Good day and welcome, everyone to the Google Inc. fourth quarter 2006 earnings conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Kim Jabal, Director of Investor Relations. Please go ahead.

Good afternoon, everyone. Welcome to our fourth quarter 2006 earnings call. On the call with us today are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Operations. Eric, George, Larry and Sergey will provide some thoughts on the quarter, and then we will have Jonathan and Omid join us for your questions. This call is being webcast from our Investor Relations website. Our press release, issued a few minutes ago, is now posted on our website, as well as presentation slides that will accompany today's prepared remarks. A replay of this call will be available within a few hours. Some of the comments we'll make today are forward looking, including statements regarding possible future benefits from our partner deals; growth in our headcount; future investments in AdSense partnerships, distribution and content; costs and benefits associated with implementing our transferable stock options program; future product innovations; our expected operating and capital expenses; charges associated with stock-based compensation; possible future pressure on traffic acquisition cost rates; and our expected tax rate. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our report on Form 10-Q for the quarter ended September 30, 2006 as well as our earnings release posted a few minutes ago on our website for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. Also, please note that certain financial measures used on this call such as EPS, net income, operating margin, operating income and our effective tax rate are expressed on a non-GAAP basis and have been adjusted to exclude charges related to stock-based compensation, or SBC. In addition, we also adjusted our effective tax rate to remove certain discrete items that occurred during the quarter. We adjusted our net cash provided by operating activities to remove capital expenditures, a measure referred to as free cash flow. We report our GAAP results as well as provide reconciliations of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website. With that, I will turn the call over to Eric.

Thanks very much, Kim. Business continues to be very, very good here at Google and we are very happy to present another very strong performance from the company. In thinking about it, we're going to talk a little bit in our remarks as well as in your questions -- and thank you so very much for those ahead of time -- about a number of themes which I wanted to highlight. Global expansion of Google: it turns out that we are gaining share, according to most third-party data analysis, in almost every country. Our international businesses have contributed a significant financial component to our revenue, our profits, as well as our advertising and we expect that to continue. What is interesting is we are also beginning to develop the partnerships that are appropriate for a global company. So for example, we did our first large access deal with BSkyB in the United Kingdom in the same quarter. Our focus around new product development, 70/20/10 and the other things that we've talked about, has continued and indeed our leadership in search and ads continues; it's always wonderful. We have a much larger, higher quality search index in essentially all languages. We continue to search new types of content: books, code, patents, news archives, in all sorts of interesting new ways. We are showing fewer ads per search on a much higher quality and much better monetization. So again, the targeting and the technical work that we are doing is producing better return for advertisers, better revenue for us, with even fewer advertisements on a comparison basis. We are experimenting with new ad formats. Google is the innovator in many online products: maps, personalized home page, docs and spreadsheets and our products there. We are doing very, very well in mobile search. Of course, we have a very thorough and complete prioritization process that now allows us to understand how to deploy all these resources going forward. Another theme that occurred in the quarter which we will highlight has to do with our message around partnerships. We've been talking about this for a while. But overall, if you look, the partnerships that we announced last year are all kicking in and you are beginning to see the benefit of having such distinguished partnerships. An example of such a partnership is, of course, the YouTube acquisition which we are running now as largely a separate business, which is growing very quickly. But the OEM partnerships that we announced are also beginning to kick in. KDDI, China Mobile and other mobile partnerships are also working well for us. The transparency message that we have been pushing is working in that people understand what we are doing and want to work with us. A big priority for the company over the next while is the issue of growing the company. The long-term organizational structure, the human resource that we have managed to build, has tremendous potential, needs management focus, needs growth and training and so forth, and all of that is in place. What is interesting now is we are taking the learnings from our United States and UK sales models, for example, and globalizing those; and again, getting the leverage and the learning that we've had from these mature markets to the emerging markets. So to sum all of that up, Google is now presenting a much larger business mission. Many more kinds of end users with more information, more personalized services; many more partners, partners who use Google platforms to offer either their own services or ones branded by Google. We're talking to advertisers about using Google for all of our advertising incentives, not just text search, and that is going well. Vendors are using products like Google Checkout, which is doing well for us, and other services to speed commercial transactions. Developers are beginning to develop on top of Google as a platform play and using the services that Google provides to make amazing new products that really do change the world. Of course, in the media industries, because of YouTube and the success we're having in general, our role with respect to monetization and partnering with them is a story yet to come and one which we are very excited about. So with that, it's probably best to go directly to George to take us through the financials.

