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

Thank you, Operator. Good afternoon, everyone and welcome to today's fourth quarter 2008 earnings follow-up conference call. With us are Patrick Pichette, Chief Financial Officer; and Jonathan Rosenberg, Senior Vice President of Product Management. After we cover some housekeeping items, we'll open the call immediately to your questions. Please limit yourself to one question and one follow-up. Also, please note that this call is being webcast from our investor relations website located at investorgoogle.com. Please refer to our website for important information including our earnings press release and the latest slide deck. A replay of this call will also be available on our website in a few hours. Please note that we routinely post important information on our investor relations website located at investor google.com and we encourage you to make use of that resource. As a reminder, the purpose of this follow-up call is to give participants the opportunity to ask more detailed financial and product questions in an efficient and Reg FD compliant manner. Let me now quickly cover the Safe Harbor. Some of the statements we make today may be considered forward-looking and these statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to provide or publicly release the results of any revision to the 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 September 30th, 2008, as well as our earnings press release for a more detailed description of the risk factors that may affect our result. 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, operating income, and our effective tax rates are expressed on a non-GAAP basis, have been adjusted to exclude charges related to stock-based compensation. We also have adjusted our net cash provided by operating activity to remove capital expenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP reconciliations can be found in our earnings press release. With that, we're ready to take your questions. Operator?

Thank you. The question-and-answer session will be conducted electronically today. (Operator Instructions). And we'll take our first question from Jeetil Patel from Deutsche Bank.

Hey, guys. A couple of questions. I know you talked on the main call about advertisers having excess budgets to work with. Can you quantify what you have been hearing anecdotally? And, what kind of budgets are available that still haven't been spent? Is there any difference between US and maybe Europe and UK in terms of budget availability out there among some of the marketers and customers you deal with? Secondly, can you talk about depth in the fourth quarter? What have you done as it relates to depth of AdWords as it relates to Q4 relative to let's say Q3 or as a good proxy? Thanks.

I'm not sure I fully understand the second part of the question on depth of AdWords. We can maybe consider how to ask that one a little better. I'll try to address the first part. I think we mentioned on the call that most of the advertisers are not budget constrained, and the way I think one of the folks internally talked about is almost like a broken slot machine. If you're a reasonably intelligent ROI guided marketer, you are not going to tap your spending. It's basically like finding a broken slot machine that you are not going to get up from. And it's broken in the sense that every time you put a dollar in, N dollars come out where N is bigger than the amount that you paying. If that is the case you're going to want to do it 24 hours a day, seven days a week. The traditional markets you would set are quarterly daily budgets along with ROI goals. In our world, in many ways, they've sort of decided to walk away from the machine and let someone else sit down in the seat. We're not really sure why some of them choose to do that. So, fortunately, it is a minority that our budget is constrained. I'm not sure I have much color on how that differs geographically. Patrick might. On depth, I'm not exactly sure what you are asking. We talked about coverage on the call. Are you talking about ads per query? What exactly are the ads?

Yeah. Just the number of ads just serving for a search result out there. I mean, obviously, that may differ in terms of two ads versus three versus four. I guess what have you been doing in the fourth quarter as it relates to the number of results you are putting out top fold relative to quarters past?

I really don't think we go into any detail on the sort of intra ad serving dynamics with respect to the queries.

Is that one way to generate more inventory? Obviously, you've got kind of the broken slot machine concept where the ROI is still positive and working. Why wouldn't you actually open up more inventory obviously being selective and careful about it? Is that something you are constantly refining? Let's say, every month or every couple months around just yield?

We're constantly sticking with the original vision that we have for ads, which is basically trying to improve the quality and show the best ads that we possibly can. We want to really avoid showing poor ads. So we're not really thinking of it from the standpoint of, gee, we could increase yield by adding a few more ads. We're continuing to try to shelve that down.

Let me give an example on this. As we tune for quality relevance and all of the fund review that the engineer work for, you've heard that, in fact, the early 2008 level, you can imagine in a quarter where the exchange rate [changes] really rapidly in a certain geography. People will pay less for this ad and we'll need to pay less for this ad because if it's converted to US dollar it's a lot less. And all of a sudden that would have been totally fine because the change in currency may not be fine any more even though intrinsically it's totally fine in the algorithm. So, engineers spend a lot of time when they look at these wild fluctuations that we have. As an example, we make sure that all the relevant ads should be constant and the relevance they have the right cost, and then when its adjustments is [incidental], but more importantly what people want to see.

