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

Great. Thank you. Good afternoon everyone and welcome to Google's first quarter 2009 earnings follow up conference call. With us are Patrick Pichette, Chief Financial Officer, and Jonathan Rosenberg, Senior Vice President of Product Management. I will quickly cover a few housekeeping items and then we'll open the call immediately to your questions. Please limit yourself to one question and one follow on. Also, please note that this call is being webcast on our Investor Relations website located at Investor.Google.com. Please refer to our website for information, including our earnings press release and the latest slide deck. And a replay of this call will 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 Reg FD compliant manner. Now I'll quickly cover the safe harbor statement. 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 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 annual report on Form 10-K for the year ended December 31, 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 related 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. So with that, we're ready to take your questions. Operator?

(Operator Instructions) Your first question comes from Heath Terry - FBR Capital Markets & Co.

I was just wondering, as we look at the operating expense lines, we obviously saw pretty big declines in R&D and sales and marketing. We know from the headcount number in those areas that there wasn't as much of a decline. Can you talk to us about how you're getting those kinds of cost savings without using headcount as a reduction? And then just, from the increase that we saw in G&A, is there anything outside of the charges related to the change in share-based compensation that's driving that up this quarter?

I'll answer that question. Overall what you have seen, as we mentioned on the prior call, the biggest change from quarter to quarter, if you wish, in the trajectory of our cost, as we mentioned on the prior call, was this issue of the bonus accrual in Q4, which was higher than we had originally planned because our results were better and now we're resetting the plan as what is a typical plan for the year, so we're starting again fresh. And those bonus accruals, which are tied to labor, flow into different categories that do include R&D. It's also fair to say that across many of our categories of costs we've continued to be quite diligent about our trajectories and we see that also as part of our results in a number of categories. So we continue to be prudent and that is essentially the biggest element that would have flowed through from Q4 to Q1.

And so just for the follow up side of that, is it fair to say that looking at the delta and the bonus accrual is a reasonable expectation of kind of what your plans are for the level business needs to be at for outperformance to happen and us to see the same thing that we saw in the fourth quarter last year for the necessary bonus accrual catch up?

I'm not sure I understand the question. If your question is - we have now reset our plan at, let's say that it's 100%, right, whatever 100% is, so now we're running this year with the expectation of 100% and we hope to beat that - because you always hope to beat your plan - but that's what we're running with right. And if between now and the end of the year we see a big ramp up in our performance, right as we see that we will take appropriate accruals at that point.

Your next question comes from James Friedland - Cowan and Company.

I wanted to ask a question on Google Apps that was indicated in the last call as a key area for investment. At this point in the evolution, is the investment more on new features or are you starting to do more in terms of building up an enterprise sales force? And are you seeing additional enterprise wins, especially in this environment, on the cost savings and can you name any?

We had some pretty large deployments this quarter. Avago, which I think is the semiconductor division of HP, deployed the App suite to several thousand - maybe 5,000 or 6,000 users. We had some progress in one of the big states in Mexico, too, which we launched in early Q1. We also had quite a bit of progress on the .edu side, with I think 60 colleges and universities that we signed deals with. Some of them, I believe, were Cornell and Georgetown. I know we signed other significant deals with T-Mobile, Fujisoft, Euromaster - which I think is a subsidiary of Michelin - so I think there's significant progress there. The kind of functionality that we're working on are some of the big holes that I think we still had in the suite. Offline support was probably one of the more significant pieces, as was better synching with mobile devices. We're seeing pretty strong demand and traction in organizations in sort of the 3,000 to 15,000 size range. We're getting a lot of help with the reseller program that we launched. And I think your observation about what is the state in a cost challenging environment. I think we are seeing that we've got a number of customers who are using the paid Apps version. I think we're signing on more customers because of the cost savings relative to competitors. There's a big Forrester study that showed that we're a fraction of the price of the competition even relative to their cloud-based offering. So I think we're doing pretty well. There's one category, manufacturing, and spinoffs of large companies that seem to make a lot of sense, particularly when a company's building new infrastructure. And we've got some examples; I think the Avago example is one of those and I know there are more.

Are there particular industries where Apps are being better adopted at this point versus others where maybe it's a little bit more complex and harder to get into?

I'm not sure I can establish any correlation in terms of the categories of industries. I think it's more a function of how the users and the IT departments are set up. Certainly, the educational institutions have made relatively quick and robust progress, as have companies that I mentioned that have sort of spun out and are out to start from scratch and build and don't have the legacy dynamics that established companies do. But I think that's really the only broad observation that I could name. I think it's more a function of the size of the enterprise than it is the industry, so it's a few to several or 10 - even 15,000.