Thanks, Eric and good afternoon, everyone. We're very pleased with our performance in Q4, which demonstrated strength across Google and our network business and across the world. In addition to our solid results, we've continued successfully executing on our strategy to build an organization for the long term, with significant investments in our employees and in our infrastructure. We are truly a global company and we are scaling aggressively to meet the needs of our users all over the world. I will now turn to some details of the quarter. Gross revenues for the fourth quarter were $3.2 billion, reflecting growth of 67% over Q4 of last year. As in previous years, the fourth quarter was characterized by strong growth in traffic, primarily due to the holiday shopping season. In addition, continued monetization gains and ads' quality improvements positively affected revenue growth. Revenue from Google properties was just under $2 billion, representing 62% of total revenue, and year-over-year growth of 80%. Google properties revenue was driven primarily by healthy gains in traffic, as well as growth due to improvements in monetization. AdSense revenues came in at $1.2 billion, representing 37% of total revenue and year-over-year growth of 50%. Our AdSense business also experienced significant traffic gains, driven by strong performance among many of our larger AdSense research partners, as well as on our AdSense for Content network. In addition, ads quality changes, including enhancements to our content ads targeting system, contributed to growth in AdSense for Content. This quarter, we're going to provide some additional data on paid clicks, which include clicks related to ads served on Google, Google properties, as well as through our partners. Aggregate paid clicks grew approximately 61% over Q4 of last year and approximately 22% over Q3. Turning to Checkout, we're very pleased that Google Checkout adoption rates exceeded our expectations in Q4. I'd also like to note that our recent consumer promotions for Google Checkout during the quarter were accounted for as a reduction to both Google sites and network revenues in accordance with GAAP. Now turning to a geographic breakdown of revenues, the U.S. posted revenue of nearly $1.8 billion, driven largely by seasonal traffic gains from a strong holiday season, with particular strength in the retail vertical. International revenue was $1.4 billion, representing 44% of total revenue. Our growth in international revenues demonstrates that the investments we're making abroad, including the development of cross-functional regional offices around the world, are paying off handsomely. International revenues also benefited from favorable currency trends. Our European markets performed especially well this quarter. Germany and France in particular experienced significant strength, with solid performance in the retail vertical. The UK exhibited its typical seasonal pattern, declining modestly as a percentage of total revenues from 16% in Q3 to 15% at $469 million. The UK experienced similar softness in the travel and finance verticals, just as it did last year. We also continue to be very pleased with the growth we're seeing in our smaller European markets, such as Ireland, Benelux, Eastern Europe, and are likewise seeing very encouraging growth in Asia and the Pacific region, as well as Latin America, Australia and Brazil. Traffic acquisition costs, or TAC, were $976 million. The majority of TAC is related to the amounts ultimately paid to our AdSense partners, which totaled $916 million. TAC also consists of amounts paid to certain distribution partners, which totaled $60 million in Q4. As we grow our distribution and AdSense partner network and embark upon new initiatives like audio and video ads, we may see additional pressure on TAC rates. Turning to cost of revenue, the increases in cost of revenue were primarily driven by increases in depreciation expense related to our data centers. Going forward, we anticipate that other costs of sales will increase due to rising depreciation expense and credit card fees associated with both AdWords and Checkout. Operating expenses in Q4 included $134 million in stock-based compensation and totaled $862 million. These included $493 million in payroll-related and facilities expenses, which were the greatest drivers of OpEx this quarter. Non-GAAP operating profit, which excludes stock-based compensation, grew to $1.2 billion, with non-GAAP operating margins of 37%, down from 38% in Q3. Looking forward, we expect to continue investing heavily in our business. You should expect continued growth in headcount across functions and across the world. We also expect continued investments in AdSense partnerships, distribution partners and content. Changing gears and topics, in December we announced a new innovative compensation program to attract and retain the world's best talent. We currently anticipate that we will implement our employee transferable stock option plan, or TSO program, in Q2. Since all outstanding stock options will be modified to allow selling during the program, we preliminarily estimate a modification charge in accordance with GAAP of approximately $90 million in Q2 related to vested options as of the end of the quarter and a charge of approximately $160 million over the remaining vesting periods of up to about four years related to unvested options. For more details on these estimates of the stock-based compensation related to this TSO program, please refer to our press release. Before the incremental charges related to the TSO program, we currently estimate stock-based compensation charges or grants to employees prior to January 1 2007 to be approximately $621 million in 2007. Turning to a favorite topic of ours, capital expenditures for the quarter totaled $367 million, bringing total capital expenditures for 2006 to $1.9 billion. The majority of our CapEx is related to IT infrastructure investments, including data centers, servers and networking equipment. Our leadership in search and ads is a direct result of our relentless focus on building the most robust platforms for our users. As we scale, our business increasingly requires substantial computational power. In 2007, we expect to make significant capital expenditure investments. It is important to point out that the strategy of aggressively investing in our infrastructure has paid off handsomely and remains critical to our success, and we intend to follow this strategy for the foreseeable future. Now turning to cash, operating cash flow was $911 million. Free cash flow, a non-GAAP measure, which we define as cash flow from operations less CapEx, increased to $544 million. Our tax rate was affected by two discrete items. Last month, we entered into an advanced pricing agreement, or APA, with the IRS related to certain inter-company transfer pricing arrangements. We also realized a benefit to our income tax provision related to the 2006 R&D tax credit. Without these applicable discrete items, our non-GAAP effective tax rate for the quarter was 24%, and for the year was 26%. Without these applicable discrete items, our non-GAAP effective tax rate for the fourth quarter was 24% -- I apologize, I just repeated myself. Our effective tax rate will be greater in 2007 under the APA than it would have been without it. However, we expect our effective tax rate for 2007 to be at or below 30%. Please refer to our press release for more details. So to conclude, we had a very healthy Q4 across the company and we continue to execute on our strategy of building a great company. So now I will turn it over to Larry.