So I think we' going to move on now to next question. Thanks.

And we'll take our next question from Mark May from Needham & Company.

Thank you. I guess this is an expense question for Patrick, pretty broad. But how confident are you that even in your worst case revenue forecast for this year that you can maintain the EBITDA margin roughly where you ended the year?

First of all, we don't give guidance. We don't give guidance on margin. The one thing that I would say, as Eric mentioned, I think the management team is really working with two agendas always. One is, manage our resources prudently. I think Eric was right in saying in some ways the easy part was done in Q4. In that sense, this is a worldwide recession with a lot of visibility about what's going to happen. We just have to be prudent, and therefore, we're focused.

One of the things, that's sort of a subtle point that I'm not sure came across in Eric's remarks about Q4, one of the things that I think we did see and benefit from is that there was a lot of inventory on the part of a lot of retailers who had anticipated a better Christmas. Once it became clear that sales were really required and two-for-one deals were required, a whole different dynamic needed to occur to flush that inventory through. Interestingly, what we saw in November and December was consumers searching much more disproportionately for two-for-one, for sales, for coupons, and advertisers really trying to make sure that they were able to sell the inventory which they purchased when they were anticipating a better economic situation. So, one of the things we have to ask ourselves now is how much of that inventory has actually flowed through the system, which gets back to my answers from a revenue standpoint on commerce. Obviously, we would be adversely impacted if there were less total commerce moving forward. So that's really the wildcard from a user standpoint that we need to watch.

I guess as a follow-up and another way of asking it is to what extent, Patrick and team, have you identified sufficient enough amount of expenses that you could cut in your worst case revenue forecast and the nature of the expenses, how quickly could you act on those?

Again, I'll only talk about what we've done in Q4 and I'll let the facts speak for themselves. I think this management team, the company, and it's not just me, we're a management team focused on making sure that we deliver the results that we set for ourselves. Sorry, I can't give it otherwise I'd fall into guidance which I don’t want to. We're very prudent in our management for sure. We’ll move to the next question, please.

And we'll take our next question from Jeffrey Lindsay from Sanford Bernstein.

Hi, thanks for taking my question. Can I ask, will the company be changing its wireless search strategy now that Verizon has decided to move its business to Microsoft, and so can you do about this? Is it a priority for you to actually address that issue? And then second, could you just give us some sort of sense of what you are doing to improve the product development process? Thank you.

Sure this is Jonathan. I don't think that our wireless or mobile strategy really is going to change. I think we have a pretty good balance of both searches that come by the partner channel, as well as searches that come directly. So I'm certainly pretty confident that we've got lots and lots of organic search opportunities that will allow us to continue to move forward aggressively. In terms of fundamentally changing the product and development cycle, yeah, I don't think it's changing that much. I think we're just getting better at measuring it, and I think we're getting better at figuring out how to more expeditiously allocate talent to the depths of things that are most important, and that's really what the whole resource allocation exercise that we did in the fall looked at. We went through every product and we looked at the big drivers of cost, be they bandwidth or CPU, or storage intensive products, and along with the revenue opportunities and really tried to quantify both short run and long run what our expectations were, so that we could do a better job of allocating resources. I don't think we're changing any of the core notions that we probably set forth in the Founder’s Letter when we got started. People are still working on 20% time. We're still putting a big premium on innovation. We're still putting a big premium on focusing on the long term. I think we're increasingly putting a premium on internationalization.

Just one last point I would make on the mobile strategy. I think that as Eric mentioned earlier, in the previous call, it is front and center in the strategy of the company, and Android and mobile continues to be a huge part, so the fact that one deal versus another deal I don't think is central to the strategy.

And Jeffrey, just going back to the question you originally asked on Verizon, one of the things we didn't really get a chance to talk about on the previous call is that we're really seeing significant increases in the sales of the smarter phones, both the iPhone, which we mentioned, but also Android. With those kind of phones, it's going to significantly grow the pie for mobile searches, and these smart phones have full browsers. When you have a full browser, then you are typically not as dependent on a deal that locks somebody into a particular direction from a search perspective. So, the better browsers get, the better phones get, and the better ecosystem that evolves there, the better from our perspective.

Yeah, but you're not on either of the major platforms. So, you're not really on AT&T and you're not on Verizon, Verizon's the largest carrier. That means your partners are really T-Mobile and Sprint. Is that not enough to really to make Android viable?

