Operator: Good day, ladies and gentlemen and welcome to the Google Inc.'s, Second Quarter 2013 Earnings Conference Call. Today's call is being recorded.
At time I would now like to turn the call over to Willa Chalmers, Investor Relations Manager. Please go ahead, ma'am.
Willa Chalmers - IR: Thank you, Jami. Good afternoon, everyone, and welcome to today's second quarter 2013 earnings conference call. With us are Larry Page, Chief Executive Officer; Patrick Pichette, Senior Vice President and Chief Financial Officer; Nikesh Arora, Senior Vice President and Chief Business Officer.
Also, as you know, we distribute our earnings release through our Investor Relations website located at investor.google.com. So please refer to our IR website for our earnings releases, as well as the supplementary slides that accompany the call. You can also visit our Google+ Investor Relations page for the latest Company news and updates. So please check it out. This call is also being webcast from investor.google.com. A replay of the call will be available on our website later today.
Now, let me quickly go over the Safe Harbor. Some of the statements that we make today may be considered forward-looking, including statements regarding Google's future investments, our long-term growth and innovation, the expected performance of our businesses, 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 revisions 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 that we use on this call, such as operating income and operating margin, are expressed on a non-GAAP basis and have been adjusted to exclude charges related to stock-based compensation. We have also adjusted our net cash provided by our 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.
With that, I will now turn the call over to Larry.
Larry Page - CEO: Hello, everyone, and thanks for joining our call this afternoon. Google had a great quarter, over $14 billion in revenue, up 19% year-on-year; amazing performance for a Company that has yet to celebrate its 15th birthday.
We live in a world of abundant computing, with multiple operating systems and increasing numbers of devices. It is a very different environment from when Google started. There was essentially one OS and one device category, the PC. These kind of changes don't happen that often, once a decade, maybe even less frequently. But the shift from laptop to mobiles, from one screen to multiple screens creates tremendous opportunity for Google.
With more devices, more information and more activity online than ever, the potential to improve people's lives is immense; getting you the right information just when you need it; creating the tools to make everyone more effective at home and at work; and helping you share and remember the moments that matter in life. It's why I am so excited about the velocity and execution on our platforms, apps and devices.
First, platforms; with hindsight, Android and Chrome were no brainers. At the time they were big bets. The momentum across these platforms is tremendous, as you saw at our Annual I/O Developer Conference in May. I was astounded we had over 1 million people tuning in live just to watch our developer keynote. We've now activated more than 900 million Android devices worldwide, and we're lighting up over 1.5 million devices every day. That's pretty amazing given that the first Android phone launched less than five years ago. Apps usage is increasing fast. Over 50 billion apps have now been downloaded from the Google Play store.
In fact, we've already paid out more money to Android developers this year than in the whole of 2012. I love the ability to access your stuff on Play anywhere. Take our new music subscription service. Launched in May, it is an easy, fun way to discover new music with all the songs there, ready to go. You never have to think about the device you are using. Chrome, even though only four years old, has over 750 million users worldwide and growing.
Then next, apps; our goal is to design everything so it's beautifully simple and hassle free. Users shouldn't have the need to think about our technology. It should just work. This quarter we completely revamped our Maps UI. The map is the screen, with no clutter around the edges. There's more information about your surroundings, so it's easier to explore. We've launched a new, improved navigation feature, with notifications about incidents before you leave, and updates to save time if traffic conditions change. Best of all, this new Maps experience is now available on almost all devices you'd be likely to use.
It's the same with Google+. We've done a complete redesign to make use of the entire screen, and everything looks consistent whatever the device or the platform. In addition, the team massively upgraded the photos experience, making software designed for professionals automatically available to everyone for free. There's no need for wrinkles anymore. Take a look on plus, many of your photos will now be marked enhanced and improved automatically.
Finally we launched a new communication app called Hangouts. You can talk to the people you care about across all the major platforms. Video calls from your phone are very cool, give them a try.
And I'm excited about the progress we continue to make with Search. Our Knowledge Graph is now available in 29 languages, and we've expanded the range of information available. For example, we just added nutrition data. Ask Google how many calories there are in a glass of white wine and you'll find out its 123, or an avocado, 234 calories. It's good to have the facts if you want to keep healthy. And we launched Google Now on iOS in April.
In the same way, we want to make advertising super simple for customers. Online advertising had developed in very device specific ways with separate campaigns for desktop and mobile. This made arduous work for advertisers and agencies, and meant mobile opportunities often got missed.
It's why we launched Enhanced Campaigns. Advertisers have upgraded 6 million campaigns, that's almost 75% of all their active campaigns. And Nikesh will talk in a little more detail about the positive reaction from clients. This is the biggest ever change to AdWords, and the velocity and execution has been great, thanks to the hard work of all the teams.
Finally, devices. There is so much excitement around new devices today, and the potential for innovation is tremendous.
You can now buy the HTC One and the Samsung Galaxy S4 Google Play editions and enjoy the best of Google. There's a ton of momentum around Chromebooks, which are growing fast and defying the more general decline in PC sales.
Finally, I know you're all eagerly anticipating what Motorola is launching soon. Having been a tester for a while, I'm really excited.