Thanks, George, and hello, everybody. I am very excited about our results for this quarter. As always, serving our users was our number one priority this past quarter. We know that when we take care of our users, the whole Google ecosystem flourishes. I'd like to first talk about search performance. Now, there's five different dimensions of search performance that I want to talk about. One is the number of current user queries, the response time, the size of index, the document update frequency, and the complexity and sophistication of the ranking algorithms. We continue to invest in a global infrastructure that supports our search system because that investment allows us to improve performance among all these dimensions. As a result, we can now handle more user queries and respond more quickly. Our index is substantially larger and is updated more often, and the system supports ranking algorithms that are more computationally expensive and deliver better results to the user. Since users are interested in many types of information, we expanded our search index to include new types of content. We added the ability to search for code in more than 40 different programming languages and indexed more than 7 million U.S. patents. Google Video search now links to YouTube content and with that acquisition, over time, we will integrate the YouTube platform with our search engine. To make this range of information more useful, we are working on integrating different types of results -- video, images, news, books and so on -- all in one place. We are now blending book results into the main index and we will add more going forward. We are excited about providing a truly seamless user experience in search. Users also value the great innovation and flexibility driven by the open standards of the Internet era. Personalized home page users are now using over 10,000 gadgets, almost all of them developed outside of Google. This is one reason why usage of personalized search grew so much. We launched Google Gadgets to your web page, so webmasters can place some of those gadgets on their own sites as well. We merged docs and spreadsheets, and adoption grew rapidly. Users are increasingly taking advantage of the collaborative powers of hosting and sharing their work on the web. Our users also need to reach us on multiple devices from any location, so mobile and global markets are an integral part of everything we do. We signed new partnership with companies such as China Mobile, Samsung, SK Telecom and Apple. We also launched a mobile application for Gmail and a GPS-enabled version of Maps with our partner Helio. Google Search now supports localized results in over 55 countries. We made improvements to our search quality across all languages and particularly in German and Japanese. Well over half our traffic and a large portion of revenue comes from outside the U.S., so we know these efforts are paying off. We opened engineering facilities in Poland, Russia, Denmark and Korea. These new offices, like our other international locations, have amazing engineers who can create new features, not only for their local markets, but for everyone else, too. Now I will let Sergey fill you in on what we're doing to support the rest of the Google ecosystem, our advertisers and partners.

Thanks, Larry. I'm going to talk about advertisers, partners and a number of improvements we made in our monetization. First of all, our ad systems. We focus not just on making money, but also on the ad quality. Ad quality has been something that we have been working on since launch of our ad system, known as AdWords Express back then, in 2002. In the fourth quarter, we continue to enhance our ad matching by eliminating ads from some of our less commercial queries while showing more ads on commercially-oriented searches. As a result, the percentage of queries that receive ads have gone down by several points, but monetization has improved. These are the kinds of improvements that we make all the time and really improve both the quality and the monetization of our system. We also released an upgrade of our landing page quality system. This removes the low-quality landing pages from our ad results and improves users' experience after they leave Google and click on an ad. This in turn encourages users to click on more ads, because they have better and more useful content when they do so. The same user-focused approach works for partners, too. Our enhanced content targeting platform for AdSense significantly improved ad relevance. This means a better experience for users, better performance for advertisers, and more revenue for partners and for Google. We also launched the custom search engines. This way, partners can embed a tailored search engine on their site that provides a richer user experience. In sum total, we paid over $3 billion in 2006 to our partners. This is a figure that we expect is going to increase as we ramp up our video, radio and print programs. Advertisers are now using our targeting platform to place brand advertising across our content network, and they're going to have more branding options as the YouTube inventory comes online. In 2006, we expanded offline ads. We rolled out audio with radio stations, and print with over 50 newspaper partners. The ability to offer premium online and offline inventory, along with the control and analytics to optimize it, puts us in a position to provide a complete sales and marketing platform for all advertisers. In June, we launched Google Checkout to give our users a better, secure, more efficient way to shop online and the feedback has been positive. We regularly survey our users to gauge their satisfaction, and we are pleased with the feedback we're hearing about Checkout. In a recent survey using third party data, eight out of ten Checkout users described their experience as good or very good. Our fourth quarter marketing investments paid off, with dramatic growth of the user base, and repeat usage stayed strong, which is a good measure of convenience and ease of use. Checkout yielded good results for merchants too, who benefited from higher conversion rates and free transaction processing. In the six months since Checkout's launch, thousands of small and medium merchants have signed up, and we now have more than 20% of the Web's top 500 retailers. That list includes ToysRUs, Linens 'n Things, Petco and Buy.com, and there are many more you can all see for yourselves on checkout.Google.com. We expect this momentum to continue as we expand Checkout beyond the U.S. and deepen integration with other products. On an even more important note, I would like to talk about our unique culture and energy that we have been not only preserving, but even enhancing since our startup days. Our new transferable stock options will help by letting us continue to attract and retain talented people. We are proud to have been selected by Fortune as the number one best place to work in 2007. Fortune highlighted the usual Googley things like our free food, beanbags and lava lamps. But what is not apparent from the outside is the set of rigorous systems and processes that we use to manage our growth while maintaining this entrepreneurial zeal. As we grow in size and expand to new locations, we never forget that we are global citizens entrusted with taking care of users worldwide. I look forward to taking your questions. For now, it is back to Eric.