Well, we think the Android numbers will start to speak for themselves, particular this year, now that we've got some additional partners signed up to get to the next generation from a hardware perspective on the platform. So we are very optimistic about Android.

We will move to the next question, please.

And, we'll take our next question from Jim Friedland from Cowen & Company.

Thanks. Two questions relating both to tech. First, on site tech. It reached 5% of GAAP site revenues up 50 basis points sequentially and scoring a lot faster than the sites GAAP revenue. What's driving that? New deals, changes in deals…? Then on network tech that was down on an absolute basis, quarter-over-quarter, as well as percentage basis, and what's driving that? You mentioned cleaning up AdSense for search on the previous call. If you could add a little bit more color there? Thanks.

Just a couple points on that. One, on our own, Google property's tech have driven a lot by the deals that we have on toolbars and all the others that we have, and honestly, these deals are multiyear, and so as they come through, they will increase in short-term, but we see tremendous value under these, and therefore they are good economics for us. On the partner's tech, obviously mixed overall tech obviously, mix is a big element of it. And so, because of our mix during the quarter, that has big influence on it for sure. And, then the second issue is [AdSense] being weaker, obviously influenced it as well. And, then finally, on a lower marginal basis, but nevertheless, revenue from our hedging activity was also recognized between our properties and then our partner properties as well. Well the combination of all of that makes it that our partner companies has lower that versus (inaudible). I hope that answers the question.

Next question, please. Operator: And we'll take our next question from Youssef Squali from Jefferies & Company.

Thank you very much. Patrick, the UK was down 1% year-over-year and 12% sequentially. When you FX that, neutral that - do you have those numbers? And then as a part of that, how much of that is really FX versus maybe the UK market starting to mature a bit? From a monetization perspective, it was already over monetized or relatively more monetized than the rest of your territories. And lastly, on the stock option exchange, why did you guys decide to give employees options or repriced options when you could have maybe opted for restricted stock? Wouldn't have that been less dilutive?

Okay, so is that the question. Let me start first by the UK. We don't do the math for everybody, if you do the analysis and reverse engineer where the FX has gone over the last quarter, you will find that the FX has been a significant factor for the numbers that we reported. And you can't discount (inaudible) the biggest issue for me is the issue of FX for me (having) results, but you can't discount the fact that the macro economic environment and the pressure that they have in the UK, the UK is in a deep recession. So the market also get influenced by this and the dynamics of advertising and spending for products? I'm sure it is. It would be wrong to say that it's not. The UK is really being impacted by a deep recession. So it's a combination of those two rather than the maturity of the market that I think really impacted, with the first being the most significant factor. In the case of the stock option versus the DSU or GSU or restricted stock, I think that there is a philosophy issue that Google has. It wants to continue to make sure that people think of the company and manage the company as it grows. And because of that, the mind-set of the stock options is, in fact, the preferred way in terms of compensation versus GSUs and the balance of things. That’s why we kept on with stock option (Inaudible). We'll go to the next question. Thank you for your question.

And we will take our next question from Marianne Wolk from Susquehanna.

Sure, the first was regarding AdSense per content, which you implied or it sounded like you are implying, grew faster than even Google.com this quarter. Is that because you are adding partners with DoubleClick ad exchange or is that because pricing is improving? Can you help us try to understand what kind of legs are there? And then the second question I had, if you will, you talk a little bit about the competition if there is any from Microsoft cash-back program? Thanks very much.

This is Jonathan. I'm not sure that we said that AdSense per content was growing relative to Google.com. I think we were talking about cash and I think it would have grown relatively faster compared to AdSense, where we did some of the arbitrage clean up. So, I'm not sure that was what we said, but it is the case that AdSense per content has been growing. I think that one of the interesting dynamics that we're seeing there, because we're monetizing better, and yes, I think a lot of is it product efforts that we're doing along with DoubleClick. We're getting more and increasingly it appears that we are getting better inventory, and it's particularly more recently with the - as the economy has slowed, it appears that some folks are giving us more of their inventory than they had in the past and particularly some of the better inventory. So I think we see, if another network can't sell, the inventory comes to us, we'll monetize it better, so I think that's basically the story. The cash-back efforts that Microsoft is doing, we're watching that as carefully as we can, we don't really see much, and we don't see anything that is particularly sustained. We're continuing to see Google Product Search, do very well from a traffic perspective in the last month, both domestically and internationally, so I don't think we're seeing anything differently.