We're very optimistic about the opportunities in front of Google today. The potential for technology to make people's lives better is tremendous. But to achieve that potential we need to stay focused. It's why we continue to invest the vast majority of our resources and time in our core products. But my job as CEO is also to think about the future, and ensure we continue to bet on new technology that can solve big problems in the world.
Project Loon, which we launched in June, is a great example. Bringing affordable, balloon-powered Internet access to remote areas is an idea that Sergey and I had been thinking about for over a decade. It was great to see that project literally get off the ground, and give people a bit more hope for an improving world.
None of this would happen without great people and we are so lucky that we have them. I'd like to thank all the Googlers and Motorolans who make everything possible. Keep up that velocity and execution.
Now, I'll hand the call over to Patrick.
Patrick Pichette - SVP and CFO: Thank you, Larry, and good afternoon everyone. Thank you for joining us. So, why don't we dive in by reviewing the details of our overall business financial performance, so here we go.
Our gross total consolidated revenue growth 19% year-over-year to $14.1 billion. The overall business was up 1% quarter-over-quarter. Google Standalone gross revenue grew 20% year-over-year to $13.1 billion and was up 1% quarter-over-quarter. Our Google website revenues was up 18% year-over-year to $8.9 billion, it was in fact up 3% quarter-over-quarter. Our Google Network revenue grew 7% year-over-year to $3.2 billion and was down 2% quarter-over-quarter.
You will remember, the advertising policy decisions we implemented during Q4 and Q1 to ensure that useful and safe user experience continued to have its negative impact on network revenue. Other revenue grew 138% year-over-year to $1 billion roughly flat quarter-over-quarter. Play store digital sales of apps and content drove the year-over-year and quarter-over-quarter growth and it's worth noting that in Q1 we included some seasonal hardware sales due to overflow from Q4, which skewed the Q2 comp somewhat.
Finally please note that without currency fluctuations Google Standalone revenue growth would in fact have been 22% year-over-year and 3% quarter-over-quarter.
Turning to Motorola Mobility, gross revenue there was $998 million just shy of $1 billion and it's clear that we have made a lot of progress at Motorola in the past year and that we are especially excited about the future of our upcoming product lineup. So stay tuned. At Google, our global aggregate Paid Click growth was strong at 22% year-over-year, in fact up 4% quarter-over-quarter. Our aggregate Cost-Per-Click was down 6% year-over-year and down 2% quarter-over-quarter and currency fluctuations in this case had a minimal effect in Q2 CPC growth. Yet our monetization metrics continue to be impacted by the usual factors that we have discussed many times, including geographic mix, channel mix, property mix or product and policy changes as well.
Turning to geographic performance of Google's Standalone business, we continue to see a steady performance in the U.S. and rest of world. While the U.K. was negatively impacted by a warm spring, some FX in their case and a tough year-over-year comp. In our earning slides, which you can find on our Investor Relations website, you'll see that we've broken down our revenue by U.S., U.K. and rest of world to show the impact of FX and the benefits of our hedging program, so please refer to those slides for the exact calculations.
U.S. revenue was up 18% year-over-year to $5.9 billion. The U.K. was up 12% year-over-year to $1.3 billion which included $24 million of benefits from our hedging program. It is in fact worth noting that in fixed FX terms, the U.K. grew 15% year-over-year. Non-U.S. revenue excluding U.K. accounted for 45% of the total revenue or $5.9 billion and it was up 23% year-over-year which includes $11 million benefits from our hedging program. In fixed FX terms, rest of world grew a solid 28%.
Coming back to an aggregate level for the total consolidated business, our other cost of revenue was $2.9 billion in Q2 excluding stock-based compensation and Motorola restructuring. Our non-GAAP operating expenses totaled $4.2 billion, also excluding stock-based compensation and Motorola restructuring, and our non-GAAP operating profit was $4 billion in Q2, resulting in a non-GAAP operating margin for the consolidated business of 28%.
For standalone Google, our traffic acquisition costs were $3 billion or 25% of total advertising revenue. Other cost of revenue was $2.1 billion, again excluding $110 million of stock-based compensation. Non-GAAP operating expenses were $3.8 billion, excluding stock-based compensation of $633 million and non-GAAP operating profit was $4.2 billion in Q2 resulting in non-GAAP operating margin of 32% for the stand-alone Google segment.
Please note that a revaluation of our depreciation policy as it relates to our real estate portfolio, resulted in an additional $121 million in Google segment depreciation expenses, about half of which represented a one-time charge for assets that are now fully depreciated. With this change in place, depreciation, amortization expense on the property, plant and equipment for standalone Google was $667 million for this quarter.
At Motorola Mobility, total non-GAAP operating expenses including cost of revenue were $1.2 billion. Keep in mind intangible amortization expenses attributed to the standalone Google and Motorola Mobility are in fact included in these non-GAAP measures. Of the $283 million in intangible amortization expense in the quarter, $153 million was the result of the acquisition of Motorola, of which $116 million was allocated to Google and $37 million was allocated to Motorola Mobility. And as a result, the non-GAAP operating loss for Motorola Mobility was $218 million in Q2 and the non-GAAP operating margin for that segment of minus 22%.
Headcount for the consolidated business was down roughly 9,000 people in Q2. Please keep in mind the consolidated headcount now excludes Motorola home business. It also reflects the impact of the ongoing mobility restructuring. Standalone Google added about 1,400 people during the quarter, and in total the consolidated company ended the quarter with around 44,800 full-time employees.
