Good day and welcome everyone to the Google Inc. Conference Call. This call is being recorded. At this time I would like to turn the call over to Ms. Krista Bessinger. Please go ahead, ma'am.

Good afternoon everyone and welcome to today's third quarter 2008 Earnings Call. With us are Eric Schmidt, Chief Executive Officer, Patrick Pichette, Chief Financial Officer, Sergey Brin, Founder and President of Technology, Jonathan Rosenberg, Senior Vice President of Product Management, Omid Kordestani, Senior Vice President of Global Sales and Operations is joining us from London today, and Hal Varian our Chief Economist. Eric, Patrick and Sergey will provide us with their thoughts on the quarter and then Jonathan, Omid and Hal will join us for Q&A. Please note that this call is being webcast from Investor Relations website. Please also refer to our Investor Relations website for important earnings related documents including our press release issued a few minutes ago along with slides that accompany today's prepared remarks. A replay of this call will also be available on our Investor Relations website in a few hours. Now let me quickly cover the Safe Harbor. Some of the statements we make today maybe considered forward-looking including statements regarding investments in our core business, traffic acquisition cost, operational efficiency and cost and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Please refer to our SEC filings including our quarterly report on form 10-Q for the quarter ended June 30, 2008, as well as our earnings press release for a more detailed description of the risk factors that may affect our results. Copies can be obtained from the SEC, or by visiting the Investor Relations section of our website. Also please note that certain financial measures we use on this call such as EPS, net income, operating margin and operating income are expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based compensation. We have also adjusted our net cash provided by operating activities, to remove capital expenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release. With that it is my pleasure to turn the call over to Eric.

Well. Thank you, very much, Krista, and good afternoon everybody. First, let me welcome Patrick, Patrick Pichette, who is of course our CFO, who is off and hit the ground running. He certainly joined us at an interesting time. Before he goes into the detail, which of course everyone is quite interested in. Let me just talk about some of the highlights. Thanks to everybody's hard work. Google had a good quarter. Traffic and revenue were both solid and we kept tight control on costs. Year-on-year, for example, search query traffic is growing in almost every vertical. We believe that these results reflect the fact that as marketing budgets are squeezed, targeted, measurable ads are becoming more valuable to advertisers. As consumer budgets are squeezed, people use the web for comparison shopping to hunt for bargains online and in stores. Regarding the economic situation, I think everybody on the call and listening understands that it is pretty clear the economic situation today globally is worse than people were predicting just a month ago. So, look at the difference in the papers. What started off as a financial crisis appears at least according to the consensus around the world, to be affecting the wider economy. When I talk to other CEOs in Europe and in America, it is clear that the economic situation is so fluid, that we are all in uncharted territory. The question is how should Google respond? Our answer, as always, is looking at the long-term, and we believe that even more today -- more important today than ever. Search, which of course is Google's core, is where we are putting a lot of our investment -- better search, better ads, [proof latency]. Our user experience is getting much better. Index size is getting much larger, greater personalization for better results globally for every user, lots and lots of language support, more highly relevant ads against as many queries as possible and using more sophisticated tools for advanced bidding and measurement and optimization. So that advertisers, who understand that advertising is directly correlated with revenue, can use those tools to maximize revenue based on the terms that they set and based on the budgets, which is what they care about. So the opportunities are more than just the search and ads. In Apps, for example, the company is going to cut IT costs and increase productivity with greater collaboration well. We are there for them. Our enterprise applications really add value there. In display by improving targeting, we deliver better and more relevant ads for users and for advertisers, agencies and publishers. The DoubleClick integration now going very well. David Rosenblatt from DoubleClick is now President of our display businesses, says it is going great. YouTube is now running 90% – ads against 90% of all the content claimed by partners using our content ID tool. We are experimenting with different advertising formats now well announced in video ads, click-to-buy and pre-roll. Geo-Mobile another core component and new opportunity for us geographically relevant in location based advertising is valuable to users in our view, who are working, developing advertising products that match ads to geographic data. We think that is a big opportunity for us. So along the way, we are going to stay very close, keep a very close eye on costs. It makes sense given everything we read in the papers and we have done that effectively in this quarter. It is the right thing to do and what I like about it. Sergey can talk about this a little bit if he likes. Sergey likes to say scarcity builds clarity. I think it is a great focusing opportunity for Google as well. To a very realistic about the macro economic climate, but we are optimistic about Google's future because we are confident about the enduring value and power of the web. Sergey will talk about this in more, but fundamentally people are moving to the internet, they are moving to more targeted advertising, are using information in a smarter way and Google is one of the significant beneficiaries of that. We fundamentally believe that users will always want information and need to communicate and advertisers will always value relevant and very measurable advertising, which of course these are Google's core strengths. So, with that Sergey maybe you would like to – sorry Patrick maybe you talk about our financials first and then we will go over to Sergey.