Well thanks, Sergey. So in thinking about this and listening to the folks, a question that comes to mind is, what is the key to our success? I think it is search. Search is getting better and better as we continue to innovate across the globe. Our employee base has grown, and in a very positive way. We have a great group of engineers and developers and employees who are able to share and communicate and contribute essentially new and innovative ideas and approaches. So we are able to continue to provide the most relevant information available on the web. The strength of our ability to target this personal information continues to improve based on user feedback, better technology, et cetera, and this results in our advertisers being able to spend in the most effective way to contribute to everyone's bottom line positively. The net effect, of course, is strong revenue growth, good advertiser satisfaction and a real value to the end user. Our partnerships, of course, are growing very nicely, benefiting both our customers and partners, and everybody is getting to know us better and better. MySpace, Apple, Samsung, China Mobile, others we haven't mentioned, all doing well with many more content partnerships coming in 2007. So at Google, we are very proud to be providing access to the world's information. We are committed to investing heavily in our people, innovation, creativity and fostering new ideas for our business model and products. We are also extremely proud to continue to deliver tangible results that exceed what we believe we would be able to do, with our commitments to technology, customers, advertisers and partnerships. We will obviously continue to evolve those relationships as we need to. And our commitment is to provide the most relevant information across the board in a personalized and targeted way across any device. What you want, when you want it and how you want it. With that, thank you very much, and Kim, maybe we can go to questions.

(Operator Instructions) Your first question comes from Anthony Noto – Goldman Sachs.

Thank you very much; also, thank you for the paid click growth rates. My question pertains to that. 22% sequential growth in paid clicks, but gross revenue grew 19% sequentially. I was wondering if you could bridge the gap for us. Was price down sequentially per lead, or is that Google contra-revenues? Can you give us any clarity on that difference? Thank you.

Let me add that we are asking Jonathan Rosenberg and Omid Kordestani to join us, as we have historically. Jonathan, you are probably the expert at this.

Sure, Anthony. I will let George address the contra-revenue piece. But I think the thing that you really need to look at when you look at the sequential growth, if you really want to get a measure of price to look at the health of the industry, you need to come up with something that is like a CPI or a Dow Jones index so that you are comparing apples to apples, quarter to quarter. There are a bunch of other things that impact CPC. Probably the biggest is growth rates. In emerging markets versus developed markets, you basically have the dynamic that the newer markets have lower prices. So what that tends to do is, since they're faster growth, that tends to put downward pressure on CPC. There's another dynamic that you have in terms of Google.com, which has actually been growing faster than the other properties and has a higher CPC, so that actually puts a little bit of upward pressure on CPC. On the other hand, with that AdSense for Content, we're adding a lot of social network-type traffic in, particularly with the MySpace deal. So that puts downward pressure on the dynamic. There's also a lot of other dynamics, particularly during the holidays, where the advertisers are searching very aggressively for more keywords that can allow them to get more leads. When they do that, they tend to find some of the previously undiscovered keywords, so they get lower CPC keywords. So there's a whole combination there. There's no data that suggests that on an apples-to-apples basis, we are seeing a decline in CPCs of like keywords. So those are the other dynamics that make the equation work out with respect to the 22% versus the 19%.

Basically, we had a very good session with our Ernst & Young accounting firm and this was back a few months ago. We clearly agreed with their position that these Google Checkout transactions were going to be accounted as contra-revenue. That is the appropriate GAAP accounting treatment for it. So that is why we have shared that with you.

Could you give us a sense of the magnitude?

At this point, it's on the order of magnitude of 1% or thereabouts.

So it hurt your sequential growth by 1%? Or 1% of your total revenue?

The latter.

Thank you.

Your next question comes from Mark Mahaney - Citigroup.

I also want to follow up on Google Checkout. You talked a little bit about the cost. Can you talk about the returns you're seeing on Checkout in particularly two areas? To what extent you've seen merchants spend more with Google because of the facilitation this has had of their ecommerce business? Or what impact it's had on users in terms of their willingness to chase the badge or to look at Checkout promotions and to take advantage of those opportunities? Thank you.