Our effective tax rate was 24% in Q2. Like in Q1, several one-time items, as well as the continued shift of earnings between domestic and international subsidiaries impacted our tax rate this quarter. Also please remember that in Q1 we also had a significant lower rate in that case due to the 2012 R&D credit, which was obviously not applied to our Q2 rates.
Let me now turn to cash management. Other income and expense was $247 million for the quarter, which reflects realized gains on investments in interest income offset by the discontinued – the continued impact of our FAS 133 expense on our hedging program. For more detail on OI&E again please refer to the slides that accompany this call on our IR website. We continue to be very pleased with our operating cash flow, which is strong this quarter at $4.7 billion. CapEx for the quarter was $1.6 billion and this is versus last quarter at $1.2 billion.
I want to remind everybody that the majority of our Cap Expense is related to data center construction, facilities related purchases, and production equipment. CapEx is just inherently lumpy and as I mentioned last quarter during my remarks, our infrastructure will continue to be a strategic area of investment. It's one of the foundations of our future growth.
Now free cash flow, again very strong at $3.1 billion for the quarter. Larry's comments make it clear that they're just enormous growth opportunities ahead of us as a Company. It's in this spirit of optimism that we continue to fully fund strategic growth opportunities with the same confidence and discipline we demonstrated while growing our Mobile business, Android, YouTube, Chrome, just to name a few.
With this I will hand it off to Nikesh who will cover more details of our business performance in the quarter and after his remarks, we'll open up the lines for questions. Nikesh?
Nikesh Arora - SVP and Chief Business Officer: Thank you, Patrick. As Patrick mentioned our business has had a strong quarter. We had over $13.1 billion in Google Standalone gross revenue. Overall performance was particularly strong in the auto sector in Brazil and as Patrick mentioned, growth in the U.K. was hampered because of a particularly warm spring.
Before I talk about trends we are seeing and investments we're making in our business, let me call out the effort of our marketing team that continues to create great Google moments. In May, they put on our second annual YouTube Brandcast event in New York for 1,800 advertisers. The event was a great way to show YouTube's unique ability to help marketers connect with highly coveted consumers and ultimately build their brands. At Brandcast, Jeffrey Katzenberg of DreamWorks said, YouTube is a whole new entertainment paradigm, and we think he is right.
Also as Larry mentioned, the team put on another successful Google I/O Developer Conference, showcasing our incredible momentum across our platforms to over 6,000 developers in San Francisco with over 1 million people tuning in from around the world. We continue to be pleased with how our business is evolving, growing and diversifying.
There are three key areas where we continue to make investments; first, our transformation into a marketing platform that works across the connected world Larry described; second, our systematic move up the marketing funnel to help clients more and more with brand-building campaigns; third, our investment in our non-ads business, such as enterprise services, hardware and digital content through Google Play.
First, our investments for our constantly connected users; the rapid adoption of new devices means that more people are spending more time online and connected. In fact, new devices and new connectivity means they're moving to a world where people are constantly connected with devices with them all the time.
As an example, eMarketer says that the time spent online on mobile devices by U.S. adults grew 273% from 2009 to 2012. From 2011 to 2012 alone, the time spent connected to mobile devices increased by nearly half an hour a day. This means not only are a lot of new services and apps available for users, but also huge opportunity exists for businesses looking to reach mobile users at the right time and location. That brings in Enhanced Campaigns. As Larry talked about this, Enhanced Campaigns was a big long-term bet that is designed to help advertisers more easily reach customers across devices with the right message, all within one campaign.
We've already migrated 6 million of active campaigns to Enhanced Campaigns over the last many months. Our goal is to migrate all of our advertisers and campaigns by the end of this month. This effort has been executed at breakneck speed and client reaction has been generally positive. We're getting back evidence from clients seeing improved performance using Enhanced Campaigns. For example, Pizza Hut saw their mobile ROI increase by 20%. They found that their mobile click-to rate has increased by more than 60% while their cost per order on smartphones has dropped by 17%.
We believe Enhanced Campaigns does set up our clients and our business really well for the long-term and the move toward a constantly connected world goes far beyond just direct response and transactional marketing. People are spending time watching videos, playing games, consuming news all this creates great new opportunities for brand marketers to engage users.
In fact powered by our TrueView format, YouTube's mobile revenue in June of this year was three times of what it was at the beginning of the year. To help advertisers reach viewers across more screens, we've opened up our TrueView formats to all of our (AdWords) network across thousands of apps.
Turning out attention to brand marketers, this is a very, very important area for us where we continue to invest broadly. It's important because the largest global marketers from CPG companies to film studios, all conduct large major brand advertising campaigns, of course that represents significant budgets that have historically been spent on TV.
A good example of this was the Cannes Lions Festival, the Dove – Real Beauty Sketches campaign that appeared on YouTube won the Titanium Grand Prix award which is considered the Festival's highest honor. We worked with Burberry to launch Burberry Kisses which allows users to send message to loved ones sealed with the digital imprint of a real kiss. This campaign runs on YouTube and our Display Network across desktop, tablets and mobile. Last month we began to integrate our recent of Wildfire into the DoubleClick platform so that brands can now manage the broader customer journey across search, display, mobile, social, rich media and video again all within one platform.
