystem exploding. And I'll let Jonathan give you really the sense of that one. So from a cost side, it's nonmaterial. Jonathan.

Jonathan Rosenberg
Yeah. Well, I mean, we gave some data just on the scope of the numbers, the 160,000 Android devices, as well as the growth in apps from 30,000 to 70,000. But I think the most important, the most obvious thing to think about from our perspective is, what's the most popular app on these devices? The most popular app is a browser. And what do people do with the browser on these devices? They search an order of magnitude more than they have on any previous type of smartphones which they'd had in years past. So the combination of people browsing on these smartphones connected on very, very fast networks and searching on them is basically the formula around, you know, how Google makes-how Google succeeds.

Justin Post
I don't know if I can get a follow-up, but, I mean, are you seeing search activity really strong on mobile devices with Android, and do you think you're losing any ground relative to search activity within applications? Thank you.

Jonathan Rosenberg
Android search grew 300% in the first half of 2010. So, yes, search on Android devices is exploding.

Justin Post
Thank you.

Patrick Pichette
I think that there's another way to kind of frame it in numerical numbers. I mean, the mobile has grown 500% in the last two years, in terms of the traffic. So think of that, and then think of Android being an accelerator of that, because every time you bring the NPV of all these platforms coming forward, you get a lot more. So that's how to think about the problem and the solution that we bring.

Doug Anmuth, Barclays Capital
Great, thanks for taking the question. Two things I wanted to ask. First, just on the macro environment, can you comment on what you saw at all during 2Q, in terms of whether the environment seemed to change at all, either in the U.S. or Europe? And then secondly, just given the $3 billion commercial paper program, and, you know, can you update your current thoughts on returning cash potentially to shareholders? Thank you.

Patrick Pichette
OK, let me start with the last one first. I mean, really, the commercial paper is a fantastic opportunity for us, given the portfolio that we've put in place for our cash, to actually have the working capital flexibility around it. So now if I need working capital for my day-to-day operations, I have that flexibility through commercial paper. That's really the essence of what we're doing. We have made no decisions at all on share buybacks. As I said to everyone, it's a topic that is regularly debated, brought to the Board for debate, and we have nothing to announce on that one. On the macro side, I would say -- Look, there's kind of two things, right? Everybody reads the press. Everybody's seen everything that happened in Q2, the Europe, the death, the this, the that. I mean, for us at Google, it's been a great quarter. We've had -- our business has been a great quarter, and we've seen no impact of what's going on in the macro world to us. And that's why we said-you know, for the last three, four quarters, we've said, "We're really pleased with how, we're kind of performing in this kind of economy." And that's why we feel confident about the future and feel confident about investing now. And that's why we're doing it.

Doug Anmuth
If I could just follow up quickly on the first one on cash, can you comment on how much of your cash is international versus in the U.S.?

Patrick Pichette
It's about 50/50.

Doug Anmuth
Thank you.

Ben Pitz, UBS
Great, thanks. Would you talk about your advertiser and user adoption of some of the new product ad formats that we're actually seeing on your site? Are these ads having a material impact on CPCs? Because we understand they're being sold on a CPA basis. Thanks.

Jonathan Rosenberg
This is Jonathan. I can give you a quick review of the top formats, and then maybe Nikesh can chime in and give you a sense of some of the specific customer experiences that he's had. The click-to-call ads on the high-end mobile phones are doing very well. The click-through rates go up 6% when you put ads with a phone number, 8% when you put a local address. So click-to-call is doing very well. It's easy to see some of those. If you just want to take a look for yourself, if you try "travel agency" from a smartphone, you'll see them. There are thousands of active campaigns on click-to-call. So you can take a look at that. Sitelinks is also making pretty good progress. We've given you examples on past calls, where you type a big brand like Sears, and then you see the more useful links that you can get through, and the click-through rates on those can go up as much as 30% over the ads without the Sitelinks. But we changed the way we do Sitelinks, and we've added a new one-line format, and that also allows Sitelinks to show up in more places. You can try "flowers" if you want to see that. The other format that's getting some adoption is the-We're adding the seller ratings, which shows merchants' ratings out of six starts aggregated from reviews on the Web. You see that if you look for things like digital cameras. And that's doing pretty well as well.

Patrick Pichette
Nikesh, any further thought?

