Alphabet Inc - Class A (GOOGL) — Q1 2015 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to Google's First Quarter 2015 Earnings Conference Call. With us today are Patrick Pichette and Omid Kordestani. 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. 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 cover 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 innovations, 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. For more information, please refer to the risk factors discussed in our Form 10-K for 2014 filed with the SEC. Any forward-looking statements that we make are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information or future events. During this call, we'll present both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP measures is included in today's earnings press release. The press release and an accompanying investor presentation are available on our website at investor.google.com. With that, I will now turn the call over to Patrick.

Thank you, Ellen. Hello, everyone. I want to say at the outset that this quarter, Google turned in a strong performance, and this despite substantial currency headwinds. As we have all seen, the U.S. dollar has continued to strengthen, which resulted in a gross negative currency impact on our revenues of $1.1 billion for the quarter. Even after the significant benefits of our hedging program, the net impact to our gross revenue was still $795 million. If these currency trends persist, FX headwinds would obviously continue to impact our results in 2015. Now turning to our results, our gross total consolidated revenue was $17.3 billion, growing 12% year-over-year and declining 5% quarter over quarter. Without currency fluctuations, our gross total consolidated revenue growth is in fact a healthy 17% year-over-year. Despite significant FX pressure, Google site revenue was up a healthy 14% year-over-year to $11.9 billion and was down 4% quarter-over-quarter. Once again, strength in mobile search was the key driver of growth here. Network revenue was up 1% year-over-year at $3.6 billion and down 8% quarter-over-quarter. As I mentioned last quarter, our network businesses include two businesses with different growth profiles: our legacy AdSense business and our newer display and programmatic business, where the latter continues to perform quite well. This quarter, we reclassified some revenues, primarily related to double-click ad serving software from the other revenue to network revenue line. This reclassification increased network revenue by approximately $130 million in Q1 and decreased other revenue by about the same amount. The display and programmatic business, as I mentioned earlier, continued to be reflected in the network line. To see the impact of this re-class on historical periods, please see the earnings slides on our IR website. Finally, Google's other revenue grew 23% year-over-year to $1.8 billion and was down 2% quarter-over-quarter. It was driven by year-over-year growth in the Play Store, offset by declines at Nexus and the FX impact. Our global aggregate paid clicks were up 13% year-over-year, down 1% quarter-over-quarter. Our aggregate CPCs were down 7% year-over-year and down 5% quarter-over-quarter. On our monetization by property, Google sites paid clicks were up 25% year-over-year, down 3% quarter-over-quarter. Google sites CPCs were down 13% year-over-year and down 3% quarter-over-quarter. Network paid clicks were down 12% year-over-year and up 4% quarter-over-quarter, and network CPCs were up 2% year-over-year and down 11% quarter-over-quarter. As you know, we don't usually break down the impact of individual factors on the quarterly changes in our clicks and CPCs. But this quarter, I want to provide more color on what's happening within our sites, clicks, and CPC metrics so that you can better understand the dynamics of the underlying businesses that drive them. So many commentators are incorrectly assuming that the growth trends in our sites, clicks, and CPCs are primarily due to difficulties monetizing search on mobile, but that's in fact not the case. Remember that sites metrics include clicks and revenues related to ads served on Google's properties, most notably obviously, Google.com, but as well as YouTube, engagement ads like TrueView, where users choose not to skip an ad is counted as a click. While over the past year, we have seen YouTube viewership increase dramatically both in established markets and due to rapid expansion in emerging markets, and quality improvements in the TrueView ads mean that more users are choosing not to skip them, increasing the overall ad view. So this means that there is a much higher volume of TrueView ads being seen, which has been a significant driver of year-over-year growth in the numbers that you have seen in site's clicks. TrueView ads currently monetize at lower rates than ad clicks on Google.com, but as you know, video ads generally reach people earlier in the purchase funnel, and so across the industry, they tend to have a very different pricing profile than they would have on a typical performance search ad. Excluding the impact of YouTube TrueView ads, growth in site clicks would be lower, but still positive, and our CPCs would be healthy and growing year-over-year. So really, we have two positive stories to tell here today. First, as I mentioned earlier, we're experiencing real strength in mobile search, and the CPCs in our core Search business continue to grow year-over-year, so it's doing very well. Second, viewership in YouTube videos and TrueView ads are growing significantly, and YouTube's contribution to our advertising revenue continues to grow at a strong rate year-over-year. And we're really pleased with how the YouTube business is progressing. So that's the story. Turning to geographic performance, you'll see in our earnings slides that we've broken down our revenue by the U.S., U.K., and rest of the world, and show the impact of FX and the benefits from our hedging programs. So despite large currency headwinds, as I mentioned, we saw solid performance for our core Advertising business around the world. The U.S. was up 11% year-over-year to $7.4 billion. The U.K. was up 6% year-over-year to $1.7 billion. And in fixed FX terms, the U.K. actually grew 12% year-over-year. Our non-U.S. revenue, which excluding the U.K., was up 14% year-over-year to $8.2 billion, accounting for 47% of our total revenue. And in fixed FX terms, the rest of the world grew a solid 24% year-over-year. Now let me turn to expenses. Traffic acquisition costs were $3.3 billion for the quarter, or 22% of total advertising revenue. Our non-GAAP other costs of revenue was $2.9 billion in Q1, which excludes SBC. Our non-GAAP operating expenses totaled $5.4 billion, excluding stock-based compensation. As a result, our non-GAAP operating profit was a healthy $5.7 billion, and non-GAAP operating margins were 33% in Q1. Headcount was up just over 1,800 people in Q1. In total, we ended the quarter with approximately 55,400 full-time employees at Google. Our effective tax rate was 22% for Q1. Let me now turn to cash management. Other income and expenses were $157 million. Interest income and realized gains on investments offset the continued impact of expenses from our FX hedging programs. For more details on OI&E, please refer to the slides that accompany this call on the IR website. We're pleased with our strong operating cash flow at $6.6 billion. CapEx for the quarter was $2.9 billion. Most CapEx spend was related to product, production equipment, data center construction, and facilities. Clearly, our computing capacity is a strategic asset, and that's why we're investing in it. But we innovate there, just as we do everywhere else. Compared to five years ago, we can now deliver more than three times as much compute power for the same amount of power or money. Our free cash flow for the quarter was $3.7 billion. So once again, strong results in the core business as evidenced by our 17% fixed FX revenue growth this quarter and solid margin. Now I would like to turn it to Omid to provide you more specifics on our successful performance of our core and new businesses, and then we'll turn it over to questions.