Finally I want to talk a little bit about our investment in emerging non-ads businesses. We made a bunch of bids that are now beginning to show promise. We are seeing acceleration in new businesses such as hardware, digital content and enterprise. First hardware; we continue to see great momentum across Chromebooks and mobile devices such as our Nexus program. Around the world Chromebooks are now in more than 6,600 brick-and-mortar stores, including Walmart and Staples. That's about a three-time increase this quarter. As Larry said, we have also added two new devices to the Google Play store from Samsung and HTC.
On the digital apps and content front through Google Play we continue to see tremendous amount of growth in this area. People from over 190 countries now download apps from Google Play every day. More than 50 billion apps have been downloaded so far. In the last year Google Play digital content like music and movies have launched in 21 new countries, including India, Mexico, Russia with eight more European countries launching Google Play Books this week.
Publishers like Penguin, Random House, Time, Inc., movie studios like Disney and NBC Universal and app developers like King and SQUARE ENIX are creating terrific experiences for our users. We have also collaborated with all the major record labels to launch a new music subscription service that users seem to be enjoying really – enjoying a lot.
Lastly on the enterprise front, that's another great revenue stream for Google. It comprises productivity apps like DOS and Gmail as well as our cloud infrastructure. Now more than half of the Fortune 500 companies use a paid enterprise product from Google and over 5 million businesses use our productivity apps. This means we have closed long-term relationships with our enterprise customers.
New customers this quarter include some of our world's leading businesses like Federal Express recently built their store locator on Google Maps, Snapchat which runs their application on Google's cloud infrastructure, and LinkedIn is using Google Search Appliance. New Google Apps customers include Pearson, Keller Williams Realty in the City of Boston. HP is now Google Apps reseller combining Google software with HP's hardware for an initiative to help small businesses called SMB IT in a Box.
To conclude, across our entire our business, we are investing with enthusiasm and have tremendous opportunities. We strongly believe that we're making the right moves for our users and clients and we're extremely optimistic about the future.
With that, let me hand back to Patrick.
Patrick Pichette - SVP and CFO: Thank you, Nikesh. So Jami, if you want to give us the instructions please to get going on the Q&A please, I'd appreciate it.
Operator: Ross Sandler, Deutsche Bank.
Ross Sandler - Deutsche Bank: Nikesh, I just had one kind of high level question on Enhanced Campaigns in the transition. So can you just give us a little bit more color about the ROIs that most of your customers are seeing? You mentioned a few comments, but are they going up? Do you see a significant opportunity in providing conversion tracking across different screens? What do you think will happen with search budgets if and when you can solve that problem?
Nikesh Arora - SVP and Chief Business Officer: Thank you for the question. I think it's fair to say that over the last nine months we've had to do a super herculean task to take millions and millions of campaigns as Larry mentioned, 6 million campaigns where we've had to work with our advertising partners to go and covert them towards and Enhanced Campaigns. And we've had some amazing insights both working with the advertisers and as well as our teams, as many advertisers have discovered that they were not addressing the noble opportunity appropriately. They discovered new inventory, they discovered better ROI and better conversion. Of course we had disobeyed the conversion analytics will work across every team and be able to be made available to all of our advertisers. So, we believe that as we get more and more – as we get better in terms of being able to provide more targeting and more comprehensive ad solutions from mobility and across all screens. The ROI should continue to improve. So, I'm very optimistic in the longer-term, because we believe mobility provides more context to advertisers in terms of where the users are where they have been, which would allow for more accurate advertising and advertising which is almost like as good as information for them. So, if that begins to happen, we think the advertising ROI continues to increase and hopefully that means good things for such budgets.
Operator: Ben Schachter, Macquarie Securities.
Ben Schachter - Macquarie Securities: One question for Larry and one for Patrick. Larry, when you think about hardware, are there other hardware categories beyond just phones and tablets where you believe Google can potentially build meaningful businesses. And then Patrick, in Q1, we didn't really see the usual uptick in expenses that you kind of see annually. But then now, we do see it in Q2. It sounds like some of that with the accounting issue around depreciation, but can you help us understand what happened there more?
Larry Page - CEO: Thanks Ben for the question. I think we've been an early innovator in smartphones and we've been really excited about starting Android when no one really thought it was going to be interesting. And I think it's always a mistake to assume that technology will be static. So, I think assuming over the long-term we are going to have new kinds of devices and ways of interacting with computing and the internet. Obviously we are excited about Google Glass and new ways of interacting with hardware and new types of hardware. With any technological change you probably overestimate the short term and underestimate the long term. So I think we are really excited about making those investments. We are making sure we are positioned to live the future and that's why I won't be using Glass because I feel like every time I am using Glass I am living that future. That's really, really exciting to me.
Nikesh Arora - SVP and Chief Business Officer: Why don't I jump on the next question, so on the issue of expenses, look our expenses in Q2 were completely in line with the objectives we set for ourselves. In general we continue to exercise financial discipline and monitor our product profitability, but it's on that basis that we recognized that significant opportunities are ahead of us and with the view to the long-term we continue to invest significantly and intelligently to fuel these opportunities. The fundamental issue is, as I said a number of times on previous calls, if you want to hire X amount of people you have a target for the quarter, or for the year and they come in sometimes a bit over, sometimes a bit under. But the real question is, are you still on the right trajectory for the long-term you are shooting for. So that's really the issue between Q1 and Q2.