I don't have data on the first of your questions, but on the latter, we know that users are drawn to Checkout badges. There are varying implementations and in some cases, as long as we make it clear enough to users that Google Checkout is there and they can more efficiently complete their transaction, we've seen substantial increases in their likelihood of both clicking on the ad and then subsequently a significant improvement on the conversion rate. Jonathan, do you want to add anything to that?

Sure. Basically the dynamic, Mark, since we are in many cases increasing the clickthrough rate for the advertisers, they're basically getting better ROI, and they're also lowering their transaction processing costs. So there's a couple of dynamics that create a pretty significant incentive for them. They're also, I think, discovering that Checkout facilitates the buying process which means more sales for them. So basically, most of them are beginning to think about Google as a sales channel rather than a marketing expense. Since what they care about is conversions, we expect that they will continue to invest in channels that help them increase their conversions. Most of the data that we're hearing from the vast majority of the partners would so indicate. I think we actually just announced today the addition of Blue Nile, so we are continuing to see very positive growth, particularly with the larger online retailers.

Your next question comes from Brian Pitz - Banc of America.

Thank you. A couple questions on mobile. You have made a number of mobile acquisitions such as Android and Dodgeball over the past year. Any information you could share with us in terms of new product launches around mobile? Secondly, thoughts on when mobile may actually be somewhat of an impactful revenue driver? Will we see anything in '07, or is this more of an '08 story and beyond? Maybe if you could even talk about the split of revenue. Is it going to be fee-based, mainly advertising we understand, but do you foresee any fee-based revenue in there as well for content? Thanks.

It is clear that 2007 will be the year that mobile search query traffic grows substantially. Our current model is to use targeted text ads and we have evidence that the monetization of those ads is higher than in non-mobile uses. So it looks like the advertising revenue on a per-search query is likely to be significantly higher on mobile than on non-mobile. As part of that, we are investing in new categories of using mobile devices. For example, YouTube content is being used and can be viewed on mobile devices in various partnerships that we're doing. Those are as much opportunistic for us, and they're not really driving revenue yet; although in theory, you could imagine a combination of video, video advertising on a mobile phone that would have the best entertainment value but also very, very high monetization rates. We're unlikely to split it out. It's not material today in a financial sense, and more importantly, it's still emerging. We are making a significant investment in technology around mobile because of the growth rate of mobile and the ultimate scale of that business. You won't really see its financial impact until '08.

Your next question comes from Robert Peck - Bear Stearns.

Congratulations, guys. A quick question here on YouTube. Could you just maybe give us a feel for what the revenue run rate is and what was in the quarter and the margins on it? Could you comment a little bit about what Chad spoke about over the weekend, talking about revenue share? How exactly would that work with both the content owner and the publisher, even touching on audio fingerprints, and also on how you're going to stop uploading copywriting content? Thanks.

So it's really a bunch of questions about how YouTube is working. We don't break out the YouTube revenue separately. Our primary focus with YouTube right now is user adoption. We are experimenting with various advertising models. User adoption and advertising are growing very quickly. So it looks like early returns about the justification around the acquisition, the calculations that we did all look very positive to us. We are very, very, very pleased. As part of that, we are running YouTube separately. Chad, of course, is both the founder and a brilliant leader, and he has been pushing very hard for the development of a model where ultimately the people who produce the content in fact do get some revenue coming back in various forms of sharing. We don't have a formal program around that, but you should expect this year we will begin to offer such programs. So the combination of the ability to share revenue with content partners; we're doing that both with traditional partners, but also with a new emergent category which we are very excited about, who are all on YouTube. The combination of the two could ultimately be a very significant large business for us. It is too early to know exactly when. With respect to things like the fingerprinting, one of the things that we are very concerned about is we want to respect the copyright ownership, especially the ownership issues and the authors of copyrighted works. We are in development of a number of technologies that will help us there: audio fingerprinting, video fingerprinting. It's in various stages of being rolled out. That is an area of big research in the computer science community and also a significant investment here at Google.

Just on the advertising, Eric, how do you envision that? Is it more of a two-second roll? Is it a 30-second roll, or is it just a display ad near it? How should we think about it?

The true answer is we are going to experiment with different alternatives. Pre-rolls have historically not made sense, and there's some evidence that the traditional pre-rolls people have done have not worked. But we are certainly looking at alternatives and variants on the pre-rolls as well as post-roll, and also in-context advertising. The real value we found with people who have produced copyrighted work and the reason that they want to talk to us and want to work with us is we're talking to their fans. We know who those fans are, and those fans come to them for the copyrighted information and that is a highly monetizable base, and that's very attractive to the copyright holder.

Thank you.

Your next question comes from Mary Meeker - Morgan Stanley.

It is Dave Joseph asking for both of us. Can you talk a little bit about the dMarc betas that I believe wrapped up during the quarter for radio and print ads? From what we heard, they were pretty successful and that they even ended early. And I was wondering what the next steps there might be and whether this might even be a revenue generator in 2007.