Thank you, Patrick. Our teams turned in a great performance across our business this quarter. I thought I would switch up our typical format a bit this time around. So I'll quickly share some highlights, and then I want to talk more about growth areas that we are really focused on, mobile and branding. Let's start with the rise of programmatic ad buying. It's an extraordinary change for the ads industry, and I want to point out that our investments in the DoubleClick platform continue to be a big positive for us. We recently made TrueView, our skippable ad formats on YouTube, available through our DoubleClick suite, and we brought Internet-delivered TV content to our Ad Exchange through M Dialogue, a company we acquired last year. Google Play is also growing fast, connecting developers and content providers with more than 1 billion people on Android devices around the world. Developers are building thriving businesses on our platform, and in February, we announced that over the past 12 months, we paid more than $7 billion to developers. We're honored to be partnering with them. Our partner hardware ecosystem is also doing great. LG Watch, Urbain and Huawei Watch recently announced new Android wear devices, and Pioneer launched in-dash car units compatible with Android auto. Also, 10 top computer OEMs are now making more than 35 Chrome devices available in 38 countries, so there's great momentum for us. Google for Work continues to grow at an impressive pace, thanks to the addition of customers like G4S, one of the world's largest private-sector employers, who moved 70,000 of their employees to Drive for Work. Working with our partners, we also recently launched Android for Work to accelerate the general adoption of Android devices in the workplace. Business is going great in these areas, and we continue to invest to capture the potential we see for growth. Now I want to talk more about the two areas where I see a lot of opportunity for us. First, the shift to mobile, and then the trend of TV budgets shifting to digital. Mobile devices are driving the huge shift in the way people consume media. You've heard about the trends many times. Here is our point of view. As we all know, consumers reach for their phones a lot, and some of these moments matter more than others, like when people are looking for answers or making a decision about what to buy or do. For example, more than eight in ten smartphone users use their phone to research a product decision they're about to make in a store. These moments include small things like looking for a movie review and really big decisions like researching a new home purchase or figuring out what car you want to buy next. So people expect to get exactly what they want, when they want it. As a company built on intent and immediacy, that's good news for Google. Our job has always been to connect people with what they are looking for in the exact moment they are looking. Our ad products are a critical way we've delivered the right answers at the right moment, and it's something we do really well. It's often more valuable to know someone is shopping for a new SUV than it is to know basic demographic information about them. We have great opportunities in mobile with some of the most popular mobile apps including the Google app, YouTube, Gmail, and Maps, and our great Android platform. Search is also important to the mobile experience. We have retooled our search engine for mobile, providing direct answers and enabling voice queries. It's really a delightful experience. For example, you can try opening the Google app and asking about the plot of the Godfather movie or flipping a coin, and you will be pleasantly surprised. Chrome for mobile is also a popular app with more than 400 million users, and a large number of people use it as a primary way to search the web. We continue to invest in improving the mobile web for both users and developers. In the recent Chrome release, we made it easier for users to add their favorite sites to their phones' home screens and get helpful opt-in notifications from sites they visit often. We've also been working to index apps just as effectively as we index web content. We now have 30 billion links within apps indexed, and if you're looking for information that lives within an app that you don't have, we'll now begin showing links to install the app right under the search results page. The Google app on Android can also keep you up-to-date by servicing information from more than 40 different apps when it's relevant, like Pandora music recommendations on your commute or a car request when you arrive at the airport. We are also working very hard to make our products more accessible to the next billion people who are coming online. The first computing experience for these users won't be on a desktop machine or