Thank you. Next question please.

And we'll take our next question from Sandeep Aggarwal from Collins Stewart.

Thank you. Jonathan, I know you have answered multiple questions on coverage, but I have one question on coverage, and then one or two product related questions. When you were decreasing your coverage ratio in '07 and maybe in '08, you theoretically sacrificed some of the searches for clicks, which could have generated some revenue, and as you expand your coverage again is it fair to assume that you may not regain all those searches, which you probably lost when you were decreasing the coverage ratio?

Well, sure, yes. I'm not going to gain on search that I lost last year.

No, let me clarify. In the sense, because you were decreasing your coverage ratio because you were improving the quality score, so as you expand your coverage, will you be able to capture the nature of those queries which were let go last time?

I don't think it's really symmetrical. I'm not really sure that increasing coverage is directly the opposite of decreasing coverage. So I don't know. I think we'll be showing ads on a better set of queries and continue to get benefits of that ad.

Okay. Let me move to actually two product-related questions. One is how similar or different is a mobile Internet-generated search query versus a PC-generated search query in terms of a CPC, as well as a mix of commercial versus research-related searches?

Yeah. That's interesting. I'm not sure we know the answer with respect to CPCs because I don't think that market has matured as well as it needs to from an option dynamic standpoint. One of the things that we just started doing is making it much easier to run your PC-based queries on the mobile devices and customize the ads, so that they look better and work better on the mobile devices. The only data point that we've seen so far is that click through rates seem similar to that of desktop computers, but I don't think we have a good sense yet for what CPCs will look like in a more mature market. I personally think that they could be much higher, because I think when people are going to the trouble of running a search on a small, portable device, particularly a location aware small portable device they're much closer to consummating a transaction. And so, you can imagine that that search is more valuable, particularly to an advertiser in close proximity to where the search is run. Mobile is bigger on the weekend, which is another trend that we've seen. I think that's probably bigger during the week. But those are really the only other clear trends that we've observed.

Thank you. We'll go to the next question please.

And we'll go next to Gene Munster from Piper Jaffray.

Hi. Good evening. If you could talk a little bit about just from a very high level from at the economic environment, I know you're not economists, but is it reasonable to expect some form of seasonality emerging in the business in 2009?

There's obviously seasonality within the business. If you look back to the last few years, Q4 is a very strong quarter. Q1 is also a stronger quarter relative to Q2, Q3 when people are on vacation. Seasonality is part of the business, always has been and continues to be.

Okay, great. And then second is that you mentioned on the previous call that some of the behaviors around the holiday quarter in comparison to shopping and so forth, more people doing searches, but do you have any expectations about some of that search behavior in 2009 that same kind of Wal-Mart effect continuing or just any general thoughts on search behavior in 2009?

No. I guess the only comment that I can have there is the comments that we made about consumers shopping for deals everyday. We certainly measured some of those things and I think we've shared some of the data points that we had. It is a lot true that on days like Cyber Monday, whichever (inaudible) after Thanksgiving, you see people looking more on coupons and behave in price comparison. But I don't think that behavior was limited to key shopping days. The increase of deal seeking queries then was a minor compared to the surrounding weeks, and I think you are going to see that people are going to continue to shop for deals. It is just clear that their deals are out there.

The next question, please.

And we'll take our next question from Ross Sandler from RBC Capital Markets.

Thanks for taking the question. First, on international and then the second question on display. So, on the international side, if my math is correct, international revenue ex-FX was up 35% year-over-year in the fourth quarter. That was an acceleration from 32% last quarter in 3Q 2008 on an FX neutral basis. So, if the comments around UK showing some macro sluggishness, where was the accelerated growth coming from? Was it particular to a geographic region or was it more a factor of company induced growth initiatives like improving coverage? And then, a follow-up on display. Google's approach has been to kind of position the company for the days when purchasing display ads is an automated format similar to how search is bought today. Do you think there's a need for a strategy in the interim to give large display advertisers and agencies a little bit more hand holding to get things going in display before the buying process is fully automated, which could take a few years? Thanks.

Okay. I'll answer the first and I'll let Jonathan answer the second. We're not going to comment specifically on the numbers you provided, but it is true that in the grand scheme of things, international continues to perform well where Continental Europe certainly is much less mature than the US and the UK. And as discussed in the previous call, some countries like Germany and a few others who are better than the others have done fairly well even in this economic environment. It's also true that we have a number of environments where we are growing rapidly in our [break] countries. We talked about China, we talked about Brazil. We have a lot of optimism for these countries because they are much less mature. So there's a lot of runway in them; different economics, but a lot of runway. That covers the international. Okay. I'll let Jonathan cover the other question.