Your next question comes from Steve Weinstein - Pacific Crest Securities.

I'm just trying to understand. You had almost a full quarter still benefit from the DoubleClick acquisition and so when I look at your U.S. business where you're reporting basically 3% growth, without DoubleClick, was the business in the U.S. basically flat year-over-year?

I don't have those details so I won't answer it. It is true that we have - so if you think of the coming quarters, DoubleClick will be, like, we're finishing the first year of DoubleClick, so what I can say which is a factual statement is we had in Q1 we're finishing the first full year of recognizing revenues for DoubleClick, but now DoubleClick's integrated in all the display [inaudible]. So in Q2 you'll see the effect of that.

So as a follow up, then, I hope you can clarify one more thing on the G&A expenses. If we back out basically the $46 million in expenses you kind of recognize sort of one-time, is that a fair run rate to work on right now? I guess I'm missing something about how the bonus accruals is going to change throughout the year.

No, what I mentioned is that the bonus accrual that we took in Q4, that did not get moved into Q1 because we reset it, you know, much more than offset additional expense pressures that we talked about.

Your next question comes from Richard Fetyko - Merriman Curhan Ford & Co.

Guys, if you were to compare the mobile and the display initiatives and if you include YouTube within the display, which one do you expect to be the bigger opportunity in the next two or three years? And then the follow up on that, could you elaborate more on the display ad strategy? You have the Ad Exchange, you have also the AdSense for display or for content that you're integrating display into. Could you give us a little more color on what sort of strategy or product you're emphasizing within that display initiative?

I guess I'm not - broadly, the story and the strategy is to address the issues and the challenges around the way display ads are bought and sold. We do fundamentally believe that those are going to change quite dramatically over the coming years and we're trying to bring much more measurability, the kind of efficiency that we had with search advertising to display and make it much more efficient for both advertisers and publishers to offer better ads for users. So, I mean, basically building the largest scale network that we can that's going to give the best ROI to advertisers on the one side and the best yield to publishers on the other. So if we get fully integration of DoubleClick and Google products, we're going to have the combination of this big leading platform for advertisers to create and manage the most effective campaign and publishers to on the other side manage and monetize their inventory. So I think it's the combination of being able to do both of those things we expect will be very, very powerful. It's hard for me to handicap whether or not the scope of overall revenue on the display side or the mobile side will be bigger. We're obviously very, very excited about both and making strong progress in both, so I don't have a sense of what the size of those industries will look like in two or three years.

Your next question comes from Doug Anmuth - Barclays Capital.

Can you provide some color, Patrick, on the reasons for the sequential decline in other costs of revenues?

Again, in other cost of revenue, if I just go through my notes, they are still tied mostly to payroll issues rather than equipment issues or machine utilization. So that's basically it.

So, just to clarify, so you're saying more related to the bonus accrual than to depreciation?

Yes, that's correct.

Your next question comes from George Askew - Stifel Nicolaus & Company, Inc.

I'm going to address this bonus issue one more time. I'm just trying to get a sense of the size of the bonus accrual in the first quarter. If you look at it as a percentage of sales, for example, in the first quarter '09 compared to the year ago quarter, first quarter '08, was it materially different?

I don't have the answer to that question. But I think again in general terms I think that if you think of your modeling, I think looking at run rates from a year ago may be useful to kind of get a sense of magnitude versus Q4 because Q4, as I said, was sufficiently different that actually it does make a difference between Q4 and Q1.

And then secondly, as a follow up, there's media reports hitting late this afternoon here that YouTube is partnering to stream full-length movies, TV shows, etc., a redesign happening there. What can you tell us about this kind of news on YouTube and the redesign that appears to be imminent?

Certainly what we're hearing from both viewers and advertisers is that they want premium content and a premium viewing experience and we want YouTube to be as comprehensive as search there and we want, in fact, as much professional quality content as we can and advertisers as we can of all sizes and types. I believe there's a conference or some additional details on the Sony issues coming out directly from the folks at YouTube, so you might want to take a look and watch for that. They should have all of the details about the Sony relationship and dynamics from San Bruno.

Your next question comes from Mark Mahaney - Citigroup.

Just one quick financial goals question. In past historic years I think there was a goal - and I know it was stated at Investor Days in the past - to simply expand pro forma operating income sequentially as long as possible. Is that still a goal within the company? That happened this quarter. But is the way you think about this, financial goals, just to expand that sequentially going forward, that non-GAAP operating income?