a laptop; they will be on a mobile phone from day one. In fact, many of them will use a mobile device as their only computer. We launched Android One, a new family of high-quality, low-cost smartphones in Indonesia and the Philippines this quarter, making it available in a total of six emerging markets. We're also working to eliminate the barriers to access due to connectivity issues. For example, in countries like India, where a user might have a slow wireless connection, we can deliver a fast-loading light version of search so they can get their answers quickly and pay less for data. And with the Chrome app for Android and iOS, our data compression features help reduce data usage by up to 50% while browsing the web. There’s tremendous upside to these efforts, and we're in a great position. I'm also very excited about how we're helping marketers succeed in this mobile world. As I mentioned earlier, we're connecting brands with the right people at the precise moment when it matters because of our strong, intent signals. Mobile also enables us to help drive the 90% of commerce that still takes place offline, which is a massive opportunity that our partners are really excited about. People are searching on Google for things like 'near me,' 'closest,' and 'nearby' twice as much as they did last year. Our local inventory ads are a great way for businesses to drive purchases in stores right when people are looking for local options. We also help advertisers better measure the store visits that their digital ads drive, and we recently expanded these capabilities to advertisers in new countries. Our ads are also driving people to download apps precisely when they are looking for them. Our mobile ad network offers great targeting and reach and is the foundation of our app install offerings. Last month, we also introduced ad promotion video ads and extended app install ads to our mobile Google display network, which increased install volumes for early testers by an average of 28% without impacting cost for install. We also recently began testing sponsored search results within Google Play with a small set of users and developers, helping app developers reach valuable users directly within the store. So I am very excited about the mobile future, and marketers are, too. Our pivot to mobile has great momentum and is delivering strong benefits to users and advertisers. I also feel very excited about the trend of video content and TV budgets shifting to digital. YouTube is the world's most popular video service on all screens, with hundreds of millions of hours watched on YouTube every day. The place where 1 billion people come to watch video is a natural home for video advertising budgets. When people come to YouTube, they come with the intent of watching video, so it's the perfect time to reach them with a video ad, not when they are distracted by something else. More and more, brands are seeing the value of reaching audiences on YouTube too, with the number of TrueView advertisers growing by 45% in 2014. YouTube drives great results, and we can measure the impact. We have run over 6,000 brand lift studies to date across some of the largest brand advertisers, and in studies we have run for Google Preferred campaigns, we found that 94% of the campaigns we studied drove a significant lift with an average of 80% in ad recall. That's why we're bringing it back this year and expanding it to more than 10 new markets. Google Preferred is also attracting some of the biggest TV advertisers to YouTube. More than 30 major brands that have never advertised on YouTube before signed on with Google Preferred and saw such great results that they have continued to advertise with YouTube afterward. YouTube is home to great content and engaged audiences, and we're seeing the natural shift of TV budgets. So those are some of my observations on the trends affecting our business, what I'm hearing from partners, and why I'm upbeat on the opportunities ahead. You will see a lot more at our Brandcast up-front in Europe next week at the AdWords Performance Summit in early May and our I/O developer conference in late May. We look forward to seeing you there. Before I go, I want to thank all the Googlers worldwide for a great quarter, and I want to say a special thank you to Patrick, who has been our fearless CFO for almost seven years and who wrote one of the most heartfelt retirement notes I've ever seen. If you have read it, you'll know that he was inspired to move on after climbing Mount Kilimanjaro. I've since then traveled to Kilimanjaro for all Googlers recommending local deals near their homes. Patrick, you will be dearly missed. We wish you and your wife all the best on your new venture. Thank you. And if Ruth, if you are out there listening, we can't wait to begin working with you soon. Thank you.