Nikesh Arora
I guess from an advertiser perspective, they've always had a sense that over the last few years we've actually had some disparity in the quality of our natural search and quality for ads. Things like Sitelinks create tremendous parity between what people get in natural search and what they get from an ad format. So there's tremendous appetite on our large advertisers to be able to send their consumers or users to a deeper part of their website, which Sitelinks allows. So the adoption of Sitelinks, the adoption of click-to-call -- a call, as Jonathan said, is extremely sort of more lucrative for them, because they can actually track it, and they can actually track the transaction that it creases. So these new ad formats are definitely helping and are getting out there. One thing that Jonathan did not touch upon is the ad innovation on the Display side as well. We've had tremendous new formats. We've launched the whole YouTube front, where we actually increase the inventory because we get more and more content where we can show ads on. In addition to that, we also have new ad formats, which effectively -- I mean, imagine a basic ad and now getting it to be an auto-expandable masthead that shows up on YouTube, which allows us to impact the pricing of the ad format. So the more richer the ad, the more an advertiser is willing to contribute, because it creates a more engaging experience and, therefore, a higher revenue opportunity. So I think across the board in the ad formats are both -- we're seeing more appetite for them, and at the same time, they're allowing us to create more return for the advertiser, allowing us to price them better.

Ross Sandler, RBC Capital Markets
Hi, just two quick questions. Patrick, you said the costs for Android are fairly immaterial, so can you talk about the operating margins in the Display business on a revenue ex-TAC basis? How much of the margin compression that you're seeing right now is coming from Display growing faster than Search? And then second question is, it looks like the ROW regions accelerated a bit in the second quarter if you strip out the hedging and currency impact. Can you talk about, Nikesh, which regions are driving that, and can you specifically talk about the environment in Europe, you know, given the macro? I know you talked about it for a second earlier. But just any further color about continental Europe. Thanks.

Patrick Pichette
The Display business has, you know, to a certain extent, if you take it as a blended, slightly lower margins, if you take the Double-Click platform, for example, which is more transactional. But overall, I think that, you know, they still are quite healthy and they don't -- if you think of CPCs the way I think about them is, you have, really, kind of two big components that work. The innovations that Jonathan talked about that actually drive CPC up and then because those products perform better they add pressure to the auction and therefore drive CPC up. And then the two or three components that actually drive them down in the short term actually, it's not as much display as, the places like Brazil and India that are growing very well. So internationally. And, because they don't have as an auction right now, right, the CPCs are slightly lower but they're growing, so that's slightly positive. 

And then we already talked about mobile themselves as being lower CPCs. These are the two that are actually growing incredibly rapidly and that on the mix in the short term kind of put a bit of a downward spin on the CPC formula, but both of them as we know, they're growing rapidly so it's real dollars net in, and then on top of that we know there is going to be future pressure in them. So I'm pretty please about the performance of those.

On the issue of Europe and FX, everybody's got a model out there, right? We've lived an incredible roller coaster of FX over the last year or so. If you look at currencies like the euro and the pound they were quite similar on par versus year over year, but the last quarter versus this quarter a huge change. And then in addition to that if you look at places like the real in Brazil, the Canadian dollar, the yen, those have quite increased year over year. So when you do your models relative to FX and OI&E just take in consideration the fact that year over year, the net-net position is that it's been strengthening, all in, quarter over quarter it's been going down, all in. And then on top of that, our FX, our hedging program is really a long-term hedging program. So this quarter we've reaped $78 million, $79 million of benefits. Now, so, it's a tough puzzle to solve, but please take the time to look at year over year and quarter over quarter, because it's a puzzle to build. I hope that answers your question.

Jeetil Patel, Deutsche Bank
Two questions. Do you think that Android and mobile represents a bit of a defensive strategy since you kind of pride yourself on the lack of costs in that business as a whole, and the same time you're adding head count as a whole in the company. And second, just curious, the feedback we keep getting in the industry is that the Android infrastructure and support seems to be lower than what your ecosystem would like, and what is the appetite to create other revenue streams outside of advertising inside let's say mobile, in the form of let's say an app marketplace that is pretty vibrant. Thanks.

Patrick Pichette
So let me just give kind of the highest level answer is, the answer is yes, it's both. Obviously having, we did it for offensive reasons, not defensive reasons, right? We believe that actually open platforms that create the ecosystem where our developers can create a whole set of new generations of apps is incredibly important. And in addition to that we do know that these new formats like the smartphones create an entire new set of activities in which you live, and you will search, and you will transact. So from that perspective I think that it's obviously both. I take your comment that if the market in general is saying they want more support from us in that space, right, we're investing heavily because we believe one, that search advertising, our acquisition of AdMob, the investments we're making is because for us advertising is completely nascent in the space relative to kind of tech search. And then second is, we ourselves are doing a lot of innovation to cloud computing and others to actually create a whole new set generation of apps ourselves. So, I think that yes, defensive, yes, offensive, but in the end benefitting everyone. I'm glad to hear you say you want us to invest more in it.