Thank you, Eric and good afternoon everyone. So, as Eric said a few minutes ago, we had another solid quarter despite a challenging economic environment. A few numbers: gross revenue was up 31% year-over-year to $5.5 billion reflecting healthy growth across the Google - both Google.com and our network. Google.com was up 34% year-over-year to $3.7 billion driven by steady traffic growth and AdSense was up 15% year-over-year to $1.7 billion, also reflecting solid growth across both content and search. Global aggregate paid click growth was also reasonably good goes up 18% year-over-year and 4% quarter-over-quarter, reflecting healthy growth across all major properties. We saw also steady growth in the US with revenues up 22% year-over-year, to $2.7 billion and up 5% quarter-over-quarter. International revenue also held up reasonably well, accounting for 51% of our total revenue or $2.8 billion. The UK showed some softness, but up 17% year-over-year to $776 million, but essentially flat quarter-over-quarter including the impact of the currency. The rest of EMEA performed better driven by relatively good performance in the Netherlands and Germany. Asia and Latin America were solid as well, mostly driven by relatively good performance in Brazil and China. From an advertisers’ spend perspective, we saw a combination of strong relative performance in many verticals including home appliances, apparels, jobs, but also and not surprisingly some tougher performances in others such as home financing, auto financing, and real estate as everybody can imagine. Let me turn to expenses now to traffic acquisition costs were $1.5 billion in Q3 or 27.9% of total advertising revenue. This is down from $28.4 million in Q2. AdSense TAC was $1.3 billion and Google TAC was $167 million. As we embark on new initiatives, we may see additional pressures on TAC rates going forward. Other costs of revenue they have increased $4 million over Q2 to $678 million and the largest driver of the increase was data center related costs and those include depreciation, equipment and operations. All other operating expenses totaled $1.63 billion, including approximately $269 million in stocks-based compensation and expenses related to payroll and facilities increased $49 million over Q2 to $859 million. On the headcount front, we finished a quarter with approximately 20,000 full-time employees. That is approximately 500 net new employees added in the quarter and over half of these new net hires are in engineering, and then followed by sales and marketing. We have implemented and continue to follow a disciplined hiring process in all areas of the organization, but as we have indicated in the past, we continue to invest in our core business, both in the US and internationally. In consequence of all this management expense the non-GAAP operating profit, which excludes stock-based compensation, crossed the $2 billion threshold for the first time in Q3, driving non-GAAP operating profit margins to 36.5%. As Eric mentioned a little earlier in his comments, it makes sense on the current economic environment to maintain a clear focus on operational efficiency, and cost containment and we have done so, and we will continue to do so, better positioning Google for healthy long-term growth. Let me move on to interest income and other, which was $21 million for the quarter. The primary driver for interest income, and other, are on the positive side, a very strong cash balance, $14.4 billion. The annual interest we earn on that cash is currently in the 2% to 3% range, and we also had a small realized gain on investment of $11 million in Q3. These benefits are to large extent offset by the impact of our, the rollout of our hedging program in Q3. So, in Q3, our hedging expense and related impacts totaled approximately $80 million. Please note that we amortize the cost for the time value of our cash-flow hedging programs in other income and expense on a monthly mark-to-market basis, not a straight line basis. As a result, the amount of amortized expense were recognized in any particular quarter is impacted by how much the option moves in or out of the money, as well as the underlying currency volatility. So, in particularly volatile periods, like the ones we are experiencing now, this can result in a front-end loading of expenses associated with the outstanding hedges, as was in fact the case in Q3. So clearly, currency was working against us in this quarter, but on the good news, our hedging programs are in fact working well. So, a bit more on the hedging program, our FX program should be viewed essentially as an insurance policy. Our programs are designated to protect us against future downside risk to revenue and earnings, reported in US dollars. Our largest currency exposures are the euro, the Canadian dollar and the British pound, and are now hedged and over the coming year. We will rollout incremental hedges to cover much of the remaining exposure. So, how does the accounting for all these hedging works? It is FAS 133, which is the standard in US accounting and we use FAS 133 to account for our cash flow hedging programs. FAS 133 is not a simple standard this by any means. So, it is well worth a time, to take the time to understand the basics and I encourage you to do so. We walk through some of those basics of FAS 133 in our earnings slides deck, which I encourage you to reference. It is posted as Krista mentioned on our Investors Relations site. For the impact on Q3 before hedging, the recent strength of the US dollar relative to other currencies had a negative impact of $59 million on revenues in Q3. We were able to recognize as a benefit of approximately $34 million to revenues through the cash flow hedging this quarter. So, to understand why our hedging does not offset a 100% of the negative impact of currency on revenue, it is important to remember three key factors. First, our cash flow hedges are designed to protect against a downside risk to earnings not revenue. Secondly, our Q3 hedges were made against three major currencies, the Euro, the British pound and the Canadian dollar, but not all currencies. Finally, our pound hedges were put late in the quarter. So, with that let me return to our financial results. I am pleased to report that operating cash flow remain strong at $2.18 billion for the quarter, CapEx for the quarter was $452 million. We have invested very heavily in our data centers and are continuing to do so. As in previous quarters, the majority of our CapEx was related to IT infrastructure including data center construction, production of servers and networking equipment. Because of economies of scale, however, as well as greater efficiencies in our system infrastructure and in some ways Moore's Law, we can actually do a lot more today with less, which is a positive trend for us. That said, we will certainly continue to make significant investments in CapEx in future periods. Finally, free cash flow. A non-GAAP measure, we define the free cash flow from operation less CapEx. It remains strong at $1.73 billion, up 61% year-over-year. So, in summary, our core business continues to demonstrate strength, despite a challenging economic environment, while we are focused on operational efficiency, we have and will continue to make crucial investments that are needed to drive value for our users, our advertisers and our partners. Before I hand it off to Sergey, I would like to take a moment to share with you some of my early thoughts on joining Google. So, I thank Eric for the kind words at the front end of the conversation. First, let me say that I am delighted to be here and to join this company. This is obviously a great team I am joining, and everything you hear is true. These are super smart people, tremendous integrity, positively ambitious for the company and without a doubt our great winning combination. It is a great time to join Google and it is a real pleasure for me. Yes, the financial and economic environment is going through a lot of uncertainty, but with great uncertainty also comes tremendous opportunity. I look forward for leveraging my financial and operational background to take advantage of the tremendous opportunity in front of us and lead with the team the company into the next phase of growth. With that, I would like to thank you for the time and I will turn it over to Sergey for his thoughts on the quarter. Thank you.