Yeah. I think your observation is well taken. I think Eric said we want to make display advertising easy and we want to make it acceptable for all advertisers and publishers. The challenge is that today is extremely inefficient, so that does make for a very big challenge. Lots and lots of activity in the display world happen even by faxes, never mind phone call. The logistics involve people doing things like literally cutting and pasting HTML code to get ads up and running on a site. So, I think we absolutely recognize that between now and when we can achieve the kind of science that we'd like, we've got to do a lot to continue to help advertisers get these ads going. One of the things, we've launched a display ad filter which does make it much easier for the small advertisers, particularly AdWords customers to use display and get reasonably creative professional looking display ads with the AdWords interface. I think getting to the long run goal of making this more like Google AdWords is going to take time, and I think we need agencies to help with it, and there are some great agencies and (inaudible) who are helping carry this forward, and we'll keep doing whatever we can incrementally to make it easy for advertisers as well.

Next question, please.

We'll take our next question from Steve Weinstein from Pacific Crest.

Thank you. I'm curious. In your toolbar or other distribution deals, in those relationships and whether contract ends or you go with another partner, does your revenue commitment to that partner continue as long as someone continues to use that toolbar? Or, is there a finite date where we could stop modeling that as an expense of the business? And then second, you've talked a lot about the display business, and you're obviously very optimistic about it. Can you help us get a sense of scale or size for that business today at Google, and where it might become a meaningful piece of the business?

So, we not going to give you detailed answers to (inaudible) these questions, unfortunately, but typically, in most of the deal type efforts that we're engaged, we're paying for what we're directly receiving. So I'm not going to go beyond that. And we don't comment on sort of the relative size of different businesses. But obviously display is getting to be quite significant and we alluded to the degree to which the DoubleClick integration has made significant progress and YouTube is really using DoubleClick as a platform for the business that they're building. So it's already a meaningful and growing part of the business, but I think that's all we'll say.

Thank you. Next question, please.

And we'll take our next question from Mark Mahaney from Citigroup.

Thanks, two quick questions. Patrick, back on the cost side. I know you’re not talking about cost going forwards, but what would you point to us as the best examples of cost constraints in just the fourth quarter? The setup for the question is, if we remove the revenue contribution, which must have been all margin from the hedging program, non-GAAP operating margins, actually declined sequentially. So what do you think is the best evidence of the new cost controls that are at the company?

So let me give you, I'm just looking for my list here. We have done in Q4, and I can share that with you, a couple of areas where pretty if you do understand how do you contain cost growth. So obviously, hiring pace is the clear one, right. I think last quarter we had, what, 400 people, now they are now 500 somewhere around there. We have 100 for this quarter. In the previous quarter as well we did talk about managing our contractors and our temps in a better fashion, so there will be opportunities there. We have a lot of office space. Google has, right, because we're everywhere, and we've been publishing from this office building and we don’t need in the short term, we have some options there. Improving machine utilization, I talked about it on the call a bit earlier. Using better machines gave us a lot of CapEx and OpEx. Same thing for better utilization of bandwidth. So, we have, in general, a number of other elements, if you think about professional services, including self-service as well within the Google, so just to give you a sense of the broadness, the comprehensiveness, and it's one where we are just being responsible at managing our resources. So this gives you a sense of the excluding management that we are working with.

Thanks and a quick follow-up just on the AdSense for search. I think the comment was made during the call about cleaning up AdSense for search network. Can you give us any sense of how far along the process you are in doing that?

I'll let Jonathan talk about it. It's more a (inaudible).

Not sure I can give you a sense in terms of proportionally how much of the way we're there. Certainly, I think there's a disproportionate number, I think there were a good number of shopping oriented sites that we are working in a manner that wasn't consistent with our terms, but I don't think I can give you a sense of to what degree we have gotten rid of all of it. Part of it's like dealing with email scams. You get rid of it, and then it comes back. So, I think it's kind of going to be an ongoing battle. I'm not sure I can predict how that's going to play out.

Great. Thanks. We will move to the next question, please.

And, we'll take our next question from Jason Helfstein from Oppenheimer.