Jeetil Patel
It seems like your handset vendors are aggressively investing, and we haven't seen it from your side, at least as we talk to some of your partners out there. Do you think that other models outside of advertising need to be explored at this point?

Patrick Pichette
I'm not sure I understand your question. Other models such as what?

Jeetil Patel
Let's say consumer applications. So, there are other companies that have created business models obviously around game downloads, other app downloads that are charged. Obviously you have as well, but it seems like, you seem to be, maybe it's early days, but still early in that development.

Patrick Pichette
I think you're absolutely right that it is early days, and I think that the 70,0000 apps that we have is actually a demonstration of the effervescence of that ecosystem that's actually just building now.

Jonathan Rosenberg
This is Jonathan. It is at a very nascent stage. I think we also, there's a lot more infrastructure that needs to be built to support a lot of the commerce. We substantially need to improve the billing capabilities in the market, and that's obviously one of the things we're investing in pretty aggressively. But, I don't think of this as defensive at all. There is a huge opportunity for incremental usage of search as I talked about earlier, and when we see an opportunity for people searching more, that's obviously something that we want to participate in. So, we see this platform as winning, we think that gives us an opportunity to build the mobile Internet, and we think that in the long run that's going to be good for Google, that's going to be good for the applications developers, and that's going to be good for consumers. So we're investing in building that winning platform.

Steve Weinstein, Pacific Crest
I was hoping you would help explain some of the movement in the P&L expenses. You mentioned that most of the hiring is going into engineering and marketing. When I look at the sequential increase by dollars [inaudible], you had a large increase in G&A, about 48 million sequentially, and that's compared to only like 20 million in sales and marketing. So, can you explain that a little more, was there anything in the G&A line that is one time or not repeatable? Why are they moving like that?

Patrick Pichette
You have to look at, there's a couple of things. One is our recruiting. If you go year over year, and quarter over quarter, we had kind of three big elements. One is we had our recruiting machine that started to build last year was not built in [inaudible] of last year. So, if you think of the hiring infrastructure and the people infrastructure, has actually been building, and now you see the full flow through. We also have had ion G&A in general another area, if you think of everything else that's kind of people, we've talked about legal, we've had a number of legals costs in this quarter that have also flowed through just because of a number of legal activities that we've taken. So, these are the two biggest components that would actually explain the big variances.

Mark Mahaney, Citigroup
Two questions please. A year ago you talked about being close to profitability on YouTube given all the momentum you've seen over the last year. Do you feel like you're a lot closer, are you profitable with the YouTube asset? And secondly, when you sell display ads, do you feel like you're selling them to existing search customers, or do you think that it's opened up a significantly larger customer pool, or a mix of those two? Thank you.

Patrick Pichette
So let me talk about profitability and Nikesh will have the answer to your second one, Display. Look, we don't comment on YouTube. What I can tell you is we're incredibly pleased by its trajectory. YouTube is, take a step back, it's two billion views per day in its fifth year of existence. It's one ... over a billion monetization videos per week. It's a huge first page, and it's aggregating audiences, and you see it today through the top brand advertisers showing up for it. So in the World Cup you saw the Sonys and the Cokes. This is the power of YouTube today, it's like a worldwide audience. So, in that sense, I would argue, read it in the tea leaves. It's a great business for us. On the display side, Nikesh.

Nikesh Arora
Just to add to what Patrick said. To be fair, what Display and YouTube has given us, has allowed us in the case of [inaudible] customers to complement the portfolio in terms of being able to offer integrated campaigns which go all the way from branded sites like YouTube, to networks like the Google Display Network, and to be able to sort of commingle that research. Not only that, many advertisers now actually commingle that with television ads as well as their print programs. So you see a much more integrated campaign capability that begins to happen. We've had examples recently like Patrick mentioned InBev (NYSE: BUD), Sony, Volkswagen at the World Cup. What's interesting is, Procter & Gamble has become one of our larger advertisers this quarter. That's primarily driven by the ability of CPG companies to both see the value of search in their ability to build a brand, where they figured out that people research online and purchase offline. We call that the ROPO effect. So people like P&G are beginning to see that impact. Other consumer companies are beginning to see that impact. In addition to that, we're seeing, like Patrick mentioned the Omnicom deal which we just announced, agencies are beginning to realize that this is an integrated buy. This is a buy you need to do across multiple properties, not just YouTube, the Google Display Network, the search network. Hence, the notion of trying to create a trading desk, not just with people like Omnicom, but we have deals in place with (inaudible) and GroupM, etc., as well.