Audio is one of the several new initiatives we are pursuing in the advertising area, as well as inventory acquisition. We are working hard on integrating the product functionality, the campaign management tools as well as the build out of the sales force and the partnership teams to acquire the proper amount of inventory. So again, it is early to tell on most of these initiatives their full impact on the financials, but we're making great progress with both the advertisers and the pursuit of great partnerships for inventory.

The only data that I would add is it was pretty robust in terms of scope with respect to the radio station affiliates. I believe we had over 700 radio stations in more than 200 metros in the network. So the scope was pretty significant.

Your next question comes from Safa Rashtchy - Piper Jaffray.

Good afternoon and congratulations on a great quarter. Could you talk about your partnerships? Eric, you mentioned that these are starting to bear fruit. Could you give us some additional color to help us gauge that performance? If you look at the AdSense revenue, the growth of course is very strong, but hasn't been accelerating. Where are you in terms of in your cycle in reaping the profits from these partnerships? If I can give you a quick example, last year you increased monetization and we saw some really big improvements in your Q3 results and then kind of started to slow down. So can you give us a sense of where we are in terms of the benefits you could get from these new partnerships?

Thanks for the comments. In general, we are very pleased with the broad activity we have, both in terms of direct partnerships that we established with the major content or search partners, as well as our online network. And on the AdSense search front, some of the major partnerships are really in place already worldwide. We are actively either pursuing the renewals or some of the few that we don't have, we are obviously very interested in pursuing. So I think you'll see a lot of stability there. There's actually some nice growth with some of these partners that are doing a lot of work in improving their search functionality and using either our services or their own, but using our monetization. In the case of the content, we're doing a lot to just improve the quality of the content network. So we undertook initiatives that on the one hand, improved the way we monetize the advertising on those content sites. On the other hand, the landing page quality had an impact, where it limited the performance in the network, so the two had a counteracting effect. So I think that's what you're seeing. You're just seeing stability on the search front; and on the content side, improvements in the quality is affecting that and again making it really stable instead of seeing a dramatic increase. But in terms of the coverage, we are doing really great.

We saw significant revenue growth in our revenue partnerships, non-Google.com partnerships, in the quarter and we anticipate that that will continue.

Your next question comes from Ben Schachter - UBS.

I was wondering if you could give us an update on your interest in health care. You've been more vocal about intentions there and I was wondering if you can perhaps quantify the type of investment you might make in that space, and over what time horizon? And then also, George, last year one of the few numbers you gave some guidance on was that CapEx would grow faster than revenue. I was wondering if you could quantify what to expect in CapEx?

On the health care I just want to highlight our interest in health care is primarily driven by requests we have gotten with a number of both government NGOs and commercial entities in seeing if there could be the kind of IT improvements in health care that we have seen in search on the web with Google. We view health as very important. We'd like to contribute to that. It is not something that we are thinking of as something that we're looking to drive the P&L or whatnot. It is more about what can we do to contribute to that community. It is too early to say exactly what that might be. We are still investigating where we can make the most useful contribution.

On the CapEx side, as long as we have a healthy, vibrant, growing business like we have today, we have no choice but to continue to invest in CapEx because it just regenerates more competitive advantage for us.

Your next question comes from Imran Khan – JP Morgan.

A question about your globalization. I think you get almost 75% of the revenue from the U.S. and UK. I was wondering if you could give us some sense in terms of monetization of queries difference -- if not quantitatively, maybe qualitatively -- between U.S., UK and continental Europe?

The UK has been traditionally very, very strong; in fact, in some cases, stronger than in the continental United States. We do see this odd dynamic, particularly seasonally in the UK in the fourth quarter, where they kind of have the reverse effect than they do in the U.S., and we have talked about that in some previous calls. A lot of it just relates to the fact that they plan vacations a lot earlier, so travel and also the finance vertical tend to be a little less robust. When you move to the continent, the monetization does go down modestly, but in some of the areas where the ad systems have been for at least a few years, it's still very high, such as Germany. But beyond that, we haven't really broken out any color in terms of rank order of monetization.

My general comment is that people are pretty much the same all around the world and that the differences that you see are really a function of both GDP growth, broadband penetration, the development rate of where they are in ecommerce. The UK performance has always been strong and it is probably true for many, many companies. Partly that is because of the nature of the decisions that were made five or ten years ago in the United Kingdom. There's every reason to believe that the similar structure in all of the countries that you listed, for example in Western Europe, are working very, very hard to adopt the same broadband policies, electronic commerce policies and so forth. In many of those countries we appear to have even higher market share than we do in the UK and so we should see significant positive results, as a result.

Your next question comes from Jordan Rohan - RBC Capital Markets.

It has been reported in the past, right before you purchased YouTube or made the announcement of your intention to purchase YouTube, that YouTube actually cut some deals with Universal, Sony, BMG and Warner Music Group. How are those deals accounted for in terms of content licensees? In which line of the income statement might they be? Can you give us some idea if the rumored $50 million in total amount that was reported is in the right ballpark?