Thanks, Patrick. I would like to update you this quarter on many different improvements, we made across the board. Let me start with our infrastructure and I am talking about both the hardware and software infrastructure, the powers all of our services. First of all, this quarter we significantly increased the size of our index. To put this in perspective now, every four hours we index the same amount of information that is equivalent to the entire US Library of Congress. I would encourage you, by the way, how can you see this? I encourage you to search for information that might not have that many references about on the web, whether it is a neighbor or local place, something like that, and just to see how much more information we have been able to put on the index. We have also worked a lot on our performance. Particularly, we had a lot of improvements in search, especially if you use the Google toolbar, which I encourage you to do. In YouTube and also many of our Apps, especially Calendar. Hopefully you will see the improvements as snappier performance, when you come back and use these services now. We have also been working on our overall efficiency from an energy point of view and I should report that our data centers now use several times less energy than typical facilities that would house and cool the same number of computers that we would have. Next moving on, Search of course remains core to our business, and now for the second quarter in a row we have launched over 100 search improvements during the quarter, so more than one per day. This is obviously improved things for our users all around the world. Very important feature, Google suggests that we have had available in a variety of different interfaces and now is on Google.com is running in ten countries. This actually really helps users and speeds them up much more than you might expect. As you are typing a query, we will fill out what is likely the query that you might want, spelled correctly and it really significantly speeds the overall search process. We also have continue to take our other corpuses that are not just web pages, things such as books and videos, and we continue to blend more and more of those into the first page of results, across all of our domains. The numbers of these blended results has increased significantly over the past quarter. I would encourage you to try searching, for example, for Michael Phelps. You will see video of swimming and whatnot. This also is very powerful, especially when you look at video, because people think of video as entertainment, but in fact video is a very compelling reference material. It is a really good way to learn something, to really understand it. Oftentimes you will not actually think to search for video. So, for us to present it in the first page of results means people are going to get much higher quality information about what they are looking for than they otherwise would have. On the business front of course, advertising remains the vast majority of our revenue. We continued to improve our ad systems. We have updated our quality based bidding system, which helps weed out underperforming ads and gives us the opportunity to run better ads, and generate a better return on investment for advertisers. We have also made some changes to how we rate landing pages in terms of quality and we really want to make sure that when our users click on ads, they are taken to useful sites. That way, people are encouraged to click on ads in the future. In fact, on the whole, I should mention that our ads add a significant amount of high quality material to our search and we believe it they overall increase our overall search quality experience. We have also been working hard of course, on display ads as Eric mentioned with David Rosenblatt now heading that entire operation, now with DoubleClick integrated, and the various properties that we have with potential display inventory. We are really moving along and we have made about two dozen improvements to our content network over this past quarter. Just last week, we launched a new category, AdSense for games. Over 200 million people play web-based games every week. Our network already reaches almost 10% of them, just at launch. So, we are very excited about that. Speaking of display inventory, I just want to talk a little bit about YouTube. They have been experimenting with a number of monetization methods. We have now, the click-to-buy feature that you might have seen, where now if you watch a YouTube video that is either could be a user uploaded video or uploaded by, for example, a studio and now people can just click-to-buy either CD or a video or other content that is similar to that video and this is obviously a benefit to both end users as well as the publishers and presents a great monetization opportunity. I should also mention that we have launched full length videos from CBS within stream ads and that means they can be pre-roll, mid-roll and post-roll. These full length videos really take you to another level of offering completely different kind of video than one would typically expect on that site. We have also been investing a lot in geographic and local information and I am sure many or all of you have used Google Maps and Google Earth. They are really big monetization opportunity because they are such a local searches and there are many local businesses. Now we have been able to expand just a data available there, so we can provide a better end user experience by launching Map Maker to over 100 additional countries. This is our product of lets end users create and edit the maps for their own countries and regions and by doing so the users have already added over 50,000 kilometers of roads and 75,000 business listings. I should mention that an increasing percentage of our local search queries now deliver user generated maps content. We have launched Street View in Japan and Australia, and we saw significant increases in usage there. Of course free tune as now available on BlackBerries, and many Java enabled phones in addition to the other phones that already had it. It can be pretty handy, you know, when you do a search for now business or store, restaurants something like that, you can just click on the Street View and see what it actually looks like and make sure that is the place you want to go. As I mentioned before, now with the ability to do that on phones, it is very handy. Now speaking of phones, we of course had a very important announcement this past quarter, which is our new Android operating system and which is launching first on the T-Mobile G1. You can get these phones starting next week and at your T-Mobile store. I have been using mine for a few months now as my primary phone and it is been very helpful. It really integrates the Google services very nicely on the phone, it has really great web browser. You know, I am able to search and brows through my Gmail just as if I was at my desk top. The G1 is just the first of a number of phones that will hopefully be running Android. You should take note of all of the partners we have built in the open handset alliance. I would encourage you all to try it out and if it suits your need then please, by all means, get an Android phone. Moving on, we have been busy at work as Eric mentioned on Enterprise. Now we have over 1 million businesses using Google Apps. In fact, we have launched Google Video for your business as part of our Apps premiere edition. Now you may think of video like YouTube this basically for your business a last thing that might be needed in a business. In fact we have had great demand for it. Internally we use video quite a bit. We have so many internal talks that we are able to record and then the people, who miss it, can just watch it online. We have had just a great amount of demand by businesses for this. I think this will be a very compelling feature to our Google Apps product. In addition to businesses, Google Apps are increasingly being adopted by universities. Now over a million students use Google Apps just a couple of years after the launch, and we have had dozens of universities and colleges deploy Apps since the New Year just started including Indiana University, University of Virginia, George Washington, and many others. Now lastly, I wanted to tell you something I am really excited about. I am sure many of you saw, it is a launch of Google Chrome, which is our new web browser. As you know, we created a lot of web services, and an increasing challenge to us is to have a robust enough platform to be able to run those web services quickly, and reliably. Chrome does both of those things. It has incredibly fast JavaScript engine, which we are really excited about called V8. In addition, it has a process model that is much more robust. Now, if you have a problem with one tab in your browser, you can just kill that tab and your browser just keeps running just fine, whereas in the past, number of browsers if you had one tab hang you could hang the entire browser. We are continuing to improve it and we have opened sourced it entirely. So, not just Google, but the whole community is improving Chrome. We hope that it obviously continues to improve Chrome, but also it raises the bar for all browsers because we want all the web platforms out there more capable so we can more easily deploy our services. All in all, it is been a very busy quarter at Google. We have had so many announcements, launches, so many improvements; it is really hard to keep track. I appreciate all of you following it. Thank you and talk to you next quarter.