Jason Helfstein, Oppenheimer & Company
Can you comment on Android slash Chrome as an operating system? When we think about Android in of itself on a mobile device particularly like on a cell phone we can see the revenue opportunity over time with ads on apps. When you think about Android or Chrome as perhaps an operating system for tablets or for computers is there ever a revenue opportunity in the software or should we think of it the same way as we think of Android today?

Jonathan Rosenberg
I think it's probably too early to answer that question. I think we're mostly focused with Android on building out the platform, on getting more smartphones out, and on the Chrome side, it's still too early to say.

Scott Devitt, Morgan Stanley
Regarding paid clicks, up 15% year over year, it's been pretty consistently in the teens for almost two years now. I was wondering if you could just talk about maybe the top three or four drivers that's keeping that rate at such a robust level for such an extended period of time.

Jonathan Rosenberg
I think the biggest thing is just the continued secular shift in advertising from things offline that are not measurable to the ROI-based model of search advertising where the advertisers can actually see the benefits in the ROI that they're receiving on the money that they're spending. We did see a good bit of that during the recession. I think there was a disproportionate fraction of budgets that were spent on things where the ROI could be tracked. I think on our side, we're doing a lot in terms of ads quality as I mentioned in my scripted remarks, and I think the ad format efforts that both Nikesh and I talked about also serve to increasingly drive clicks.

Nikesh Arora
Just to complement this -- I think that we have seen, in fact, I would argue the paid clicks moved quite a bit over the last couple of years in response to the recession. We've seen that, and we've seen a great recovery in Q1 and Q2, and on a year over year basis. I think that for us what's really interesting is -- people are searching, the secular trends, as Jonathan said, are happening because people are searching, people are clicking, and the quality of the ad network and the products themselves continue to improve. I mean, we just see the symbiotic relationship happening.

Youssef Squali, Jefferies
Thank you very much. Two quick questions. I guess the first for Patrick. Patrick, as you look at your business needs for the next couple quarters, do you think that your level of hiring and your level of CapEx, which this quarter has doubled from the prior quarter, is sustainable? Is it at the level you need to get to where you want to get to? And second, what are you reviews in contextual searches that have been implemented by the other search competitors and which, at least on the surface, seems to have you guys losing some market share? Thanks.

Patrick Pichette
I'll let Jonathan talk about contextual search in detail. On the issue of market share, just to kind of give the highest level answer, I mean, there has been a lot of debate about people's methodologies from external sources on market share. And so I would just -- Even the press itself kind of cautioned all these numbers of late. So I would just kind of put the flag out again to say just be cautions. I mean, we are very pleased with our results right now in terms of market share.

Youssef Squali
Do you feel you're losing market share?

Patrick Pichette
No. And the issue that we have is if you think of -- Now I just want to go back to -- because there's been so much noise on this data, I think it's important just to mention it. If you go back to the fundamentals of hiring and CapEx, CapEx, right, is lumpy. And here's a perfect example of lumpiness, right? To be able to work in Scandinavia in the winter is difficult. And as we said, we're building a data center there. Now it's spring and we're working there. So we're also, you know, adding machines. And it just happens that when you get the generations of chips available and everything available, then you start rolling out. We had a bit of -- kind of -- the lumpiness shouldn't surprise anybody. And I think that everybody that, you know, I had discussions with when we were at kind of like 189 million or -- it clearly -- you know, also unsustainably low levels, so we're kind of running our plans accordingly. So just stay tuned for CapEx. But it just happened to be lumpy.

In terms of hiring, I think that it really is the case that, you know, we -- I'm going to take a step back to three quarters ago when we said, "Look, for us, the recession is over." For us, we see great products and we have a mind-set of the next half decade and the big platforms we are building that are creating these huge ecosystems. And for us, Search is one. And Mobile and Android, as we just talked about, is one. And Display is amazing, right? It's really growing. And to not put resources to actually shield this ecosystem, which is the next decade, you know, it's just such an opportunity. So that's why we're investing aggressively. We think it's the right thing to do at the moment in the company. And that's the balance we're striving. Even Q3, if you think of headcount, you have a lot of people -- I'm sorry, I shouldn't call them kids -- the people that we just graduate from university are going to join us, right? So there may even be -- You know, you can think of the bump of the accepted-but-not-started because they're going to go backpacking for the summer before they come and join us. But I mean, ultimately, right, we're looking at a trend of continuing to invest. And it's the right thing at this time in the history of the company. So that's on CapEx and on hiring. And then on contextual search, if there's something that you want to-you need a more refined answer for, Jonathan? I'm not sure I understood.

Jonathan Rosenberg
I guess I'm not sure exactly what data you're looking at or what examples you're referring to.