Thank you, Omid, and absolutely true for Ruth as well. Candace, why don't you give us the instructions to turn on the Q&A?

Hi. Thanks for taking my question. I have two questions. First, our research has suggested that many or maybe most mobile websites and mobile apps are still in pretty bad shape when it comes to user experience and conversion. I think one can expect these to improve over time. The question is, is an improvement in conversion rate and experiences within mobile apps, where users transact good or bad for Google? One could argue that people are going to spend more time in apps, transacting apps and not search. How should we think about that? Secondly, it's been more than two years since when we've seen the capital intensity very high. It continues to be quite high with $2.9 billion of CapEx. Is this the new normal? Is that what should we expect going forward? Thank you.

Omid, do you want to take the first one? I'll take the second one.

Sure. Thank you, Carlos, for the question. We are actually very excited about improvements of these mobile websites. And we really are happy to see where we can deliver the best answers to our users, whether it be through an app or whether we find it on the web. We're working with developers, webmasters, publishers really to serve their content to users in the format they feel best and we also recently introduced this Install App Carousel, which is evidence of that effort. So it's really about delivering the right results for the users and the less friction you have there and the more targeted you are, we'll see the benefits in monetization. On the other side, Carlos, on the CapEx side. We are far from surprised by these numbers internally. Part of our plan, we are shifting as you know, we've been building a lot of data centers over the last 18 months. And so that is actually giving us the opportunity to put in new equipment in. And we are jumping on the opportunity, thinking through the total cost of ownership of these things and the much higher efficiency of these new machines. Having said that, I won't comment about future, but I just want to reemphasize that we are not surprised by these numbers. To us, actually, they make sense given our strategy. And they really fuel all the innovations that we have going for us. So it's an important part of our strategy. It's a strategic asset.

Thank you.

Thanks, Carlos, for your question. Candace, let's go to our next question, please.

Thanks, Patrick. Thanks for all the additional color on the paid clicks and the CPCs. So just so we step back a little bit because there are many of us who thought it really was driven mostly by mobile. Is there a point to your assertion that these major shifts that we've seen over the last two or three years in CPC pressure have really largely been driven by YouTube TrueViews and the adoption of that? Is that kind of the point you're making? And if you would – in the past, you always listed the factors that would cause the shifts in paid clicks and CPCs. Could you just check off what the other items are and put them in order of priority? What's moving those two wheels? Thank you.