We're not going to comment on specific rumors. The deals that you're referring to were done prior to the closing of the acquisition and they were accounted for in the acquisition accounting, essentially. YouTube is busy doing a whole bunch of interesting deals which we will account for in the proper way as they get signed. I would prefer that we not comment on any of the specific rumors during that time. It was important that the content deals that they did be done at the time so that we had clear issues with respect to copyright and so forth. They were very, very strategic for both us and for YouTube.

Your next question comes from Justin Post - Merrill Lynch.

Could you help us understand your view on when you extend the Google ad platform to traditional media, what are some of the advantages you provide to advertisers? Is it going to be broader reach, better measurement, some pricing advantages? What do you see as your real advantage there as you enter traditional media going forward?

Our focus is to really provide the widest reach possible, as well as the most efficient way to manage these campaigns across media. We're seeing already some of the early benefits of that. Last quarter, there were companies, our customers like Volvo, P&G and OfficeMax, as an example, that took advantage of our rich media-based advertising, both image ads and video ads. Just to give you a sense of this, one of our advertisers, Volvo, went to the content network. They created several custom channels to reach their specific target market, then they used local ad targeting, again, to refine it on a more geographic basis. With P&G, they had a very humorous and fun, click-to-play video advertising, and the fine-tuning that they could do with the online campaign at a moment's notice was really, really attractive to them. In the case of OfficeMax, they actually created a micro site in Google Video and then they syndicated their advertising to the content network through 6,000 sites. So it's really the power of this advertising platform and the publisher platform that lets the advertisers have a lot of control, take advantage of the wide audience, target it properly, and now use different ad formats, depending on their marketing objectives.

Just adding a couple of comments. If you think about accountability and an enabling measurement for radio, one of the things that we provide is real-time reports on exactly where the ad played and when it played. These are things that sound simple, but they are a pretty huge improvement over the way traditional radio reports, which aren't otherwise available until 12 weeks after the ads run had previously played out. The same thing is true of some of the efforts that we're doing in print with a bunch of the newspapers right now. It's much, much easier to bring automation and efficiency with the platform that we have and with the advertisers that we have in terms of getting the kind of a dashboard that most CMOs would like with respect to their campaign performance across all of the available media.

Your next question comes from Christa Quarles - Thomas Weisel Partners.

First, you mentioned that Asia was starting to show some measure of performance. I was wondering if you could give us the percentage of the mix of internationally? Second is more of a philosophical question with regard to YouTube in that you are keeping Google Video as a search destination; but could YouTube ultimately become your destination media brand? How do you think about that in terms of the broader context of media, and would you start getting into content or would you only see yourselves in revenue share? I'm just trying to get a philosophical view there.

On the question of the international revenue, we typically don't break that sort of stuff out. On the question of YouTube, we're pushing very, very hard for the success of YouTube as a brand. It has tremendous traction with the demographic that we care about. An awful lot of people are now using YouTube every day in their daily lives.

I think I alluded to this in my remarks, but I think we're taking our time to do the integration so that we preserve the value both of Google Video and of YouTube. We're starting to provide some integration there, but I think it is likely over time that we will continue to have both Google branding and YouTube branding. I think also there will be a lot of new things that happen in those areas and innovation. I don't think in general, we have not traditionally hired lots of people to make content. We have instead relied on getting a huge number of users to all the content in the world and in getting them to that seamlessly. I think we will still try to continue to do that.

Your next question comes from Heath Terry - Credit Suisse.

There's been a lot written in the press about the form that advertising on YouTube is going to take over time. I was wondering if you could just talk us through what your vision is for how that is going to develop?

As I indicated in my earlier question and answer, we are going to experiment with a number of such approaches. There are a couple of things that we now know. We know the people who use YouTube are very fanatical about it. In particular, if they're looking at content which is copyrighted or related to a copyrighted character, we know that that person is somebody who the copyright owner is trying to reach. So the first thing that we can do is we can connect the copyright owner with the end user. We can also do advertising ad we can do advertising both as pre-roll, post-roll, but we can also do something else: we can do contextual advertising around the content in various ways. So these are all combinations that we're experimenting with. We are encouraging copyright owners to submit content to us and then to measure how many fans, how many tremendous viewers, what that community is… that's a very, very qualified viewer. We believe ultimately, we will develop partnerships in advertising along the lines that Omid suggested, many of which are very unusual. In addition to being the list that I just suggested, there will be all sorts of ways of linking our advertising system and the advertising system of our partners so that they can do very, very interesting things with the communities that have developed around powerful entertainment characters and content.

Your next question comes from Youssef Squali - Jefferies & Co.

George, your traffic acquisition cost for the quarter was about 81% of your network revenue. That's about 300 basis points increase if you compare it to last year. I'm assuming that's the net effect of AOL, MySpace and eBay deals, among others, kicking in. Is that the new level we should expect as a base going forward? Second, can you help us understand the size and growth of your display ad business? Is it at 10% revenue yet? We have heard pretty positive feedback on it lately, particularly on the placement targeting function. So just if we can get a couple comments there.

