Google Class A Earnings Call Nuggets: Apps Revenue Recognition and Non-Core Future Products

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

Apps Revenue Recognition

Mark Mahaney – RBC: Two questions please. First, Patrick, you mentioned this accounting change, but could you just give us a little bit more detail on what that accounting change was versus Play? Then could you talk about the TAC trends? I know this is just one part of your business, but you seem to be moving in different directions on your own sites, continuing to rise pretty dramatically, but on your network partner sites falling off pretty significantly. Can you just help us think about what that should look like going forward for both of those segments?

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Patrick Pichette – SVP and CFO: Let’s take them in row. First, on the Apps revenue recognition policy, let me explain what happened there, and I’ll use it with an example if you don’t mind. The way we did it is, we changed the revenue recognition. So, if you say you buy an app for $1 on the Play Store, $0.70 of that $1 will be paid to the developer and does not impact on our P&L. It didn’t before and it still doesn’t today. So, that hasn’t changed. In the past though, we would have booked the remaining $0.30 on a net of payments to carriers and OEM, and then booked that as gross revenue. Beginning in Q1, however, the entire $0.30 is now booked as gross, and the payments to the carriers and the OEMs are now booked on other cost of revenue. So, that’s the big change that has happened, and basically the reason why we did this is, as part – as we were looking through the second half of 2012, we were seeing – these used to be kind of immaterial numbers for us. Then when we saw through the second half of 2012, we decided to kind of tune our accounting policies and made that change in Q1. So, that’s the issue of what’s going on, on the revenue recognition. So, you’ll see the impact both on gross and then, as I said, on other cost of revenue, and then you get the net. So, on a net basis, it doesn’t change. On the TAC issue that you’ve raised, Mark then the answer is pretty simple, right. TAC has dropped overall because of the change in our ad policies that we have done through Q4 and Q1. So in pushing hard on implementation of our ad policies to the benefit of the user, the impact of that is actually that it lowered our network revenue, but it also lowered our TAC, which is tied to AdSense partners in that role. On our own Google sites, you will have noticed that it continues to grow, and it grows because mobile grows. So the volume of mobile in our mix is driving tactical up. So overall, TAC is down for the quarter as an aggregate basis. The ads policy changes have driven them down, and then our mobile for our own sites continues to drive them up. But that’s a good story, because it means mobile is really continuing to be on fire. So that’s the piece of the puzzle. Thanks for your questions, because it wasn’t that easy to understand it first, but I hope that clarifies the point.

Non-Core Future Products

Ben Schachter – Macquarie Securities: Larry in your prepared comments you spend quite a bit of time discussing the non-core future products. I was wondering, if you could talk about any changes to the amount of resources being invested in Google X and these products? Also can you tell us how you determine the appropriate size of the investments to these various teams and products? Then just quickly, separately, Knowledge Graph, just in general if you can give us an update on the progress and sort of how you measure that progress internally?

EXCLUSIVE OFFER! Take Advantage of the Tax Relief 50% Off Sale for a Limited Time. CLICK HERE for your Weekly Stock Cheat Sheets NOW!

Larry Page – CEO: I feel like every time I say anything I get this question. I think, honestly, my job as CEO is to get people to do those things. If you look at most companies, they will never do anything different and eventually they run into problems for that reason. So I think that’s a common failure mode. I think that the reality is it’s pretty hard to invest significant amounts in new things, because actually it is difficult to get people to do those things. So we have nothing to say differently about our general philosophy of 80% on our core things. I said that in my remarks basically that we’re still focused on our core products, on our big bets, and that’s currently the vast majority of our resources. We add resources to the new things as we’re able to and as they show success. But I – as an investor, I am – I as a big shareholder of Google, I’m certainly not worried about the expense of that, because I don’t think, like I said, it’s not easy to spend that much money on the new things. I’ll be more worried that we don’t do those things fast enough, and build on the revolutionary change that happens in the technology industries. On the Knowledge Graph, I think there’s been tremendous progress there. We’ve done internationalization. There’s a quality improvement and we’re improving the kind of questions we can answer, as I mentioned, about weather and other things. That happens from improvements to our Knowledge Graph, and I’m very excited about that. I think we start big investments that are still for a long time we’ll continue to see improved products there.