Well, thank you very much, Sergey. You are going to stay for the Q&A for a few minutes, too.

No problem.

Thank you Patrick as well. We will have Hal, Jonathan, and Omid join us and maybe we would move to questions Krista.

Yes, we are ready do queue up for questions, operator.

Thank you. (Operator Instructions). We will take our first question from Imran Khan from JPMorgan.

Hi, thank you very much for taking my question. Question about the economy and what the trend you are seeing. I think Eric, you talked about that the economy seems like weakening over the last four weeks or, so that I have been hearing the same thing. Can you give us some color like how is your business trend, July, August, versus September? Did you see the business weakening significantly in the month of September or if you can give us some color regarding what trends you are seeing in October? The second question is regarding the network revenue. Excluding TAC, it seems like network revenue growth rate decelerated quite a bit. I just try to understand that better, thank you.

Thanks, Imran. I am going ask Hal to help me here. We see fluctuations and they are more complex than they may appear; some things go up, some things go down. Obviously, it is going to change as the global financial crisis moves through. It also varies by country and by region. Hal?

Yes, I think I can give you a little color on some of the things that are being going on. As you know we do not give guidance with respect to our internal numbers, but we have a nice tool out there called Search Insights; we can take the pulse of the consumer. If you look in the last several weeks, there has been this almost obsession with financial markets. Huge increases in inquiries on money market, mutual funds, buy gold, 401(k)s, banking crisis, LIBOR, home safes. So right now, I think it is very difficult to really extrapolate from the current period where you have got this major event going on, really a once in a lifetime event. Let's all hope it it is once in a lifetime. So, it is very hard to tell what things are going to look like going forward basis.

Jonathan, do you have a view on this?

Just very quickly on the second question which I did not think Hal got to the network deceleration. , Imran, there are really two things that you want to look at. Some of it is a function of quality efforts, and the other is basically a function of deal flow in the large partners that we have that are participating. So, those are the two things that you need to look at. Our landing page quality which Sergey mentioned in his introductory remarks relates to the quality issues.

