Google Class A Earnings Call Insights: Deceleration of Google Websites and Knowledge Graph

Google, Inc. Class A (NASDAQ:GOOG) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Deceleration of Google Websites

Carlos Kirjner – Sanford Bernstein: Two questions. Last quarter, we saw a material sequential decline of Google Website revenue’s growth rate of more than 400 bps. Even after accounting for FX, this quarter, we see another deceleration, I think of about 250 bps on an FX neutral basis in the Google Website’s revenue line. Of this in a context where YouTube is growing really fast based on your comments. So what have been the major drivers of this continued deceleration of Google Websites, and should we expect the growth rate declines going forward? Secondly, on TAC, it seems that TAC for distribution as a percentage of Google websites revenues grew less than what we had seen earlier in the last several quarters in 2012. What has driven the stabilization of this TAC, of distribution TAC, and how should we think about distribution TAC in the future?

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Patrick Pichette – SVP and CFO: Carlos, on the first one. You are right that there is a quite a bit of noise because of FX on the sites year-over-year between Q3 and Q4, but overall, I think that you we’re very pleased with the growth in around 20%. You’re right that in the last quarter there was a bit more headwinds than this quarter. But overall the core search business is doing well and driven really by the strength in mobile and we’re obviously additionally pleased with the YouTube business, particularly the watch page. So, despite the fact that there is a quite a bit of FX noise in there and that carries over — that FX noise does carry over to sites. Overall, I think that we’re very pleased with the overall growth. In terms of TAC, I think that that’s the case where obviously our mobile revenue is growing and it is having impact on our mix shift, and that’s really the fundamental trend that you see in TAC, rather than a change in the TAC rate of any particular partner. So, that’s really what’s going on there. But I think, as we said in the previous calls, we think of TAC in the way, there is a really positive story in TAC, which is it is distribution and it’s worth paying for. This is the positive side of our business having much more distribution of our apps across and that’s true also for mobile. So, we’re really thrilled that all of the mobile is thriving to the extent that it is, and remember that finally Pack is not a new phenomenon for us. I mean we have always dealt with distribution partners and will continue to experience and manage it to make sure that it drives revenue and profit for both parties in a balanced way. So, nothing new here but really excited by the trends.

Knowledge Graph

Ben Schachter – Macquarie Securities: Two questions for Larry around the notion of sort of answers not linked. The first on Knowledge Graph, can you just give us a high level view on where we are in terms of its implementation and how widely it’s rolled out? Specifically how if at all it impacts the economics of Google’s businesses? Second on Google Shopping, the PLAs and the interface changes I think significantly improved the user experience but a consumer still needs to leave the site to transact. Do you anticipate a mechanism where users can usually transact on Google Shopping without having to leave? As you said sort of no extra work needed.

Larry Page – CEO: I think that we are still – we rolled out Knowledge Graph very recently and I think we are still in the early stages of that. I think that I mentioned some of the internationalization mark that we did which is hard work. I think well we are continuing to do that. I mean like elsewhere we are still at 1% or something of where we should be. So I am really excited about what we can do in the future. I think to the economics point, I think that the way we look at it is we provide much better answers for people really grew the business. So we increased the number of times that you might want information because you know you are going to get great answers or increasing it for modality shouldn’t get answers like voice or mobile or so on. So I am somewhat excited about that and generally we monetize those things. I don’t have a comment on the specifics of that, but I think, we are quite excited about that. The Knowledge Graph does run on the right hand side where the ads also run. I expect there could be some short-term impacts on that, but I think the primary thing is getting people better answers is really good for our business. Google Shopping I guess you’re asking about product listing ads, I think that we are also in the very early stages of that. We just rolled out Google Shopping. We’ve seen tremendous uptake from merchants and from users, and I expect that the quality of the site, the ease of buying things will improve over time, and I’m really excited about that. I am not going to comment on details about that, but we are always focused on (indiscernible) experience there. So can we have our next question please?

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