Yes, Mark. Thank you for your question. And in fact, that's why I made the comments I made today. I'm just talking about the situations as we have it now. I'm not looking back to prior years, I'm just saying what we have seen in this quarter and the last quarter. We're just seeing a real acceleration at YouTube, and that's why we thought it was important because we saw this change. From the fundamental strong performance of YouTube, both in terms of its coverage and in terms of performance, like even the TrueView ads, right? We tuned these ads to make sure that people want to watch them so that they are very effective, and when they do, then people watch a lot more of them. And so over the last quarter, over the last couple of quarters, we've seen a real takeoff, and the geographic expansion is giving us a lot more coverage. So it's a real positive story for YouTube because we see it now, we're reporting now. So it's not a view back to the last five years at all. I just wanted to clarify that. So thank you for your question.

Okay. Thank you.

Candace? Let's go to our next question.

Thanks for taking the question. Omid, I was hoping you could drill down a little bit more on the mobile search changes that are taking place. Talk a little bit more about what you think the key factors are here and the key differences, and whether that impact is an actual result of monetization. And then, Patrick, just on the margins and costs in the quarter, non-GAAP operating margin is basically flat from a year ago, so trying to understand how much you think that was a factor of one-time items a year ago, or a change at all in terms of your view on cost discipline within the business? Thanks.

Thanks, Douglas. So with mobile phones really becoming such a primary way people search the net, our goal is really to help people search, find the content that's not just relevant and timely but also really easy to read and interact with on these smaller devices and smaller screens. And it's important to note that this is just one of over 200 signals we use to evaluate the best results. Non-mobile friendly sites won't disappear from the mobile searches. They'll still rank high if they hold great content that the user wants. But the lack of mobile friendliness is a problem for web publishers because that leads to abandonment of the websites, and that's a real issue. So it's really early to speculate exactly on how the monetization impact of these organic algorithm changes will be. But we always start with the user to deliver the right answer, the best answer, be it on the mobile web or the app. And we think that ultimately that's good for publishers, advertisers, and our users and that monetization success will follow.

Great. And so, Douglas, on my side, if you look at it, I mean, we're really pleased with Q1. If you look at the operating profit of the company, right? Despite the Q4 to Q1 revenue trends that are always seasonal, we delivered essentially the same $5.7 billion of non-GAAP operating profits for the quarter. So we're really focused on our sequential performance rather than what happened a year ago, and there were no real specific one-time items in this quarter. This was a pretty clean quarter. We're very happy with it. Thank you, Douglas, for your question.

Thank you.

Candace, let's go to the next question, please.

Great. Thanks for taking my questions. Just go back to your comments on splitting YouTube out from the CPCs and paid clicks, you mentioned paid click growth would be lower excluding YouTube. Would you be willing to help us understand that growth rate – what looks like now, what it looked like a year ago? And on the CPCs, you mention that search CPCs continue to grow. Is that true even including migration into emerging markets where CPCs are lower and in the shift towards Mobile?

So we don't – look, what I wanted to do today is clarify the issue between YouTube and our .com properties rather than to go into all of the details. You've seen in my notes of my comments that the impact of TrueView and site CPCs would be growing, right, if you kind of take out the TrueView ad impact. And I've also noted that mobile search is continuing on the path of strength. So from that perspective, what I wanted to make sure of is that you get the color that if you just exclude the great growth of YouTube, but it has very different fundamental dynamics, that the core of what is typically search performance both on Mobile and Desktop combined is doing really good, and the CPCs would be growing if you take the effect out. So that's really what I want to make sure of, so people don't continue to hound on this issue. It's not more about mobile having terrible monetization. In fact, there's a good story there, too. Thank you for your question.

First, Patrick, congratulations on a great run at Google and enjoy the future bike rides. A couple of questions. Can you talk about how you think Google Wallet needs to evolve to better compete with ApplePay and others? Are you beginning to see acquisitions in that space or will it be more organic? And then Patrick, any updated thoughts on how Google is viewing its cash balances? Are you going to return some of that cash before you leave? Thanks.

The easy answer is really for Omid, so let him take that one and then I will talk about the cash issues.

Sure. On ApplePay, again, I think it's just really great that the industry is really opening up here and that the merchants, the banks, and consumers are all starting to experience this. Our focus is really to bring this set of new APIs for payments called Android Pay, and our goal has always been to remove much of the friction that our users encounter today in their everyday shopping experiences. So we're excited about what the industry is doing here and what the user adoption will be, and we're working with all the partners to put all the pieces together and finally create the momentum that we are all looking forward to benefit from.