Got it. Thank you. Hal, I agree with that and hope it is a one-time event of our lifetime.

Our next question?

We will go next to Mark Mahaney from Citi.

Thanks. I wanted to ask two questions please. First has to do with the thoughts on cost, Eric. You talked about being needing to be more cognizant of cost structure in a deteriorating economic environment, and what is going to be a severe recession. Does that mean you cut back on just on operating costs, or would there be a point where you would actually delay materially major investment priorities like mobile? Then a quick question to Sergey. Could you just talk broadly about what in display advertising you think can be fixed, or what are the major innovations that could be brought to display advertising that we have not seen before? When you look at that, what do you see that Google could bring to that market? Thank you.

Mark, on the question of investments, Google has shown courage, when we need to. We also intend during this period to show very responsible management of our expenses. Patrick, do you want to talk a little bit about how you are structuring this?

Sorry, I got off mute. Yes, absolutely. I mean in these uncertain economic environments, and I think that we have seen it through to Q3 results. I think that the company is very responsible in managing its cost base to make sure that we are adapting to the environment in which we are operating. So, operational efficiencies and cost containment have been in place for couple of quarters already and they continue to do so. So, we are adapting. We are very nimble and very agile in this and we will continue to be. Regarding the second question that you have asked. Strategic investments are strategic investments and those you separate them from day-to-day operations, and every time we have a great opportunity, we are going to jump on it and as I said in my comments, the basics of CapEx infrastructures and the fundamental infrastructure for the company we are not going to stop. So, that is the balance we are striving.

Sergey, the second part of the question.

Yes, on display; I think there are certainly a lot of opportunities in display, and let's just not forget when we first got started with AdWords or the predecessors to AdWords, it took us a number of years for those things to even catch up to what then was the big dollar numbers of the display advertising and finally to show the incredible power for both advertisers and end users of search-based advertising. So I think we could see the same thing with display where it actually takes actually while to mature with the new model. One of the things what I think is very valuable for display, even though it might be more brand focused, you still really care about targeting and showing the right ads to the right end users at the right times and try to show them things they might be interested in. You might want to have a return, not be a click necessarily but just be the branding and having generating awareness. Nonetheless, you really want to reach the right people. Now another part of that is we have great measurement tools. You know what happens after people might see an ad and how might they act differently. We also have access now to a vast variety of inventory ranging from our AdSense network to a variety of our DoubleClick technologies. This can give you access to more inventory and finally, our properties such as YouTube and Orkut. So we still see this as an area that is ripe for development and innovation and we think that we can continue to create great tools for display. This includes, by the way, things like not just – we are not just talking about banner ads on web pages, includes AdSense for games as I mentioned earlier, it includes feeds, it includes video like YouTube and other sites. So, it is a big opportunity.

Let's go to our next question.

We will take our next question from Brian Pitz from Banc of America Securities.

Thank you. You announced three changes relatively recently in particular replacing minimum with first page bids I think late in Q3. Would you talk about the early impact these changes are having on the auction process? Thanks.

Yes, sure. This is Jonathan. That particular quality-based bidding effort I think was launched around the first week of September. Basically, the impact that that has is the quality score is calculated real-time on each query. So, what was happening previously was that keywords were inactive and not available based on the quality dynamic. What is happening now is there are keywords that are able to participate in every auction because we are calculating it real-time. So, it is basically allowing us to get what were previously in active keywords to compete in the auction more successfully based on the real-time calculation. That is pretty much it.

Any major impact so far that you are seeing as a – how long will it take to really work its way through?

As far as the quality announcements that we typically talk about, it is certainly one of the bigger things we did in the quarter and typically these things tend to manifest themselves in terms of their impact reasonably, expeditiously after the launch. So, I think that most of the benefit of the typical quality enhancements is real very quickly.

If you want to remind everybody that we make very – we commonly make 10, 20, 30, 40, 50 quality improvements in a quarter, these are just some of the better known ones. We are constantly tuning based on our quality testing and again globally as well.

Great, thanks.

Our next question?

We will go next to Christa Quarles from Thomas Weisel Partners.

Hi. My question is really related to the Yahoo! deal. Eric, were you surprised by the vitriol in the response from the advertisers out there? Clearly there is reality in how this thing functions versus perception. I would be curious how are you approaching the government meddling in your ability to function and operate and how are you responding as it relates to the Yahoo - Google arrangement?

Well, Christa, thank you. I will let you used the phrase meddling and I am not going to be using that phrase. When we did the deal, we understood that the deal would be both controversial that our competitors would oppose it, and they would oppose it using every tactic that they could and also that there was a proper role for the legal review process. So, we anticipated were turned out to be roughly four-month delay. Literally to give everybody time to talk about it. We are hopefully during the end of that period and we are obviously in communications with the Justice Department and the other groups that are doing it. With respect to the advertiser reaction, we have seen a balance of reactions. We have seen some large advertisers, complain. We have seen other large advertisers say that this is ultimately good for our businesses. I obviously have a bias on this question and in my view many of the complaints are based on the fact that people do not understand how the auctions really work and the benefits that auctions provide. Auctions provide really a clearing price for accurate value and because the prices in our auction are largely set by people, who can back-solve to the cost per acquisition. The cost-per-click and the revenue that we get is largely tied all together. Hal in fact wrote a blog post yesterday precisely on this issue because there has been so much confusion about it. Hal, do you want to comment on that?

