Word For Word: Google Analyst Day

Google hosted a four-hour meeting on Thursday with analysts at its Mountain View, California, headquarters. The event, its second annual Analyst Day, was in the spotlight because of comments made by the company's CFO earlier this week that resulted in a sharp decline in Google shares.

What follows is a running commentary of the presentation, based on a webcast seen by Elinor Mills of silicon.com sister site, CNET News.com. Google executives on hand included CEO Eric Schmidt and CFO George Reyes, along with company co-founders Sergey Brin and Larry Page.

Also present were Jonathan Rosenberg, senior vice president of product management; Alan Eustace, responsible for engineering efforts; Kai-Fu Lee, heading up efforts in China; Marissa Mayer, product management; Jeff Huber, in ads and commerce; and Omid Kordestani, vice president of sales.

Other panellists included Nikesh Arora, vice president of European Operations; Sukhinder Singh Cassidy, vice president of Asia-Pacific and Latin America Operations; David Fischer, director of online sales and operations; Joan Braddi, vice president of search services; David Eun, vice president of content partnerships.

2:32 Conference ends.

2:30 Question: Can Google explain how to link search with traditional media and work with the ad industry in ways that media will not consider threatening? Brin: "Magazines are excited. This gives them a way to sell inventory that they couldn't sell before." Schmidt: "We're trying to bring our targeting and analytical technologies to industries that didn't have them before." That can be a significant revenue driver. Advertisers don't really want to just be on text ads and just on Google. All are amenable to higher targeting and better analytics.

2:29 Question: Thinking of becoming a domain name registry? Schmidt: "There are issues as to whether we'll become a primary domain registrar or work with others." Brin: "We'll continue to experiment."

2:26 Question: Competitive pressure on AdSense? Page: "The content-based advertising, Google's had great technology there to produce ads that are relevant. Other companies are behind Google... Google is also offering publishers greater choice about what they're promoting." Brin: "We've been able to offer publishers something new... Small publishers don't have an ad sales force. They may not want random flashy ads all over their site... That area even more so than the search area is very new, and there's room to do a much better job than we're doing today, and we will continue to invest heavily."

2:24 Question about Gmail performance: And does Google plan to do a thin client? Brin: "Gmail was born out of Larry's and my need to read email... There are certainly other services that are on the web and on the desktop that don't work as well as they could." Schmidt: "We're trying to solve the problem an end-user has in a way that's not in their existing solution... People will need ways to store all their information in ways that are different from what they do today."

2:22 Question: Can Google be trusted with users' information? Page: "All the internet companies including us have a great incentive to be trusted... There are tremendous economic reasons to make sure we are trusted. Whatever companies win in this space will be trusted by their users. We take this very seriously."

2:20 Question: Google's core business is linking people to other sites but Google Video data is stored on its servers. In the future, is proprietary data like Google Video and Google Base going to be more important to the business? Brin: "With Google Video, the company still allows the content owner to control it, post it, describe it, charge a price but at least the end-user has a good experience. Same issue with Google Base."

2:14 Follow-up question about payment system plans. Schmidt: "We do not have a broader goal to solve the general payment problem, because it's not part of our mission."

2:10 Question concerning click fraud. Brin: "We believe that's a small fraction... We think we're doing a good job on that."

2:04 Question: Google payments has been expanded to Google Base. How will it be expanded to other advertisers, like click-per-call? Is it a threat to PayPal? Schmidt: "There's been a lot of speculation. We are on the record saying that we are not intending to compete with PayPal... "It makes no sense to compete with what others are doing well... " EBay and PayPal are very good partners to us. Google's payments approach is a tactic to solve an important problem - to have an ad turn into a purchase. The quicker we can automate that - including payment, fulfilment, etc - the more sales there'll be."

2:02 Question: Seems like every time you launch a new product, it has to be taken off because of user demand. Where is the competitive advantage here? Brin: "The servers are very largely utilised. We haven't communicated as clearly about the servers (used for new products and tests) as we should have that the servers are not meant to be full production servers but to be test servers."

1:57 Question about release of censored search in China. Brin: "We are currently not planning on conquering the world. (Be careful, Sergey, said Schmidt.) On the question of China, that was an issue dear to my heart. I was born in Moscow during the Communist era... (Google decided not to censure its search results and, as a result, users often couldn't reach it because of government control.) We gradually came to the realisation to the fact that we were hurting not just ourselves but the Chinese people. Having spent time talking to people who were in Tiananmen Square in 1989 and human rights organisations... we eventually came to the conclusion that we were doing a greater disservice to the Chinese people. We'll see how that evolves. Brin: "In the DOJ case, we felt that the request was really overreaching on a variety of levels. One of them was privacy... Also, it's a question of, should we be doing homework for the government? I believe it is a slippery slope."

1:55 Question about working with Ajax. Brin: Company has had good experience with Ajax and JavaScript. There are important technical challenges to overcome with some technologies but no impediments that can't be overcome. Google tries to minimise its use of databases. For the performance critical areas, company uses its own internal solutions.

1:52 Question: What impacted fourth-quarter profits? Reyes: "The biggest issue in the fourth quarter was all around the tax rate. That's an important item and Google is focused on it but that's not an operating item. It was a very solid quarter."

Question: Why was the tax rate higher then? Reyes: "The tax rate was higher because more of Google's profits [outside the US] became taxable in the US at far higher rates."

1:50 He's joined onstage by Schmidt and co-founders Page and Brin, who prepare to take questions from the audience.

1:49 Reyes: Google is showing phenomenal year over year - growth in revenue, operating income and free cash flow operation.

1:47 Reyes: 2006 priorities: improve search quality and increase end-user traffic, improve quality of ads as perceived by end-users, build new products and services for publishers, grow overall partnerships and build systems and infrastructure of a global $100bn company.

1:45 Reyes: For distribution deals, Google sometimes offers a bounty-per-toolbar or revenue-share arrangement - looks for long-term strategic partners. Google evaluates merger and acquisition targets and looks for ones that are consistent with Google's mission, have superior engineering talent, and can help jump-start innovation. Examples: Keyhole (technology used in Google Earth) and Urchin (technology used for Google Analytics) met all criteria.

1:43 Reyes: Google not experiencing increased pressure on traffic acquisition costs. Those costs overall have been declining. But there are heavily negotiated deals and smaller deals that get done more easily. TAC as a percentage of total revenue is declining.

1:41Reyes: Google stock units are restricted stock units. Regulations have changed with regard to how they're disclosed and expensed.

1:40 Reyes: Revenue per employee is a key metric. Google's revenue per employee is double that of its competitors - $1.44m per head versus $700,000 per head for rivals.

1:37 Reyes: Operating expense drivers are research and development. Sales and marketing growth is driven by head count, office locations and toolbar distribution deals. New hires are made to scale with the rest of the business. Most of the operating growth this year will be driven by head count. We grew to 5,680 employees at the end of 2005. Expect the head count internationally to grow faster than in the US in 2006.

1:35 Chart shows that international revenue more than doubled for 2005 and for the most recent quarter. The UK contributed 14 per cent of revenue globally. More than half of clicks now take place outside the US. Google made progress in China through resellers. The company recently launched Google.cn and made great strides in Japan and Korea. It opened offices in India and Israel and has new offices in Brazil and Mexico. It's very strong in Germany, France, the Netherlands, Spain and Italy. Japan, Canada and Australia also contribute meaningfully to international revenue.

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