Thanks. I'm going to try to get three quick ones in. So one, there was no mention of apps in the release, and I'm wondering if we should read into that. My second question, without giving specific numbers, can you comment on paid click trends by geography, so perhaps like better or worse than the 18% you reported? And lastly on cash. How much cash resides outside the US? And connected to that, would you consider buying back stock to offset option dilution? Thanks.

On the thing clicks by geo, I just wanted to say, we don't comment on the details. All I can say is, as we've said in the previous calls, we have healthy growth across all major geographies. So, I'll cover that one. I'll let Jonathan talk about the apps and I'll get back to you on the cash issue.

Yes. Apps are certainly one of the top things that I mentioned. I think I talked that we are getting about the fact that we've released over a 100 enhancements to the whole application suite in 2008. I think I said, momentum is particularly strong, both Eric and I (inaudible) the million business on apps number, as well as the 10 million users and three million active users from school. So, we continue to be innovating aggressively on apps. If I think about this last year, there was Google site, Google video. I know we had same tools for Outlook and Blackberry, numbers of large enterprise deployment. Eric has mentioned the general continued demand for (cloud) driven efforts. And I also think that the opportunity here in 2009 as enterprises are struggling to deal with increasing IT cost, in a recession that should be a good opportunity for us. It's relatively low-cost platform that's easily updated and delivers a lot of the functionality that they need.

Let me come back on the cash issue. I just wanted to check out before, we don't disclose that, so that's why (inaudible), I would have given you the latest update, but we do not disclose on that, so sorry for that. Is there a question on (inaudible)?

(I don't know about that).

We look at it all the time, companies do all the time, and there's no one else to make them best. Next question, please.

And we'll take our next question from Rob Sanderson from Broadpoint AmTech.

Two questions: one on the macro, and one on the currency hedging program. Just want to revisit some of the things said here on the macro environment and the impact we might have on seasonality. I think Jonathan was discussing two-for-ones and discounts. I think that also led to some more aggressive keyword bidding, but don't these dynamics set up a much more seasonal Q1 than we've seen in previous years?

Well again, so we don't give forward guidance, but it goes back to the same thing I said before. It depends on the total amount of commerce and services that are occurring in the economy at large, so I wouldn't read much more into it. Other than that your ability to predict what's going to happen from a macro economic perspective in Q1 there is probably similar to ours. If there's less commerce, overall, then that's going to adversely impact Google. If there's not, and there isn't consumer driven reductions in commerce and spend, then we should be fine.

Okay, thanks. And then on the currency hedging program, Patrick, you mentioned you're not fully implemented in the UK. Is there any way you could give us a sense of what it may look like in Q4, had you been? And just on the basic mechanics of the program, it's forward cash flow you're attempting to hedge out here. Does this mean as the dollar strengthens you see an unrealized gain that then flows back to the income statement over future period that you hedged against? So first, is that the right general mechanics, and then if that's the case, then currency is ready to remain constant from here. Should we expect a similar gain in the future periods as we saw in Q4?

The mechanics is right. I'm not going to pronounce myself about the future, because in the last six months I've been living through this roller coaster, so who knows. And on the first part of your question, all I can say is, we implemented our (click return) hedges in Q3. It's a partial effect, (Inaudible) affecting Q1. I mean, that's all we knew, we can give you. We'll take the next question, please.

And we'll go next to Imran Khan from JPMorgan.

Yes, Hi. Thank you again for taking my questions. Two questions, and then I have a clarification, just because I think there was some confusion about that. So the first two questions are, if you look at the seasonality in the fourth quarter business, was there anything abnormal? Have you seen the growth rate, if I look at the year-over-year growth rate, October and November versus December? Any color on that will be very helpful. And secondly, question probably for Jonathan. It’s being reported that the relationship with Warner Music that they are pulling out their content from YouTube. If you can give any color on that in terms of monetizing this music content, that would be very helpful. And in terms of the clarification, the $129 million FX hedging, that flows through your US revenue line or international revenue line? And Google.com versus AdSense. Thank you.

Okay, on the seasonality issue we're not going to give you, we just don’t divulge October, November, December. We just don't go there. Could you just repeat your hedging question?

Yes. So the $129 million, the benefit that you had, do you recognize the revenue on your US revenue line or does it help the international revenue line?

I understand now. Sorry. We recognized, of the 100% of the 129 we roughly, you can think of it as 70% for Google properties and 30% for the network properties and so therefore you have to have a sense of what’s US versus international. We do it actually not as much. It's 100% obviously international, because we're hedging. We don't need to hedge US, right?