Sure. We have been making a concerted effort to try to educate people more about how our model works. One thing we were bit surprised in is even people, who had been using AdWords did not necessarily understand how and why functions the way it does, so we are really trying across the Board to communicate better with all the sectors that we serve.

So, next question.

We will go next to Ben Schachter from UBS. Ben Schachter - UBS Congratulations on a nice quarter.

Yes. Thanks Ben.

In order for the display strategy to work, do you think you need to offer more inventory on your own sites or can it become meaningful just through better penetration of the AdSense network. Also on Google Checkout in the past there have been a lot of discussion around the badges and how they have increased click through rates and conversions. Seems there is less of an emphasis on that product. Does it make sense to potentially work with PayPal on moving forward. Then one last house keeping one. If you look at depreciation and cost of goods less TAC they seem to be flat quarter-over-quarter, which is never happened before. Any comments on that? Thanks.

So, you asked three questions and so Patrick you will do the third one. Omid can you and thanks Ben for that. Can you talk a little bit about display and Checkout?

Sure. Ben I am calling from London so please let me know if the voice is not getting through correctly. As far as we mentioned earlier we put a concerted effort across all the regions in our product teams and brought Dave Rosenblatt into the position with his vast experience from DoubleClick to help us really pieces all together, and bring a great focus in our execution. Simply, our objective here is that we want to marry the art of display, which is the engagement it offers with the science of search advertising relevancy and measurability. We have a lot of inventory, great inventory both across our Content Network already and across YouTube and that our goal really is to focus both on the advertisers and publishers here for advertisers, really scaling the advertising process for media planning, buying, selling, all the way to optimization and for publishers helping with increasing the yield, and that they are experiencing. We have great, great headways already in Q3. We had NBCOlympics.com using DoubleClick serving ads over 30 million unique users. In Europe, they use the platform very effectively to increase the number of transactions and reduce the cost per transaction by 33%. So, this measurability and reach is already very effective across our network and our existing properties. As Sergey mentioned a long-term focus for us to get all the pieces together and execute and grow the business. As far as Checkout goes, I think again, we continue to evaluate what is the best ways to focus and utilize the existing headway we have made. There is really nothing, really new to announce here other than we are considering how best to apply the service, going forward. We are open to all kinds of options and we will evaluate it as and we see the results.

Patrick, do you want to handle the last question?

Yes, I would just like a clarification. You said about D&A specifically or is it OpEx excluding D&A and TAC that was a question?

No, I was really looking at the depreciation and looking at the cost of goods less the TAC. If you look at those excluding stock and they are both flat quarter-over-quarter and that has never happened.

Yes, what we have done is in the first part of the year, we had been accelerated some depreciation amortization in the bunch of equipment now is flow through. That is really the core driver of that.

Thanks.

Okay, thanks. Next question?

We will go next to Doug Anmuth from Barclays Capital.

Thanks for taking my question. First one for Sergey, you made some comments last quarter indicating the coverage may have dipped too low. Can you talk about what you did with coverage during 3Q and a little bit on your updated view on that? A second one for Hal, can you just talk about how advertisers are changing their behavior and strategy in terms of keyword bidding in this environment, and what is happening with average cost-per-click and what is happening with ROIs as well. Thank you.

Sure. Hi, Doug, I can start briefly on coverage and maybe Sergey can follow-up. I think one of the things that we have probably done a better job in the last year or so, is we have done a much better job of eliminating the bad ads than we have introducing functionality that makes it particularly easy to enable, good ads. This is not really a dial that we just want to turn. We have a very clear goal, which is to show as many high relevant ads against queries as possible and there are lots and lots of queries still out there that we can do better on. We have a good list of those, particularly complicated long queries, or queries that have very diverse meaning. Queries with modifiers, for example if you look on 'Wee Games', we have ads. However, if you type in 'best Wee Games', we do not. Your plumber is not on AdWords. So, the goal is not really too explicitly we try to figure out how we get coverage up. The goal is to figure out how we add the bidding functionality, so that advertisers can serve better ads. If you are actually looking at your components of the RPM equation, which we do not really break out much. Generally you are seeing what we have said in the past, which is the coverage is in the ballpark of the historic lows.

With respect to the advertiser behavioral side, people focus on this aggregate cost-per-click measure. As we have said before, it is misleading, because it is aggregating across the entire world, and it is aggregating across AdWords and AdSense So relatively small changes in the mix can show up in that number. We do not really think it reflects the actual advertiser behavior, in a very clear way. Our experience is advertisers are willing to take all the clicks we can give them at the current CPC, and even in tough times. We think that will continue to be true because nobody wants to turn away a customer. So, we think that is actually a pretty solid number and will continue to be so and thank you.