Youssef Squali
Well, just -- I mean, there -- the two main competitors have adopted some processes that, in a way, inflates the number of searches that are run on their databases. And you guys don't do it. I wanted to just know if this is something that you guys may pursue as well, or ...

Jonathan Rosenberg
Sure, I understand. Right. So, I mean, generally, we don't comment on the third-party data, but what you're alluding to are basically the methodological problems that have been publicized with respect to auto-roll slideshows that generate. Yeah, basically, if you think about it from a search perspective, it's a spurious request because it's not really an incremental search.

Youssef Squali
Right.

Jonathan Rosenberg
So the thing that matters to us is, ultimately consummating transactions by conversions that we're sending to advertisers. So what we care about is the number of genuine searches that users are running where they want to get directly to an answer or a website or where they're interested in actually clicking on an advertiser's ad. It wouldn't help us in any respect other than in generating accounts in shared data to cause the total number of searches to artificially go up if there wasn't user intent behind them that was of value to our advertisers. So the basic answer to your question is no.

Youssef Squali
OK, makes sense. Thanks.

Jordan Rohan, Stifel Nicolaus
I'd like to delve a little further into some of the growth that you're seeing in the rest of the world territories. Can you talk about how much directionally growth you're seeing out of Asia versus Europe, if that's a breakdown that you're willing to give? And if not, can you talk about, you know, which countries really stand out from a growth perspective, on the positive side? Thank you.

Patrick Pichette
I'll let Nikesh answer that one.

Nikesh Arora
Well, you know, I'd prefer not to talk about regions, because in every region there are countries which do fantastically and there are countries which are challenged. You know, if you were asking about Greece, I wouldn't have to answer the question. So similarly, there are countries like Russia, like Brazil, like India, which are growing fantastically for us and continue to show good growth. It's a combination of more advertisers. It's a combination of Internet penetration getting higher. It's a combination of people getting savvier, advertisers getting more and more ready for the E world. So we're seeing good growth this quarter. We saw good growth in Brazil, India, Russian -- we saw great growth. And then we saw good growth in many other parts of the world. So, you know, even places like France performed for us wonderfully this quarter. So even these larger marketplaces like Australia and New Zealand performed well for us. So I am loathe to give an answer on a specific territory. I prefer talking about countries because I don't know how to go visit Asia.

Jordan Rohan
Fair enough. Countries are even more helpful. Thank you.

Sandeep Agarwal, Caris & Company
Oh, thanks for taking my questions. Actually, I have two questions. One is, if you look at the sponsor clicks versus CPC last quarter, paid clicks were up 15%, CPC was up 7%. Sponsor-paid clicks remained at the same level, but CPC have come down quite a bit. I know some of this is mix shift, maybe some of this is FX. But I guess my question is, you know, is there any competitive dynamics or maybe increasing focus toward organic search or changing user behavior playing any role in terms of some weakness in CPC? And then I have a follow-up.

Jonathan Rosenberg
This is Jonathan. I think probably the easier way to answer the question is to just give you my quick observations on the things which are clearly driving -- contributing to driving CPCs on average up, versus those that are impacting them in the other direction. I don't see anything from a user perspective or share perspective that is obvious that's impacting the overall equation. I think we are seeing, on the positive side, conversion rates improving, which is driving CPCs up. I think your comment about the relative shift in mix to google.com from AFC does contribute positively to CPC. Google.com is obviously higher. So any mix shift there, everything else being constant, increases CPC. The obvious things that we've talked about in the past that push it in the other direction are emerging markets, Brazil, India -- Nikesh talked about some of those examples earlier. Mobile growing in the mix, and people increasingly looking for longer tail queries that monetize lower to add into their campaigns. Those are the overall factors.

Patrick Pichette
Sorry, Sandeep, go ahead with your follow-up.

Sandeep Agarwal
Yeah, so, Patrick, actually, you know,the other revenue, actually, on a yearly basis is showing visible slow-down versus last quarter. And you specifically made comments that Double-Click was very strong. And then, you know, also you have a Nexus One, which is contributing second quarter, in terms of the kind of increment revenue source. In spite of these things, other revenue was noticeably slowed. So was it because there was some kind of slow-down in the Google Enterprise business? Or what else is going on there?

Patrick Pichette
No. In essence, it's one word: it's Nexus One. So the quarter-over-quarter impact of Nexus One is driving, you know, substantially that change.

Aaron Kessler, ThinkEquity
Yes, hi. A couple questions. First, on China, I'm just trying to clarify. Is it your understanding that the government's OK with your new solutions in terms of your search link on this .CN site? And is there any updates on trends and traffic you can give us that you're seeing in China? Also, just in terms of click-through rates for mobile on sponsored ads, any comparison you can give us there versus how you see click-through rates on PC? Thank you.