Operator: Mark Mahaney, RBC Capital Markets.
Mark Mahaney - RBC Capital Markets: Two questions please. First on CPC, Patrick you mentioned a couple of factors behind the kind of deflation there. I don't think you have ticked off Mobile. I don't know if there is any particular reason why you didn't or maybe I missed it. Then in terms of the employee adds, may be a question for Larry, as you think about that where you have been able to get employees, the ease or the difficulty with which you have been to hire the employees that you have wanted to hire, could you comment on how that has changed if at all over the last year or two?
Patrick Pichette - SVP and CFO: So, why don't I jump in on the first one, clearly mobile has some effect of it and we've talked about that in the past, so it's just one of the many factors that are at work. I just gave the list. And then property mix obviously and the channel mixes, includes a bunch of mobile shift as well there, and that's part of the equation clearly for sure that drives both sides of the equation. And I just want to remind everybody that it's always kind of dangerous to just look at CPCs by themselves or just look at paid clicks by themselves, but in fact, it's a combination of the two that gives you the health of the business and these mixes move all over the place depending on the number of changes going on in any quarter, and – but overall, very pleased with the overall performance. On headcount, I'll let Larry to jump in.
Larry Page - CEO: Yeah, Mark, I think I don't think we've seen any significant change in the short-term on hiring. I think we're really looking at – we have really great people at the Company and more great people want to work with us. We've been able to buy smart companies too where you get great people. And I don't see any major changes now that's been changing. I also think retention for the Company has been great. People are excited to work here. They're excited to work on important things and make the world better. We are able to hire some of the best people in the world, and I think that's been continuing and it's pretty stable.
Operator: Carlos Kirjner, Sanford Bernstein.
Carlos Kirjner - Sanford Bernstein: Two questions. Larry, I think you sometimes say that technology has done only 1% of what you can do, suggesting that there is a lot of opportunity for Google. If that's the case, why isn't your R&D budget 10%, 20% or materially higher than today? Or in other words, what limits your ability to spend more to capture these opportunities? Secondly, Patrick, can you tell us in general what specific financial of operating metrics you used to evaluate the success on Google Fiber as a business?
Larry Page - CEO: That's a really great question Carlos. I think that's our main job is to figure out how to obviously invest more to achieve greater outcomes for the world, for the Company and so on, and I think those opportunities are clearly there. You know as we've seen in the past with things like Chrome and Android and I have talked about them a lot. I think that execution and velocity, I talked about that a lot too. It's pretty easy to come up with ideas, it's pretty hard to make them real and get them to billions of people. And for me it's so exciting about being at a company like Google, so we get to do technological innovation at scale and get it out to on the scale of the overall to billions of people. But, I wish we can just snap our fingers and accomplish that. There's actually lot of hard work and it takes a lot of great people working really hard to make that happen. We work every day to improve our processes, improve our leadership and improve how we are organized, and to make that all go faster, and that's why I'm come into work excited every day, and I think why we are (indiscernible). I wish we could snap our fingers and do – just do a tremendous amount more instantly, but throughout its hard work to scale and that's what we do.
Patrick Pichette - SVP and CFO: Carlos, I will take the second one related to Google Fiber. Just as context for everybody, we have been on the public record to say that. We're running Google Fiber and excited about it and we've always had profitability as one of the key criteria for this opportunity. And in terms of kind of metrics, they should be just aligned with any sound business that's in that domain of access, which is a combination, at first actually was interesting because the question was how successful was going to be the product and then meaning, how many people would kind of want to take it. Then the second kind of – so we have been obviously very pleased by our results in Kansas City and now the announcements of the other two cities we have made since then. Then there is all the other regular metrics you can imagine which have to do with cost of infrastructures, cost of serve and then how they flow into our profitability model. So there's no real rocket science in the financials of it. The real kind of magic occurs with the definition of the product, the innovation on the technology that the teams are pushing and what makes Google Fiber a 100 times faster than the next best thing, that's really what we're really focused on. So I hope that answers your question.
Operator: Douglas Anmuth, JPMorgan.
Douglas Anmuth - JPMorgan: Just want to ask the Network sites deceleration that you saw 12% growth last quarter and 7% growth this quarter. If you could just talk about some of the key drivers there and perhaps how much is self-inflicted as you are sort of cleaning up more of the sites in quality and everything? Then secondly can you talk about the key drivers that you see in terms of improving conversion rates for mobile ads? You mentioned the conversion analytics, but what else do you think gets mobile ad conversion up over the next few years? Thank you.
Patrick Pichette - SVP and CFO: I will answer the first part of the question Doug and then Nikesh will answer the second part. Clearly the Network deceleration – I mean that's why we kind of made the comments last quarter about the DLA and the policies and its clearly having an impact. As you know, now we have had a number of partners that have till Q1 and Q2 have all been notified and have made the changes to their behavior. So, these policies are now coming into compliance, and as a result of it, right, you see impact. But we really believe that this is a really good thing for our users, and in the long-term we'll really benefit both the users and Google. So that's the core elements of what's going on there. And then for the second question, I'll let Nikesh jump in.