Yes. This is Sergey. You are exactly right, that is what I know in the last quarter. I should mention that we have made progress. For example the quality-based bidding launch that we talked about earlier increased our coverage significantly and fundamentally as Jonathan says look at page of our web search results. I think we are far from the ideal set of advertisements and there are many advertisers that I think ought to be showing up certain situations that that are not for variety of reasons. So, I think there is certainly opportunity to give end users better higher quality, advertisers they are going to add their overall search quality experience.

Okay. Thank you. Thanks Sergey. Next question?

We will go next to Justin Post from Merrill Lynch.

Thanks. Now you have had a bunch of mobile phone launches. I am wondering if you can give us an update on what you are seeing on the query volumes and maybe an estimate on when that could be maybe 5% of your total volumes and then on the currency I think you said it cost you $80 million in the quarter. Is that one time as you established the hedges or this is ongoing thing that could last a few more quarters?

This is Eric. We said publicly for the last few months that we are seeing an explosion in mobile search volume. It is a lot of it has been enabled by the fact that these new sets of devices have much more powerful browsers. So, they are on 3G or E-Video networks and they have more powerful browsers and people are busy browsing. You know just an amazing amount of time. We do not show the exact numbers, but I can tell you that the compound growth rate is one of the fastest growing things in the company. Patrick, you want to answer the second part?

Yes, the $80 million was – in both Q2 and Q3 because we have launched these programs and put them in place, they are much higher than what you can expect in the future. In fact, we have got the 18-month programs mostly in place for the three big currencies I talked about and now we are going to be in maintenance mode. So, from that perspective it will be less.

If the US dollar keeps appreciating will you continue to see a revenue benefit.

As you put hedges over the long-term, yes, the answer is yes.

Thank you.

You are assuming it will or will not. So, we never know. I will say, yes, we never know, whether currency is going to go up or down. Let's move to our next question.

We will go next to Ross Sandler from RBC Capital Markets.

Thanks for taking my question, just two quick questions. First on the retail category, so eBay painted a pretty disastrous picture for ecommerce and the consumer in general last night, stating that there was a meaningful slowdown in activity beginning in August and deteriorating in the mid-October. Clearly that company is having some specific issues, but you did not mention retail as a category of weakness in your prepared remarks and judging by your numbers, especially in the US that would suggest that you are pretty well diversified. So, can you comment on the current trends in the retail category and then second on the UK?, Google changed its policy on bidding on gambling keywords this morning and it appears that those ads go live tomorrow. So, unlike prior policy changes this one was delivered with a little advanced notice, agencies got the criteria this morning, and campaigns go live right away. So, any reason for the quick rollout there? Thanks very much.

Thank you. We will have Omid, since he is in London, he will answer the second question. The first question, we have looked at what we think will happen in the next few quarters. The problem is, there is so much uncertainty now in the financial markets, in the press, and in potential government action, and so forth. It is very hard for us to give you a sense of what is going to happen in retail or any category between now and the Christmas season or over the next 12 months or so forth. Hal, you have looked at the various categories, if you want to can you give some macro comments about categories for us?

Well, when you look at the US aggregate statistics, we definitely saw weakness in US offline retail the numbers that are reported by the government. One thing that we think at Google is that when there is a recessionary environment, people are counting their pennies, they are going to be researching their purchases, looking for bargains, and this potentially has something of an upside for Google. We referred to this last time I called it the Wal-Mart effect that as people shop more carefully they are going to be researching the things they buy. So as Eric said, we do not really know what is going to happen. This is a speculative statement but we think that this effect could actually work to Google's benefit potentially.

Omid, do you want to comment on the UK.

Sure. I think to be honest with you, this is one of the benefits we have now of much tighter attention to every aspect of our international operations. We now have both Nikesh, our Head of EMEA and Tim Armstrong, Head of Americas attending our executives meetings, and they are frankly upset of policies and questions that the market had put on us, and we really are being much more responsive to these things to our sales organization and change these policies, very quickly to address to the market demands. So, I think you – we will definitely work with our agency partners and customers to make the transition as smooth as possible.

Thanks. So our next question?

We will go next to Jeffrey Lindsay from Sanford Bernstein.

Hello and thanks for taking my question. We just wanted to talk a little bit clarification on the improvement in margins. Was this due in any way to improved terms on the AdSense deals or was it primarily expense control? If it was expense control was that really through avoided hiring or was there actually any staff reduction? Thank you.

I can answer on the expense side. Across all categories of expenses, people have been very diligent over the last 90 days and I can – and on the specifics of hiring, I mean, we have continued to hire. We just hire in many areas. We are continuing to hire because we have a lot of needs and then what we are doing is just doing responsibly. So there – we will continue to hire, that is why you see the net improvement in headcount but it is truly broadly across all categories of expenses that we are focusing let it be AdSense, it covers it.

I am not aware of changes that would – on the ad or ad partnership side that would result in margin change. Omid?

No.

Okay. The next question?

We will take our next question from Youssef Squali from Jefferies.