Patrick Pichette
OK, so I'll answer to China, and then I'll let Jonathan talk about the click-through rate mobile versus PC. On China, look, we're basically at the same place when we last discussed, or last time I talked about it, which is, we have -- the good news is we have our license renewal. And apart from that, certainly from a financial perspective, I just want to reiterate to everybody, revenue from China is not material to our revenue. And having said that, we had, you know, decent revenues for Q2. And so, given the sensitivities of everything that's going on with China, I hope you will understand why I don't want to talk more about it. We're working very closely to kind of continue to work through the situation. Thank you. On the click-through rate, mobile versus PC, Jonathan, insights?

Jonathan Rosenberg
We don't actually break out the relative click-through rates on mobile versus the PC. I mentioned there are new formats and efforts that we've offered that are starting to increase them, like the click-to-call offering. I think the main thing that's really going to fundamentally have to change there, which is the big difference between mobile and desktop, is that today on a mobile phone, people are actually less likely to consummate a transaction because the logistics of entering a credit card or, you know, being signed in on a browser is somewhat more time-consuming and onerous. So I think that for the mobile system to move very aggressively is going to require more of those commercial transactions actually being taken and placed on the mobile devices. On the display side, the AdSense for mobile is actually doing very, very well. And one of the reasons that that's doing well is sort of the opposite of what I just stated in terms of effect. ON a mobile device, the display ad is something that really kind of gets in your face. The screen is relatively small, so you see it. It's unlike a desktop in that you're not typically doing multiple things at once. So display, I think, is relatively closer to the desktop than is search-based ads.

Aaron Kessler
Great, thank you.

Sameet Sinha, JMP Securities
Yes, thank you very much. I just wanted to -- If you could comment on this Omnicom deal that you had signed. Can you talk about what the ramifications are? What sort of advertisers do you expect will participate? And any of the details would be appreciated.

Nikesh Arora
Yeah, sure. You have to understand, as we look at Display, there are two significant changes that are happening. One is display buying, which traditionally has been advertisers buying sites, is slowly and surely shifting to audience buying. So I, as an advertiser, no longer want to buy tiffany.com or newyorktimes.com only. I want to be able to say, "I'd like 18 to 35 year-olds who are savvy, who understand technology, and who would be interested in my product." Now, as you go toward that audience-buying notion, what advertisers are looking for is they're looking for a specific inventory and specific audiences, whichever site they might be on. So it becomes even more important for some sort of trading desk-type phenomenon to exist where an advertiser can buy across any publisher they'd like to buy. Now that makes it even more important that you can find some trading desks which are exchanged, where you can have every publisher represented. Because if you have seven different networks, it's suboptimal as an industry to have an advertiser have to go to seven different networks to be able to accumulate audiences with different standards and different ways till seven different networks look like it. So effectively, the ad agencies which are buying advertising for advertisers would like to have a common platform which allows them to buy across these entire networks. 

And that's what we're working on Omnicom with, where they believe that if they have the right trading environment setup for the advertisers, it's going to be a tremendous value for the advertisers, because advertisers come to a one-stop shop and buy across networks. It also allows for tremendous efficiency because the best seller of advertiser may not be the best acquirer of the publisher. So therefore, you can separate that in some sort of an ad exchange context, which is what Omnicom is working with us on. And if you get it right, there's hundreds of millions of dollars at stake in this kind of a deal because that allows very effective buying across the board on a network. And every player in that ecosystem can get their fair share of the profit.

Sameet Sinha
Great, thank you.

Mayuresh Masurekar, Kaufman Brothers
Hi. Could you talk a little bit about search remarketing? It seems that you are, by far, the leader in search, so a lot of display writers would need Google for doing this well. So what kind of growth or attraction have you seen for search remarketing? And what's the pricing for this product compared to all the display alternatives? Thank you.

Patrick Pichette
We don't do search remarketing. We do remarketing on the display side. We basically are able to go look at what we call interest -- based advertising. If you understand that certain users are interested in certain things, we have -- based on their having chosen to allow us to use that information, we have the ability to then market them and show them ads. And that is way more effective than blindly trying to show advertising to users. So clearly, we're seeing tremendous success in that area. But that's all we do in terms of remarketing.

Mayuresh Masurekar
And what's the pricing for this compared to other alternatives?

Nikesh Arora
The pricing is very simple. The more effective the advertising is, the more likely the advertisers are willing to bid more money for it. So you should expect the more efficient we make advertising, the more relevant it becomes, the more ROI generates the advertisers. They're willing to compete more aggressively with other advertisers with the same piece of real estate. So we see that -- we see the effectiveness of that reflected in the higher CPC for a pretty good product.