Nikesh Arora - SVP and Chief Business Officer: Thank you, Patrick. I think it's important to understand as I said, that improving conversion rates for us requires us to do a lot of things; one is we have to understand the cross-device behavior better, we have to understand the cross-device conversion. People can start to search in one device and conclude it on other device. These opportunities did not exist in the past when we were all focused on screen. In addition to that, as we talk about mobility, we start to understand that context of the user is a lot better as I said, where are they, where have they been, what could their search possibly mean, when they are searching for – when you're in a car parking lot and you're searching for other car dealership, that gives us a very different signal than if you're just sitting at your desk and searching for car. So, all those attributes, all those factors need to go in into creating better targeting, better advertising for our end users, so that, that actually helps increase ROI for advertisers and hopefully ROI for us in the longer term.
Operator: Scott Devitt, Morgan Stanley.
Scott Devitt - Morgan Stanley: I had two questions. First, Larry mentioned some of the new features and the math update, I think also the Gmail tab update, seems like it's going to push the users now. It'd be great to know if you could share that the timeline just for the full rollout in the U.S., internationally and any implications you foresee the update may have on those that are relying on marketing as a distribution channel? And then secondly, Larry also spoke about balloon deployed internet access, so I was wondering if you could talk about another initiative that seems like it has significant opportunity long term, the automated vehicle opportunity and when you think of that as a commercial opportunity at scale? Thanks.
Larry Page - CEO: I think – I'm not sure of the detail of the Gmail rollout. I have been excited to use it and I think it's a really great experience. I think we're doing a lot to improve people's experience on Gmail. I'm (not) sure we have a huge number of users on Gmail it's growing quickly, so really, really excited about it. I will just say there are some things around email experience that can be improved and we're doing a lot to organize commercial offers and things like that, make sure that there are – you are not getting overwhelmed by spam and so on. I think those have been great areas for positive features in rolling out. I think in terms of automated cars, I mean I think again it's a very early stage thing. I think we're very excited about it. I think it has potential again to have tremendous impact on people's lives on our mobility and so on. I think that changes about how we are super excited about it and working on hard. It's very early stage project obviously. Then the last part of your question, I mean, I think it's hard to predict exactly when these thing will be commercial. My question now is ask us, hey why aren't you doing it today? So, we try to reduce whatever roadblocks where we can, (taking) things out as quickly as possible. I think not only – I think there is great opportunity there.
Operator: Anthony Diclemente, Barclays.
Anthony Diclemente - Barclays: I have one for Patrick and one for Larry. Patrick I just wanted to ask about CapEx. I think you mentioned in your comments that data centers and other network infrastructure was lumpy and responsible for the doubling of CapEx. I'm just wondering, I am not sure from an accounting perspective what the useful life is on some of those investment and whether or not the amortization of those assets is part of what's causing a little bit of the uplift in operating expenses? So we had love to hear, a little more about CapEx. Then Larry, as Google continues to invest for future growth, I just wanted to ask how do you as a leader of the Company ensure that the people at Google and your employees keep the kind of small entrepreneurial culture that that Google had and was known for in its earlier days?
Patrick Pichette - SVP and CFO: So let me jump in on Anthony on the first part and then I will let Larry answer the second. We don't give the details of the different categories of depreciation by – for our assets. But you can imagine that as we build these the data centers and the computers, clearly data centers have a long lifetime because if you think of them as land or electricity power, building shelves, cooling towers all that technology has much longer useful life. Then the computers themselves, the machines, the servers have a much shorter lifetime and we track all these by categories, obviously. Clearly there is a relationship between that and our depreciation rates that have been – between that – that have been climbing over the last few quarters but there's nothing magical about it as well. I mean it's just basically what you had expect by category. On the second question, I will let Larry answer it.
Larry Page - CEO: Yes. It's a great question I think. I think I'm very, very excited to see – I mentioned Project Loon or the automated cars. I think a lot of us making sure that our employees and Google as a Company has permission to do important things and those things always start with a small group of people. They start with one or two people and then 10 people and so on, and those people can get a lot of things done. So I think probably I will measure out the Company in that way is, we are able to start up new and important things and make traction on them, and that's the only way we end up with things like Android and Chrome. Those were once those kind of projects. So I look at it as kind of a portfolio thing. There are some number of people that like to work on really crazy things that are going to really change the world and want to deal with (10) other trends and work hard on them and kind of make sure we're creating those opportunities and growing them into things that become Gmail or Android or Chrome or things like that. So I kind of look at it across the portfolio and I think we're doing quite well and I'm pretty excited about it.
Operator: Mark May, Citi.
Mark May - Citi: The first one, I'm wondering there was an expectation I think starting this quarter that we'd start to see some of the impact of Enhanced Campaigns and obviously you're seeing great adoption of that, and that adoption and the impact that that might have on blended prices might offset these mix factors that you referenced. I wonder, if you could help walk us through why that wasn't the case necessarily in this quarter? Then secondly, probably for Patrick, I wonder, can you help estimate the impact on the network growth in the quarter from the quality improvement initiatives and are these issues that might impact future quarters or was this mainly a first half of this year kind of impact?