Hi, thank you very much. Two quick ones; first on CapEx, if I look at CapEx this quarter, so $450 million was the lowest we have seen since Q1 of 2006. Are we at a point, well, basically the bulk of the infrastructure is already built and now any incremental is all that much smaller. Is CapEx starting to normalize? Second, a question for Sergey. You talked earlier about GeoLocal with product like Maps and Earth is big monetization opportunity, so we have talked about them for a long time and they remain opportunities. One of the issues there has been this direct access to the advertisers to the local merchant. Have you – are we any – are we closer to cracking the code on that?

Patrick, do you want to give a sense of CapEx?

Yes, with pleasure. I mean essentially, CapEx is a lumpy business in many instances. So think of data centers going up and down I mean one quarter you have it, one quarter you do not, so we are going to continue to invest in CapEx, we are going to continue to invest heavily in CapEx, so we have no plans of slowing down. What you see here is just a nature of that lumpiness. We are obviously getting better at it, so with efficiencies every extra unit of capacity is cheaper for us, so we are going to benefit back.

Were there any costs pushed out into CapEx into Q4?

No, none.

Okay.

Sergey and maybe Jonathan you want to have a look about the GeoLocal ad opportunities?

Yes, let me talk about it. Certainly GeoLocal has been a substantial source of investments on the part of our company and you are absolutely right. I think it is a really big monetization opportunity but it is going to have a pretty long bootstrap time because there are so many small businesses and you have to get them all in the loop. Technology is evolving quickly with respect to things shifting to mobile phones and some of them will have GPS now, some of them do not, some have cell ID different device and things. I do think that this is an investment that we are going to have to keep investing in for some time till we get really big payoff. I should mention we already have fairly substantial revenues from geo local, so it is not the case but somehow this is I mean this is a good chunk of our business and I expect that when we do finally bootstrap lots and lots of local advertisers. When there is some settling of the best user experiences for doing this both on mobile devices as well as on the desktops, I think you will see a substantial ramp there.

Eric, do you want me to add anything. Yes? This is Jonathan. The biggest thing I would reinforce from Sergey's comments is, this is an area where we are winning. Maps is the most popular mapping site in the world. We have got all sorts of data now for over 160 countries. We are also doing some very exciting things in terms of ramping our ability to get data for areas where there are not very good maps, where we are harnessing the power of users to enter information in. On the local side, what we are doing really goes beyond the traditional Yellow Page types of activities and I mean we are taking all the information that a business would want or a user to see; reviews, hours of operations, photos, web results, and we are embedding all of those on to these maps which have a great deal of traffic. So, if you just run a query, steakhouse in Chicago or something like that and when you click on the map and select a particular listing, you can now do things like click on Street View and actually see the restaurant. So we are very pleased with the traffic that is being driven. One other thing I would actually suggest you try one of the coolest maps applications I saw. Go to swisstrains.ch to see the precision of Swiss trains in real-time and you will actually get a visceral sense of what it is going to be like for people when all of this stuff works on their browsers and works in mobile devices.

Let’s go ahead and Krista I think we – this is – we are sure of running out of time, maybe this should be our last question. Krista Bessinger Yes, this is our last question. Please.

Our last question comes from Jeetil Patel from Deutsche Bank.

Great, thank you. Just one last question; on your AdSense syndication network, can you talk about the rollout of the quality score initiative? Is it still at first half '09 rollout or perhaps a little longer and have you learned anything around the testing that you are doing there or still tweaking that? Thanks.

So, again, you are using the word quality score. Could you just be precisely define what you mean?

The scoring index you are looking at for your syndication network, so rating each partner out there; just curious how that –how that initiative or program that you are looking at launching is progressing?

It is actually in the process of being launched. A number of partners already working with it and the plan is to get it done in early next year. Yes, so and obviously we spent a lot of time with them to make sure that their sites are done properly, our system responds properly to their query traffic and so forth.

Got it. How often will the scoring system change? Will it be real-time or will it take a month at a time or quarter at a time?

We tend to be very dynamic because these systems have feedback in them. So, as they learn, they get better at judging, what is a higher quality click and as they learn they get better and better and that is why such a nice model.

This is Sergey. Probably I think we have had this system in place for AdSense for Content for a long, long time. Now it is the extension of that into AdSense for search. These are obviously some of our larger customers that have significant implementations and we are taking our time to roll it out in a way that is have sensible for both us and them. This is something that we have been doing for a long time within AdSense for Content, now that will be applied more broadly.

So, why don't we go ahead and just finish up? I want to thank everybody for spending time. Everybody is very busy with all the things going on around the world. Thank you for our panelists and our call in today. From my perspective, there is an awful lot of stuff going on in the world, there is an awful lot of actions that we hope will be taken correctly by governments around the world, by the bankers and by the institutions that are there to make sure our systems run well. We have a duty and responsibility to run Google well. We take a long term view. We have the opportunity before us and we have the time and the patience to build a great future which is what we hope will happen for everybody. So thank you very much.

This concludes today's conference. We thank you for your participation. You may now disconnect.