Right.

So it’s international, but the real question is Google or network.

Got it. About YouTube and about Warner Music. It's being reported that Warner Music pulled out their content out of YouTube. Any update on that? And it seems like it's also being reported about, I may rephrase the question this way. How can we better monetize music content that you have licensed through the music industry?

Well, we certainly still got great relationships with thousands of partners including many in the music industry, so we'd love to work with Warner. But I think we're going to continue to do what we've been doing; try to continue to make mutually beneficial deals and then try to do some of the things like we talked about on the earlier call with respect to better monetizing YouTube, which we went through and which is on the call that we're currently working on. So I don't think I have more of an answer than that. On Q4, I think we have actually written in the past a little bit about exactly how Q4 differs from other quarters, particularly the blogs that Hal Varian posted, which I think is new clicks, conversion and Christmas 2008, you'll see it. That basically talked about how CPCs tend to go up at the end of the quarter and conversion rates go up even more so that you have better advertiser ROI in December. I think we did still see that this quarter. I think it's a little bit more muted than in previous Q4.

We'll go to the next question, please.

We'll take our next question from George Askew from Stifel Nicolaus.

Yes. Thank you very much. Two quick questions: Does the employee stock option exchange program require a shareholder vote or any other approvals beyond the Board actions already taken?

The answer is no.

No. Okay, fair enough. And then, secondly, I believe in the past, you may have tested display ads on Google search result pages. What is the current thinking about that possibility as a new rollout, new opportunity?

This is Jonathan. I am not sure what tests you're referring to with respect to display ads on search. In fact, I can't remember ever having done. I can get somebody to verify that for you. We have done a number of tests on AdSense for content, and obviously we're presently running display there. But I'm not sure what you're referring to with respect to search. The only thing I can think of is we did some very limited test on image search and we're now beginning to experiment with that. But other than that, I don't know of any tests.

Okay. What is the appetite for possibly pursuing that on Google search result pages?

We have to figure out the ad format. We have to figure out where it makes sense. I think as a general rule, there are not that many scenarios in which we have a big appetite on search. You run a search for a movie. It'd be nice to show you a movie trailer. So I think there are some limited number of scenarios where that might make sense. But beyond that, I can't really say. I certainly wouldn't say we'd never do something, but we've got to figure out an elegant way to do it in the right way for the user.

Thank you. We'll go to the next question, please.

We'll go next to William Morrison from ThinkEquity.

Hi. Thanks for taking my question. Couple of questions on the use of data. I'm curious if I should say my understanding is that you do not use data you collect from Google search to improve monetization or the ads on AdSense for content. I just want to confirm if that's true. And if it is, I'm curious if that's something you would never do or it's something you would consider in the future. And then the second question is on Social Media. I think the last quarter or the quarter before you mentioned that monetizing Social Media was a little bit more difficult than you thought. I'm curious if you could give us an update on where you're at and if you're making any progress there. Thanks.

Yeah, I think we can get pretty quick short answers on these. The answer to your first question is, no, we don't do that. The answer to the second half of the first question is that I generally don't want to say what we would or wouldn't ever do in the future. So I'm not going to comment there. The third question, I guess, on Social Media, I think that it continues to be very, very challenging. I don't think we have any [big rates] to report in Q4 with respect to how we're monetizing social media.

Move to the next question, please.

And we'll go next to Sameet Sinha from JMP Securities.

Yes, thank you. Couple of questions try to squeeze in here. When we spoke about advertisers bringing down CPCs just to make sure that their campaigns are running successfully with the right ROI, can you talk about what was the extent and which verticals did you see that in? Second question is, with you allowing alcohol ads in the US, gambling in the UK, do you see any benefits from that, any initial reaction? And then the third question, Patrick, looking at your cash balance quarter-over-quarter, your interest income increased about $50 million, if I do the math, it seems like you have an interest rate of 3.5%. I was wondering if those numbers look right?

So let me cover the second point first, which is the issue of alcohol and otherwise. Well, we had found it simply that we had inconsistencies in number of places all these things were legal and fun and in some cases we did offer it, and in some cases it was totally legal also in another country but we didn't. So what we did this call is basically a cleanup to be consistent in our rules, wherever they apply.

And it is generating revenue.

It is generating revenue. On the issue of what we've earned it's really in the range of 1.5% to 2% annually on our cash balance, and that's driven by the conservative stance we've taken in our portfolio right now, given with all the uncertainty in the environment, we took the position to be very conservative in the management of our cash balances, and that's why we have a lower yielding portfolio than otherwise contemplated.