Mayuresh Masurekar
Thank you.

Colin Gillis, BGC Financial
Patrick, on the acquisitions this year, what is the philosophy in the financial discipline used to determine the purchase price? And then, separately, was ITA a competitive bid?

Patrick Pichette
I'm not going to comment on the last piece. What I'm going to say is, look, we have -- there's a real kind of triangulation between three factors in our strategy for acquisitions. So think of it as talent, intellectual property, and then price. And so what we're looking for is the sweet spot where when we find teams of people that are -- you know, have clear leadership, that, if you think about it, the venture capital world is actually kind of voted by them surviving as long as they have. And they have, as a team, you know, great talent -- engineering talent, specifically. And on top of that, for the second piece of it, which is they have proven that they actually have good intellectual property. Whether it be -- you know, whatever the app they're working on, or whatever -- in the case that you just mentioned of ITA, right, a lot of interesting kind of structure of data. So the third piece is obviously price. There's a price after which, you know, it's not worth it to us. And then there's a price, you know -- there's a trade-off of, you know -- on price. And what we do is we do every one of them. We ask ourselves the question. You know, we look at the intellectual, and then let me put the over-arching last fit, which is, how does it fit within those four areas that I've talked about earlier, which is where we're trying to accelerate our development. So, you know, AdMob is a perfect example of that, where great technology, fantastic team, at the right price that basically takes a huge chunk of what was our engineering road map and bring it today, integrate it into the team. And then we have much smaller teams, sometimes 12 to 15 engineers, that have a great piece that actually, you know -- Ontoo is another one like that, right -- when you think about the video codec. So it's always a trade-off. And there are many cases where we look at them and we don't buy them because we can't find the fit somewhere in those three. So, I mean, that's how we think about it. And it is disciplined. And we have debates about them. And sometimes, you know, we kind of -- we often say no. That's how we think about it.

Colin GIllis
There are ample deals that you walk away from just because of the purchase price at the end of the day?

Patrick Pichette
Oh, yes, we do. Yeah.

Colin Gillis
Jonathan, while I've got you on the line, can you just talk a little bit about or help us frame how additive are mobile searches? You know, like, is there a rate of search growth you could share for users across all devices, maybe tied to the same log-in?

Jonathan Rosenberg
I don't actually have any data. But intuitively, I think that they are additive because what -- I mean, think about it this way: When you're at your desktop, if you have your PC at your desktop and your mobile phone, you're not going to do the search on your mobile phone. So almost all searches that you were otherwise doing on your desktop, I think you're still going to do on your desktop. On the other hand, there are times when you are out with your mobile phone and you didn't have your desktop device. Then obviously those are, by definition, incremental. Unless, of course, in theory, you'd remember to go back and do that search when you came back to your desktop. But I don't think that there's much evidence that that's the case. I think the vast majority of them are incremental. I think there are also slightly different usage patterns across desktop and mobile. You tend to see more use of the mobile devices on weekends, which is not surprising. But I don't actually have any more specific data that proves those observations or that hypothesis.

Colin Gillis
But I would imagine those curves, including the transaction curves, you know, ultimately bend toward each other over time?

Jonathan Rosenberg
I guess I don't understand. I don't understand exactly what you're saying.

Colin Gillis
Our usage -- our mobile usage, and the way we use our mobile, especially as we get more broader band, you know, you've talked about your 4G connections.

Jonathan Rosenberg
Sure.

Colin Gillis
And our desktop usage. I mean, ultimately there should be much difference between the two of them over time.

Jonathan Rosenberg
Well, I think the mobile usage will grow, and it in many ways will be incremental, because you'll be able to do a lot more when you're out in the field. And you know, for example, being able to, within a store, scan a barcode with your smartphone, look at the price on the shelf, and determine whether or not you actually would prefer to consummate the transaction through a web-based alternative, and then automatically complete the transaction -- is the kind of thing that's all going to be incremental. And I think as these devices are able to do more of that, people are going to do it.

Colin Gillis
Makes sense. Thank you.

Heath Terry, FBR Capital Markets
Great, thanks. Patrick, in looking at YouTube beyond views, you know, it's obvious that the majority of those views still aren't being monetized in any way. But what's standing in the way of more monetization of this inventory, which, for the most part, still seems to be the user-generated content side of things? How significant is it, and does the Viacom ruling change you ability to monetize that inventory?

Patrick Pichette
I'm going to let Nikesh give you the kind of high-level answer, and then I'll circle back on the Viacom specific.