Larry Page - CEO: Yes, that's a great question. I mean, I will also say maybe one sentence and turn it over to the other guys. I think it's important to keep in mind that, in Enhanced Campaigns the largest change we made in AdWords and that was done pretty quickly. So I think, are still very, very early stages of that. So we changed tremendous amounts for how our teams operate, how our advertisers operate, how everyone buys those ads, what the users see and we've done it pretty well. It's been pretty smooth which I'm really excited about. But like I said, that's the early stages of a very, very major change. I think we're very pleased with how that's going.
Patrick Pichette - SVP and CFO: So, on the second part of your question Mark. I think that you know the quality, the force for quality around our policies I mean they will take a year to flow through. I mean, once you've kind of reset the bar then it actually by the time, people will kind of adhere to these new changes, but then you have to actually navigate through the entire year-over-year effect, which will probably take a couple of more quarters. So, and that's just the timing issue. Having said that, I just want to remind everybody again that the fundamental issue that we see is, it's really important for us to actually have a great user experience and Suzan and here team kind of pounded this by making changes on a constant basis make sure that at the end of the day there is that (smart about), the quality of the user experience and the quality of the ads because in the end, that's what really drivers the benefit in the long terms. So, we have to hit – take some hits on the short-term in order to actually get the right answer in the long-term for your users and our advertisers. We're always ready to do them and that's a great example of it. So, we're actually not too worried about. We have so many other areas that we've just talked about Enhanced Campaigns, there is PLAs, there are so many other areas that offer us kind of opportunities that we just got to keep this in balance.
Operator: Heather Bellini, Goldman Sachs.
Heather Bellini - Goldman Sachs: I just wanted to follow-up on Enhanced Campaigns. I guess one of the questions people are trying to get at is, was there any impact of from Enhanced Campaigns Paid Clicks and CPCs in the quarter that you could try and help us calibrate? Then I guess the other question would be, given obviously this is still new and broad rollout this quarter, how many quarters do you think this needs to in place for you to have a good sense of the impact it might have on those metrics? Then sorry – then my last question was, anything related to the impact on FX related to CPCs? I didn't think I heard that.
Nikesh Arora - SVP and Chief Business Officer: Heather this is Nikesh. I think, and let me step back and say first of all it is – it's as Larry mentioned and Patrick mentioned, it is an existential requirement for us to take our advertisers and move them to a campaign strategy which allows us to move them across multiple screen. So this wasn't something that is just a remedy imperative, it's an imperative from a simplicity perspective, from an advertiser return perspective and also form the way our teams operate. So we have spent the last six months migrating over 6 million campaigns as I mentioned and we would probably be done by the end of this month, which is not too far away. As you can imagine that, we have been focusing on moving these things across the board. So we are still looking at the full impact, since the impact has sort of graduated over the last few months. Now in terms of what the impacts of this should be in the longer term, as I mentioned earlier, the impact in the longer term should be that we should be able to provide simpler, faster, better ads to our advertisers across multiple screens. In terms of when you should be able to see effects of these things, obviously there are effects that we see and we monitor and we take a look at. But it's for us to go out and start detailing what impacts these things are. But of course, in the long term, it should have a positive impact on conversions, and as a result, all resulting metrics that affect conversion.
Patrick Pichette - SVP and CFO: Heather, I'll just jump on your very last question about FX related to CPCs. As I said in my comments, there's actually a marginal effect. I mean, FX was not a big factor this quarter. I mean it has been a little bit for the U.K. as I mentioned, but for rest of the world, it has not been a major impact for a CPC issue.
Operator: Justin Post, Merrill Lynch.
Justin Post - Merrill Lynch: Patrick, the gross profit growth has been trailing revenue growth. I think it was about 14% this quarter for about three quarters especially. Can you talk about what's really – kind of drove the step-down last year in 3Q and is there any way to see that gap close and do you use gross profit as a measure? Do you look more revenue growth? Just some of the drivers of the difference, would be really helpful.
Patrick Pichette - SVP and CFO: Thanks Justin. Again, a topic that's for financial analysts have been always kind of top of mind, I just want to kind of reiterate kind of some of the basic messages that have not changed in how we think about this. So first of all, we care about revenue growth. We care about profitability. We care about both. I've said this before, we're not in the business to lose money or cross-subsidize or any of these things. So, regarding margins, we really look at every incremental profit dollar that creates shareholder value and really focused on these profit dollars rather than the percentage margins. Like many of the new opportunities that we may be exploring, whether it'd be hardware, whether it'd be Play, whether it'd be – many of these will have different margins in our core business, but they actually offer great kind of huge revenue pools, huge margin pools in absolute dollars, and then create much shareholder value, and in many cases, with Larry and the product area leads, great synergistic value between the products to create this great experiences. So, that's basically the mindset that we apply at it and we track them independently and together and make sure that we actually deliver continued revenue growth and profit growth. So, that's the mindset which we apply. And don't read in my comment that we are not focused on our core business. It remains our core business. The core, is the core is the core, and it continues to give us both revenue and oxygen profits to kind of fuel our growth as well. So, that's the balanced answer to your question.
Justin Post - Merrill Lynch: If I could follow-up, is there anything in that maybe operating right now at negative gross margins that is kind of in-transitory in nature?