Okay, I'm not sure that I can comment specifically to the observation, that (inaudible) in advertiser behavior, and changes in this by vertical. I did mention on the call, as I think he did, that by size of advertisers, we're seeing strength in the small and medium advertisers relative to the large ones. Some of the surprises I think that we saw with the verticals that are interesting are that autos really did much better than I would have expected, given the fact that the auto industry is doing fairly poorly. It appears that the subset of people buying cars are still of enormous value to the folks in the auto industry. I think real estate still remains the hardest hit vertical, although the mix is changing. You see things like suddenly there are more searches on property management. Maybe people are buying houses at cheap prices, and then have to figure out how to use them as rentals. Foreclosure is bigger relative to mortgages than it was a year ago. Then I think maybe the one other area that surprised me, was you typically think that entertainment is a little more recession-resistant as a category, that category I think didn't do as well as, as I would thought, so I assume that that has to do with those some of the day dynamics.

Okay. Just to follow-up on the cash question. Interest income increased by $50 million sequentially, your cash balance increased by $1.4 billion. Was that increase in interest income just due to the higher cash balance, or was it something else in it?

No, we also had a realized gain on investment of $29 million from Q4.

Okay. Thank you.

And you'll find that in the numbers at some point. Great, we have time for one more question. So we'll take the last question, please.

We'll take our last question from Ben Schachter from UBS.

Just a housekeeping on that last point. Was there bad debt? Can you just give any thoughts on the bad debt? And then Patrick, you've only been there about five months and clearly a big part of your focus is on the cost containment initiatives. Can you talk about sort where you are in terms of how you’ve actually influenced the numbers for this quarter or should we expect more of your sort of focus going forward? I mean, Jonathan, I’m broadly speaking, I was wondering if you could talk about any products that are not performing particularly well that you are rethinking and related to that any specific comments about how Checkout performed in the quarter and the future of that business?

Ben, on bad debt. We're very comfortable with our bad debt, where it stands right now, and you will see that in all of the filings. So I'm totally comfortable on it. We're managing it very closely, as you will see and so that is an area of real focus, but not an area of concern for us. We'll continue to manage it tightly. On the issue of cost containment, yes, it's true I've been here five or six months. I think my observations are as follows. And that's why in the script I gave a few minutes ago on the previous call, I believe that and I meant it, (inaudible). It was not an issue of one individual. It's an issue of leadership obviously at the operating committee. When in these times where you have no visibility, it's going to come ahead of you. In every week you get another surprise in the economy and in the market and in the banking system. We just seem to be good as an operating committee and we are so close to reform and these (inaudible) and correct me, if you go to the extreme of that, right, there's no sense throwing a big party while everybody else in the economy around here is losing their job. It's not the responsible thing. And so, I think Google has really responded well for this call. Let's be prudent, let's be responsible. Of course, like every business, right, we have a lot of levers we can use to manage the business responsibly, but let me tell you the most important one which is we are really focused on growing this business for the long-term. We are, in fact, managing the short-term because of all the hiccups going on around us, and Google is not immune to the economics in which we live around us. But I can tell that you 90% of my agenda is really focused on building on the big opportunities that Google has and it's my agenda as well. That's how I will comment online. You had a question for Jonathan as well?

Well, you can focus on the big opportunity; giving me my [bottled water back].

No bottled water, it's not good for the environment.

What you really saw after the reviews that I talked about in some of my remarks at the beginning was that we became a lot more careful about how we were allocating resources as a result. I think there were some areas that were concerning some of which you probably read about, the resources in Google Video and in Notebook and Dodgeball and others did seem disproportionate relative to what we were getting. So I think you've seen already most of the ramifications of reviews that we did. Checkout actually had pretty solid performance. We've got millions of buyers. We have added 0.5 million sellers. There's billions of dollars in transactions. It's only been in the market for two years. Holiday performance was good, particularly if you look at the state in the macro environment. We still see advertisers reporting much better click through rates on the dash ads and higher conversion rate. So I think that there are advertisers who are having good success with Checkout.

Good. So on that note, we're going to end the call. I'll turn it back to Krista for whatever is proper and thank everybody for having participated with your questions. We really look forward to follow us with Krista and Maria.

We just wanted to thank you all for your participation and we look forward to speaking with you again. Thank you.

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