Two points. I wasn't there in the old days when whoever would have said what, but certainly under my rule we don't give any guidance going forward on any of these dimensions. All I think it's important that people understand is we're demonstrating responsible management over our resources. You should consider, as you think of your modeling, the fact that we talked at length on the previous call that our revenues are seasonal and you've just got to think of our expenses much more of a kind of fixed cost. They're not seasonal in a way, right? So our labor is not seasonal and our expenses are not because we're still growing. So that's the mind-set that you should apply to your modeling.

Your next question comes from Sameet Sinha - JMP Securities.

A couple of questions. If you can talk about the networks business. Understandably, you've undertaken some initiatives over the last couple of quarters to clean it out. When can we start to see improvement in that business and when will you end these initiatives?

Could you clarify - are you asking about AdSense or search? What exactly are you asking about?

I mean the Google networks business. I'm just looking at that, trying to open it over here. It was down sequentially a little bigger than it was down last quarter, so I'm talking about. You were getting rid of some arbitrage layers, things like that. When are those activities - when do you think that ends?

Some of that relates to partner issues. Some of it is the network cleanup. I think that to date the cleanup has been largely successful, but it's kind of an ongoing cat and mouse game just like e-mail spam, so I don't think I would necessarily want to suggest that the cleanup issue has been fixed. I think we did start engaging pretty aggressively in those efforts last year and we've made great progress. I think the other piece that you may see is there are probably some FX issues in other partners that we have that are built in there that are seeing the same kind of economic issues that we have as well as having to sort of understand which partners are in the overall mix, which is a factor. We don't give you the full list of those dynamics.

In terms of the follow up, can you talk about the correct share count to use? You had repriced some options. Would these become dilutive anytime during the year?

Sorry, restate the question for me, please.

You had repriced some options, some underwater options. Do they become part of the diluted share base now that they are in the money because they were priced, my sense is, about 306.

No, not anytime soon is the answer. Very small. Very small. So you wouldn't count on them. Just to complement Jonathan on the - to come back to the issue of the network. I mean, there is a difference between obviously AdSense for search and AdSense for content and clearly two types of businesses with two different rationales if you think of behavior. And the content side, obviously, branding oriented, just like campaigns, as I mentioned a bit earlier. So on that side obviously remaining challenging in Q1 because those advertisers typically will shift to more relative - to their performance-based advertising if they have a chance and tighter budget. So really a tale of two cities between the AdSense for search and the AdSense for content. Just to complement Jonathan's point.

I agree. I think that's right.

Your next question comes from James Mitchell - Goldman Sachs.

Could you talk about the impact of no longer providing rebates to agencies on your revenue growth in the international business?

So you're referring to the best practices funding which we phased out over the course of the last year. Patrick wasn't here for all of that.

What would be specific, James, in your question? Like what would you like? We have done that.

I was wondering whether it was something that materially impacted the first quarter or it's something, because it was phased in over the last year, it's been -

No, it wouldn't have been. It wouldn't have been material.

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

Just to reiterate on the BPF, so our understanding is that a number of agencies were still getting a fair amount of money, somewhere between 6% and 7% back, as of Q4, and starting January 1 that went down to zero. So you're saying that the year-on-year decline of 9%, call it, in the U.K., I guess, was not materially impacted by that?

That's correct. For our total revenue, we may have had one agency for whom it would have mattered for that agency, but in the total of our revenues it wouldn't have been material.

And then a clarification. Why was DoubleClick revenues weaker this quarter? I think on the prior call you kind of talked about that, but you didn't kind of provide the reasons why.

Well, I think there's two elements on it, right? One is seasonality, because if you think of DoubleClick in Q4, it's a very strong quarter for the display advertising related to the Christmas, certainly in North America, which is a big element of the DoubleClick. And then second is the entire economic environment right now is putting a lot of pressure on that business. So it's the combination of these two things that really we're seeing in the market.

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

I was wondering if you guys could dig into some of the mobile data a little bit more. I guess what I'm seeking is in this vaunted example that you have in Japan, do you have sort of RPS relative to what you're seeing in other markets in terms of increase? I've listened to your mobile webinars where you've guided advertisers to bid maybe 4x what they're bidding on the PC simply because there are fewer chances to be shown. Is there any quantification whatsoever that you can provide around how monetization is ultimately different on the mobile relative to the PC?

I think it's really too early to say. I think that we certainly see the promise, we think. I mean, are you're asking specifically about Japan?

Well, I guess what I'm trying to ultimately do is quantify. I thought Eric's comment was really interesting, that you guys are now, what was it, 8% mobile browsing share?

I think I said that.