Patrick Pichette - SVP and CFO: I wouldn't comment on a specific product by product, but it's clear, if there are timing issues, if there is a product that actually isn't in investment mode, right, and at the beginning of investment curves, you know that you are actually investing in it for the timing of future profits. We do that too. I mean you can imagine our very first customer in Kansas City, right. The P&L for that day was negative, but that's not why we did Kansas City, right. We did Kansas City because we know as the city was going to be very profitable, so there is clearly products that have because of the timing investment movements that actually show – will show negative, but not because we want them to be negative, just because of where they are during investment phase. So that's how we think about it.
Operator: Brian Pitz, Jefferies & Co.
Brian Pitz - Jefferies & Co.: Nikesh, you briefly mentioned PLA. We continue to see that format in Search and recently we noticed integrated deals and offers into that format, any additional color on the impact from PLAs in the quarter? And then Larry, regarding product search, I guess more broadly, do you think users will be able to purchase items without ever leaving the Search results page at some point? Thank so much.
Larry Page - CEO: I will take the second question first. I think to the extent and obviously we can streamline the process of doing transactions or fulfilling any task that we are getting. I think in the trial we are doing in the Bay Area (indiscernible) delivery you can buy things very easily and get them delivered in a couple of hours, that was a pretty great experience. So we definitely look at any ways we can find to really improve our user's experience. Nikesh, do you want to take over the PLA part?
Nikesh Arora - SVP and Chief Business Officer: As Larry mentioned, we are trying to get the user experience to be better and better. As we have talked in the past things are moving from (indiscernible) links to entity level search where people are searching for specific entities and they expect a response as a specific entity when they do that search. So think about PLA in the broader context, that when people search for something they had like to get that answer and this is a product that they are searching for. Of course PLA has satisfied (that performance). So we are signing up tens of thousands of merchants who want to share that data with us, who wants to make that data visible as part of Google Search We think this is a good thing. Again, as we provide more and more PLA information, obviously it has an impact on peoples clicking on those links. So in the long-term that should have a positive impact on clicks on various ad formats. But for now it's too early to talk about the impact of those with the overall numbers that we have.
Operator: Gene Munster, Piper Jaffray.
Gene Munster - Piper Jaffray: A question on the Motorola X, I know you haven't said a ton about it, but there has been some talk that you are going to be aggressively marketing that. Can you just talk a little bit about this relationship that you have between having the Motorola X phone be enough of a success that you make a statement but not enough of a success that you end up corrupting or impacting your Android partners, so talk about that relationship.
Larry Page - CEO: Thanks for the question, Gene. I think nothing about what we've said has changed and we operate Motorola independently. As you can see in the level of work that's going on there to I think to operating that business, I think teams have been doing great job as we mentioned. I think they're working hard on making great product. And I think we're really excited about it. I think they're excited about it and obviously you'll get to try it out pretty soon.
Gene Munster - Piper Jaffray: Did you feel that the, I mean, the incremental investment, is it going to be – it's been rumored to be $500 million, is it something in that range?
Larry Page - CEO: Are you talking about I guess the people have been speculating about marketing and so on. And I think that obviously we are operating Motorola independently, running it much the same way we'd run any business like that, and I think we're doing things that are normal for that business. So, I think probably too much has been made over those things.
Operator: Richard Kramer, Arete Research.
Richard Kramer - Arete Research: One for Larry and one for Patrick. For Larry, given the recent launch of YouTube subscriptions and also music services, how widely do you see Google expanding into subscription-based businesses in the future? And do you see this in three to five years as something that would be a meaningfully sized segment that would arrive on network in size for example? And for Patrick, since you've had questions about Motorola being excited about it, it is nice, but the business has lost nearly $1 billion on a GAAP basis in the last three quarters. So, can you give us some sort of timescale for achieving returns here and I know you mentioned you're just looking for absolute profit dollars, but what's the ultimate aim for Motorola in term of contributing to Google's profit base or even just to distribute more widely Google Services?
Larry Page - CEO: You asked a question about subscription services. I mean I think like we said we're all excited about the Play, music subscription are being really well received. I love using it. I think we are always looking for ways to make our user experience better and obviously subscriptions are one way to do that. So I'm sure over time we'll try to meet our users need better and have more products in that area. I don't have anything to announce this time there. On the Motorola question, Patrick, you want to take that?
Patrick Pichette - SVP and CFO: I think the Motorola question has to be put in the context of two things. One is, what we originally paid for Motorola and all the assets we acquired and the benefits we got out of that acquisition, because there wasn't on lay a short term financial play there was a number of issues. We're very pleased with the divestiture of the home business which generated quite a bit of cash over the last – in Q2. So, I think that you have to put this conversation in the context of the entire acquisition for which we're really pleased and we also are incredibly proud of what the team has accomplished in the last year and having now kind of created this great entity under Dennis, who has now kind of lean and mean with 5,000 employees focused on the future and really pounding away at the next vernation of products. So, I'll leave it to the coming quarters to kind of really demonstrate the kind of moreover that showing up and you will see that in the coming week actually. Larry, any last comments before we close.
Larry Page - CEO: Now, I want to thank everyone for spending so much time with us today and we will see you on next quarter.
Patrick Pichette - SVP and CFO: Jamie, I'll let you close the call. Thank you everybody for your time.
Operator: Thank you, sir. Again, we do thank everyone for their participation. That does conclude today's conference. Please have a good day.