I think Omid is probably better equipped to answer the one question. I'm sorry, what was your first question? Hello?

One moment.

Can you hear me now? Sorry about that.

We have seen TAC increase a bit, and it's all a function of the types of deals that we are doing. And there's nothing nefarious about it. It's just a trend in our business.

On the breakout, we don't really have any official breakouts from Google directly. According to a third party taking measurements on this, there's over 25% of the top 100 advertisers are now consistently running display and video ads with Google and these are some of the advantages I mentioned, just a variety of formats, the access to the way they can target different content channels to reach their audience, both domestically and globally. Really, advertisers are experimenting with this and more and more, we are in the regular CMO meetings across the world, led by the U.S. efforts and now being replicated across the world. So I'm very pleased with this performance, and we're putting a lot of resources behind it to basically be present in front of these customers and in all of our field operations across the globe.

Your next question comes from Doug Anmuth - Lehman Brothers.

You mentioned a number of drivers of monetization during the quarter, but unless I missed it, I don't think you talked about personalization. I think that is an area you started to experiment with more during the quarter. So could you talk about what you are seeing in terms of the early returns with personalizing search, and then how you view ranking there as a monetization driver going forward? Can you also give us a rough sense of what percentage of your users actually sign in when searching?

We're very excited about personalization. Actually, in my comments, I mentioned personalized homepages and so on and use of gadgets there, which we have been really excited about our growth in those areas and the usage of those products and how excited users are about them. I think we have a ways to go in really promoting those features. We're starting to really get very healthy usage. But it's not that obvious to me when I go to Google how to get to those things, and so I think we've got a lot more growth in store. Also the quality improvements we get with personalized search are also quite significant, and we're very excited about that, and then that driving more search and more monetization and so on. So I think overall, I think we're very excited about personalization. We've had a lot of significant traction in terms of users and we have a lot more opportunity in terms of promoting that very useful functionality to our huge base of users.

Your next question comes from Paul Keung - CIBC World Markets.

The third-party data suggests that the paid click international market is growing significantly faster than the U.S. So I was curious how big is that gap for you, international/U.S., in terms of the paid clicks? Is that a gap that has been widening in recent quarters?

You are referring to growth rate of advertising revenue, international versus U.S.?

No, not the revenues, but the clicks themselves.

Specifically the question is, what percentage have the clicks grown disproportionately outside the U.S.? I'm not sure I can give you the percentage there.

Just some color would be good. Relatively, how significant is the difference?

I'm not sure how much color I can give you. There's no question that we're doing very well from a market share perspective internationally. We're doing even better internationally than we are doing domestically, where we are doing very, very well. The relative growth rates are bigger internationally in the emerging markets where the ad systems are launched.

It's actually a series of compounding. The Internet is growing faster outside the United States than in the U.S. Our advertising systems are growing faster outside the United States than in the U.S. and the monetization improvements from a low base is growing faster outside the U.S. than in the U.S. Having said that, our advertising and user traffic growth are growing very well in the United States. So it's hard to know how big a gap. They are all doing well, international better than the U.S., for a multiplicity of factors.

Your final question comes from Mark May - Needham & Co.

Thanks for taking my question. In your prepared remarks, you discuss your efforts to build an ad platform that serves all types of advertisers. You mentioned radio or audio, print and video, which most people assume you're talking about YouTube and/or Google Video. TV advertising was not specifically listed. The question is, do you see the traditional TV ad market as one that you would like to serve? If so, is the opportunity in TV advertising part of your current efforts at YouTube and Google Video? Or might TV be an opportunity that is somewhat different than what you're currently developing or pursuing at those two units?

Thank you for that final question. We have already said that we are experimenting with traditional television advertising. It is fair to say that whatever we do will be new and different from the way it is currently sold and marketed. So you should think of us as experimenting, using our targeting technology and our tremendous reach to see if we can improve what is already a good and robust business that others are in. With respect to television/radio/video advertising, there are many reasons to believe that the targeting technology that we have invented can really apply well, that people will pay, advertisers in particular, will pay much higher rates for ads that are targeted than ones that are untargeted. So for example, set-top boxes can help you target to end users and the set-top boxes are now IP addressable. So there's a lot of evidence that as we link our systems into the systems of people who are operators, we can get another leg up on targeting and ultimately provide both a more useful advertising experience for the end user and also a better advertising experience for the advertiser themselves in terms of conversion. So with that, Kim, it sounds like we should wrap up. I wanted to thank everybody again. We are very, very pleased with what is going on at Google. The systems that we have talked about, the approach that we're taking, the investment that we are taking both in terms of people as well as capital, the globalization of the business, the expansion of the business into advertising, into radio and television as was just asked, the expansion into new platforms such as mobile… the sum of those are very, very exciting and we believe will be very impactful for the company going forward.

I think that’s it. Thank you.

That does conclude today's conference.