Nikesh Arora
I'm going to let Patrick talk about the Viacom stuff. But you have to understand, first of all, YouTube is five years old, right? So this is a phenomenon that has been created over the last five years. We look at YouTube and we monetize it many different ways. We monetize the homepage of YouTube, we monetize watch pages on YouTube. We do promotion videos, and we're looking at various new ways of looking at how we can put ads into content. Now, part of the process that has been going on is we have to continue to free up more and more inventory for it to be available for us to advertise on. So we've done a lot of deals recently where -- whether it's music societies around the world and various countries around the world, where we are getting permission to be able to shore advertising in those places, which allow us to create more inventories. So that's the inventory side of things. And we believe we're on a good path to continue to create more and more available inventory. In addition to the inventory side, we have to now keep getting advertisers to start giving us quality video advertising,which can be put onto YouTube. And my view on this is that we're in the very, very early stages of video advertising. Because what advertisers do, they will splice a video ad that they've created for television and they will stick it on YouTube. Now if you understand, YouTube allows you two more things which television does not. A, it allows you to interact with the ad, which TV does not, and most of the video ads, so far, are not interactive. 

So we expect as that begins to happen, people will start creating more and more interactively. The second thing which it allows you to do is it allows you to create something of personalization. The ad your grandmother sees and I see and my daughters see need not necessarily be the same ad for anything. So you know, both those features, we think, will come into play more and more on the advertising side. So as we get more personalization, more interactivity, as we get more inventory clarified for YouTube, we think that it's going to create more modernization and opportunities. And couple that with the previous conversation on display and the ability to buy audiences, that will just provide sort of the icing on the cake as this thing goes forward.

Patrick Pichette
So, look, on my side, on the issue of Viacom, we're still in appeal, so I don't want to comment on the specifics. What I can say is two things. Obviously, with more clarity from this judgment, it gives us more room for experimentation that we didn't have before, because, until these rules are clear, you don't know exactly where the bar is. And with that clear bar, we now have much more room for experimentation. And then on -- just a comment on if there was ever a great illustration of Nikesh's point a minute ago. I mean, just look in the last few weeks about the Old Spice experiment on YouTube. And if you have not tried that, just go on YouTube and check Old Spice. About the interactivity of Twitter, Facebook, YouTube in advertising, it's just absolutely phenomenal. So it just gives you a glimpse of where the world is going. And it tells you again of how we're just scratching the surface.

Heath Terry
Great. Thank you.

Richard Fetyko, Merriman and Company
Thanks, guys. If you break down the components of your display strategy and revenue streams, how would you rank the revenue opportunity of each, between YouTube, AdSense display network, and the ad exchange in the long term?

Patrick Pichette
I'll let Nikesh answer it.

Nikesh Arora
I think it's very important to understand that all these things work to complement each other. You know, the ad exchange allows a buyer to buy across multiple networks. So without an ad exchange, it makes it very inefficient for advertising to be bought, and therefore the buy is not going to go fast enough. So you want to make sure you can create some consistency and standardization in the way display advertising has been bought. If you want to take the big TV dollars to start coming into display, as they had been in the early years, I believe Google Display Network is our ability to prove that we can create a network of our own of multiple publishers and create premium capability for our advertisers to be able to target those publishers. And last but not the least, YouTube becomes our owned and operated property, sort of like us operating google.com and our Google network. So clearly, the margins on our owned and operated properties are higher. And that allows us to have a premium property in this space. And it also allows us to accumulate tremendous amounts of content, which we can then offer to advertising. 

So you have to understand, all these three are very relevant to the overall strategy. Not trying to prioritize any one over the other, but clearly, YouTube being able to monetize, bringing more TV dollars into YouTube is fantastic. Google display network being able to monetize that opportunity across multiple publishers is great. And without Adex, which is the glue that will bind all these networks together, it is hard to see that industry growing as fast as we'd like to see it grow. If you'll allow me to CFO answer, these are each and every one of them billions of dollars of revenue opportunities. They're not hundreds of millions, they're billions. The way we think about it in terms of addressable market, this is already a $20 billion industry that is growing really fast. And so for us, every one of them we attack. And that's why, again, we continue to invest in the total ecosystem.

Patrick Pichette
Thank you very much for all of your questions. I want to thank Nikesh and Jonathan again for joining me. I wish to thank every Googler that's on the call listening to us -- I mean, our engineers, our sales force, our support staff -- all these people. I mean, every 90 days, you know, we look at our results and we continue to be so pleased. But it is really the great hard work of all our Googlers. And so for that perspective, I just want to give two thumbs up again to the Googlers for a fantastic job over Q2. And with that in mind, I'll turn it back over to Connie. I wish you a great summer, everyone, and we'll talk to you in Q3. Connie, you can close the call, please.