And on my side, Ben, I have no news on the cash issue. I will just reiterate what I've said many times, because I think that not only is it true, but it's important that we bring this issue to the attention of the audit community, the board; there are regular debates about this issue. And it's a balance between cash being a strategic asset and then the question that we ask ourselves also in our conversations and deliberations is do we have a pipeline of opportunities that would make us believe that we would actually invest this kind of money, and in that sense, it's very clear that the debates we're having will continue, but we have no further updates for you on that issue.

Good luck in the future.

Thank you, Ben. We'll go to our next question, Candace.

Great. Thank you for the question and congratulations, Patrick. I just wanted to follow up on your YouTube comments earlier. You talked about the growth you've been seeing in particular over the last couple of quarters. I'm just wondering when you are talking to advertisers, kind of what's changed over the last year or so that you really think has caused this acceleration and kind of click volume that you are seeing, and how do you think about that gap and the potential for that gap to close over time with what you see in just traditional site CPCs, if you will? Thank you.

So I'll take the technical side of it, and then I will let Omid give you more color on what's exciting at YouTube. Related to the question, and the answer I gave you, the comments I gave you today, it's really about coverage rather than the new product because we've done a lot of geographic expansion of YouTube, and that in itself gives you a lot more volume in terms of eyeballs. And in addition to that, we've done great work with the AdWords team and the YouTube team to make sure that TrueView is a more efficient product, where people actually want to watch the entire ad, and so they don't skip the four to five seconds. Given the scale of YouTube today, all you need is to have a product that people want more, and it actually delivers a lot more value. So in terms of total advertising revenue, the fact that it's at the top of the funnel clearly has very different dynamics compared to very specific performance-based ads that are tied to specific high-margin queries. But that doesn't mean that it's not incredibly useful for advertisers because that's where they start, at the top of the funnel. So these are all the pieces of the puzzle that we have going for us. And for what's really exciting about YouTube, I will let Omid comment on this.

Hi, Heather. First of all, I invite you to come to Brandcast next week. I'll be there in New York, and you'll get a sense of the momentum in YouTube. But really, the way we look at it is as usual, we first look at the users. One third of all people on the Internet are using YouTube every day to watch hundreds of millions of hours. This is generating billions of views. When we look at our advertisers, they want to be there. So we're seeing strong growth in TrueView with new advertisers. The number grew 45% in 2014, and all of the top 100 global brands have run TrueView ads over the past year. As they are experiencing success, for example, with Google Preferred, 95% of the preferred campaigns we studied drove a significant lift, averaging 80%. And more than 30 brands that were new to advertising on YouTube used Google Preferred, and then came back and continued to advertise afterward. So just having great success.

So, Heather, it's a good story all-around. We are pretty pleased by it, obviously. Thank you for your question. Candace, we'll go to our next question, please.

Thanks for taking the questions, and I will echo the sentiment, congrats, Patrick on the decision, and best of luck going forward. My question is more around mobile. I appreciate all the color around the clicks and the CPC, but maybe you could talk a little bit either qualitatively or quantitatively about the way in which mobile advertising, especially search, is evolving over time and whether some of the gaps that we used to talk about one or two years ago are starting to close in terms of monetization, whether dictated by screen sizes or people getting more comfortable. Or maybe some of the changes you will be making around mobile search with some of the ranking changes that we’ve seen. We’d like to get some color on how you’ve seen mobile evolve and how you see it evolving going forward. Thanks.

Sure. Let me just give you some thoughts, and thank you for this. We are very excited about this pivotal mobile, and it's really obviously a shift that started gradually and it's been very dramatic for us. If you talk to every product manager at Google and every leader at Google, they have it at the forefront of their thoughts on how to delight the users, and how to improve the experience, the same thing on our advertising front. The efforts we're making for discovery and search for information, whether in the apps or on mobile web, will help. The other aspect that will really help us is the improvements in measurements. Measuring across devices and in-store sales becomes more powerful because users can find this information, they can find it with local products. It doesn't become just about driving leaps to online retailers, it's about driving traffic to offline stores via mobile. We're seeing great adoption from retailers like Macy's, REI, and Sears. The way we will talk about this is this intent and immediacy that we are so good at, given our heritage in search. We are just applying all of that knowledge and experience we have in ads and search to improve this mobile experience and how we monetize.

Thanks, Eric. Candace, our next question please.

Yes. Can you hear me?

We can. How are you, Anthony?

Okay. How are you, Patrick? Congratulations, and best wishes on your next endeavors. A couple of questions. First, I want to ask about Maps and Waves. I mean, it seems to me like those are very strategic assets and businesses where Google has a competitive advantage. So can you just talk about the progress and user experiences with Maps and the opportunity going forward for the contribution to the business from those platforms? And then secondly, Patrick, given your telecom background, can you just please describe for us the strategy around Project Fi that was announced this week? How does that connect back to the other Google Access initiatives like Google Fiber? And maybe just talk about the longer-term vision there. Thanks.

Great. Do you want to jump in first?

Yes, sure. This is Omid. Thank you for the question. On Maps, we absolutely agree with you – very strategic, very popular, and there are more than 1 billion active users of the Google Map services. We've mapped the world, as you know, 200 countries and territories, including North Korea. 1 billion times the app has been downloaded on Android and lots of stats to go through. I think one of the things we're doing is not only to improve that experience and integrate it as much as it makes sense throughout the services, and whenever users can take advantage of the signals and the proper response from Google. The other side of this is also partnering. One of the things we're really actively doing is partnering on our Map service in native formats with as many partners out there that can take advantage of it. It's a scenario where we're really investing, we are very excited about it, and we have great traction, and we're also happy to offer it to our partners. You will see us both in terms of Maps and Waves getting integrated into other popular web services out there.

Great. On my side, look, there's quite a different rationale if you think of Fiber versus Access, which is really kind of asset-based. We just announced Fiber yesterday, so it's still very early days. It's focused on innovating and connectivity and communication but in "partnership" with carriers in the U.S. and hardware makers. We're trying to see again from users' perspective and from a service perspective, with or without assets, what should look like the next wave of innovation. We've always been looking to make the web faster, cheaper, and more available, and we wanted to try this new vision – this new idea of fast and easy wireless service, and then work with the ecosystem of our carriers, so that's why we have T-Mobile and Sprint, along with large carriers, manufacturers, and developers to develop this kind of new product, new and innovative service. So, different in the sense that Anthony, in the case of Fiber and in the case of Loon, it's really asset-based. This one is really about services and how we can use today's platforms to actually just drive for more innovation. So that's really the difference, but we're pretty excited. It will be interesting to see the take rate and it will be interesting to see how the market responds to it. But again, very much as usual, focused on innovation and pushing the envelope. Thanks for your question.

Cool. Thank you.

Patrick, bon voyage and best of luck with everything. So I'm trying to get some sense of the direction of costs involved in running YouTube? Granted, there's the revenue share component for the content owners, but then there's the everyday operating costs involved in just running the business, like engineers, bandwidth, etc. I'm wondering at this point what part of YouTube's cost base is variable and what part is fixed because it seems like your revenue is now large enough to cover the costs to serve your users and, in the aggregate, is probably not growing as rapidly as revenue. Even as we adjust for the reclassification, I guess, of the double-click to network, the Other Revenue line decelerated a bit more than we saw, so I'm just wondering if this is just due to Play indexing higher against those countries, in spite of the highest amount of FX headwinds, or did you have some sort of hardware shortage issue this quarter also? Thanks.

Okay. So let's start with the last one first, and then I'll come back to YouTube. On other revenues, yes, you're right that we have the reclass. And on the two other factors, clearly, Play is doing really well, but it is also hit by quite strong headwinds. We're very pleased with the performance of Play, but given that it has quite a large international SKU, it also kind of gets hit by headwinds of FX as well. On the hardware side, no shortage this quarter so no shortage issues versus fixed so that's been performing quite well. Again, when you look at year-over-year comparisons for hardware, last year we had the new Nexus Seven tablet that was quite popular. So you have quite a bit of noise on comparisons year-over-year. That's really been the big driver. In terms of YouTube, what I can tell you is we actually monitor the performance of YouTube for its profitability to make sure that it continues to grow profitably, and we basically manage with Susan to reinvest at the right pace, if you will. Fueling the growth where it is showing up and keeping tight in areas where we need more efficiencies. If you just want to make YouTube profitable to more users, it's very easy, right? You put on the brakes on growth, and then it just turns into a profitable business. We continue to work with attention where Susan has the carrot of, hey, as much profitability as I can generate, I can reinvest at a certain base, so it creates a great incentive for this growth and disciplined behavior that we have there. So we are pretty pleased by it. Thank you for your question, Steven. Candace?

Great. I just had two quick follow-ups from the last question, and then one for Nikesh. So, Patrick, on the operating margin question, so given the increased discipline you talked about last call, do you think this flat margin is sustainable in 2015, and if not, what would cause it to drop back down year-on-year? And then from the prior question, the new Other Revenue line was up like 23% in the quarter. I think it was like 19% or 20% last quarter. Surprising that the acceleration is in there given the FX trends. Can you just talk about is that Google Play or is that hardware between those two? And then for Nikesh, there has been some talk of Google introducing custom audience products for AdWords? Is that something you're willing to talk about and how big of a targeting feature like that could be in terms of improving our lives and increasing spend and search?

Okay. So, Ross, on my side, two points. One is on the issue of margin; you know we don't give guidance, so I can't pronounce myself for the rest of 2015. But I think that in Q1, you see a good example of what we talked about when we had those comments in Q4, which is we drive for that right balance. That right balance of you want to fuel as much as possible responsibly, the growth of we have the areas where we want to invest, and in other areas, right, we may decide we're actually looking for efficiencies all the time. You see that in our Q1 results. Just a note on the head count: The vast majority of head count for Q1 are in fact engineers and project managers. It's not G&A or sales. It's focused on engineering because that's what we wanted to put the emphasis on. I'm using this as an example of even though the numbers are large in a number of areas, there is actually a lot of science applied to every one of these numbers to make sure that we continue to drive for high efficiencies as much as we can. You may have heard that in Q1, we canceled another program we had, which was the Helpouts. This program did not prove the promises we had for it, so we actually repurposed the team and shut down the entire initiative. This is disciplined organization that looks at the facts that when it's not working, people can sense it, and then we have a good conversation about it, and then on the other side when we really see something kind of really going well, we want to make sure that we push hard for it. In the case of the second piece that you've asked, which was the growth in Other Revenue, I think Play is doing very well. We are very happy about that; yes, we're having good results on the Nexus Six, but year-over-year, it wasn't as strong as it was given the strength of the Nexus Seven last year. That’s been the big driver in good results overall.

So, Ross, on the custom audiences, we are very much focused on completing the cycle of better targeting and measuring attribution, all points of the funnel with our different products. We are not announcing any new products at this point, but we have a great number of targeting options, interest, intent, and location across all services, from performance to brand. You will see us innovate here, and continue to innovate here. Thank you.

Thank you, Ross. And I didn't mean to pick on you; we all trip over on occasion all the time.

Write down the cash on my notes. Sorry about that.

No worries. Candace, let's go to our next question, please.

Good afternoon. Thanks for taking the question. Patrick, thanks for all the color around the click information. It begs another question now, and given the frequency with which a lot of us misinterpret these numbers, and given the growing importance of brand advertising and the accompanying expansion of attribution and ROI modeling to measure impact beyond simple clicks, I'm wondering if these metrics have outlived their usefulness and whether you guys are considering a way to help us understand your success behind brand advertising going forward? Thanks very much.

Well, look, we look at this on a regular basis. I mean, we just happen to see on the YouTube side so much change in the last couple of quarters that we thought it was worth mentioning. I think it's served us well, and if we ever decide to look at different ways to look at the business and want to report it that way, we will let you know. For now, we have really no changes in the way that we report it.