Or you said it - somebody said it - which is the first time I'd seen this data out of you guys. So, again, it's trying to quantify what this opportunity could ultimately mean and if monetization all of sudden becomes even more intriguing, interesting in a mobile context relative to a PC one then, you know, people might get more excited.

Yes. I personally think mobile is going to be very significant. I talked in my prepared remarks about how powerful the phones are and the degree to which search traffic is up over five times in the last couple of years. It is the case that I think nearly 80% of our mobile search queries come from outside the U.S., so a lot of the lessons that we're still learning at this point are lessons that we're learning from markets like Japan, to some extent China and India. But I think the thing you really have to look at is if we've got 100 - 175 million smart phones shipping in 2009 and they all have this much, much different, very rich mobile browsing experience, you're basically talking about something that didn't exist on phones a couple of years ago. They didn't have the processing power, they didn't have the battery life, they didn't have the rich display, they didn't have an input mechanism that worked well, we didn't have the kind of vast networks that we have today, and we're now seeing many developers understand that the web is this wonderful platform for these mobile apps and they can be fast, they can be location aware, they can offer a rich experience and even work offline. And that I think is fundamentally going to change the whole value equation with these devices and you're going to see that users are much more likely in my opinion in the long run to consummate a transaction against an ad that they were served on a mobile phone because they're probably clicking on that ad or interested in that ad because they're out somewhere and ready to go consummate a transaction. So I think there's lots of reasons to think about where the business is going and where these phones are going which make us very excited. There's not a great deal of data yet on what the pace of revenue growth will be there other than what we're seeing in Japan, which is very promising.

I just want to follow up on the mobile side, you guys have an investment in Clearwire. Obviously, there's broad-based concerns there. Would you guys ante up further if they needed additional cash? Is there any plan around that investment?

The lawyer across the table is telling me to tell you we don't comment on the future potential investments.

One thing I would actually urge you to think about when you look at some of these other markets like Japan is that in some of these markets there are many users who only access the web through their mobile devices and that makes the dynamic very, very different. And of course Japan is far ahead in terms of mobile consumption than other markets, so it's an interesting market to look at in terms of where I think the trends are going to be.

Your next question comes from Justin Post - BAS-ML.

I apologize if you've already addressed this, but one of the things I see really interesting on YouTube is the quantity of searches and it's becoming one of the leading search engines out there. And I think you've rolled out some new ads. What are the click through rates on some of those video advertisements that are showing up in sponsored search results? Are you happy with that? And do you see that as maybe one of the bigger opportunities on YouTube and, if not, what really is working right now?

I think we're really still in the experimental stage on a lot of this. I mean, there's no doubt that from a traffic perspective the whole YouTube phenomenon continues. We're definitely hitting on an ongoing basis new playback and upload highs. We're basically at this point looking at multiple different ad formats. We're certainly monetizing hundreds of millions of videos in the U.S. every month, which is more than the total of U.S. monthly views on any other online video site. We don't give you the specifics in terms of click through rate, but we've got a whole bunch of new form [break in audio] and new content. We just launched in-stream ads on long-form content, so if you do a query on YouTube for Star Trek Charlie X, which is one of the episodes, you'll see an example of some of the new ads that we have there. Omid mentioned the home page format ad that we have which we're very, very happy with the results on which basically is a masthead that goes across the top. I think today it's Crank 2 and yesterday it was Volvo. And we've also got the promoted videos which we launched last quarter which are doing pretty well. But I can't give you any more details on the click through rate.

And can you tell us how the engine's doing as far as profitability? Any thoughts on margins? Are they getting better or worse? And then just a follow up on DoubleClick, are all those revenues going on the licensing line and did display help your overall growth rate, the 6%? Was display something that grew faster than that and helped the overall growth rate?

I think on the display side it does go right through to the licensing line, so it does. And then you can back out if it does make our - oh, DoubleClick, sorry. Yes, DoubleClick does go through that line.

So we can kind of back that out and kind of see how it's affecting the overall growth rate.

I guess so.

Your next question comes from Jeffrey Lindsay - Sanford Bernstein.

I just want to ask about the large reduction in traffic acquisition cost. This was due to makeshift or is it that you're rolling off expensive deals? What I'm interested in is how sustainable is that trend? And then if you could just mention - I don't know if it's public or not - just how long you've got to run on the current AOL and ASK deals. Thanks.

Okay. So the short answer is it is mix and we obviously don't comment on any deals that we have in our pipeline. I think it's also, if you look at our Q4 '08 versus Q1 '09, our Google [inaudible] versus Google total revenue on the [Google] side it's gone up slightly and that's, you know, if you think of - there's the mix within the category and then there's mix between categories and on the Google side, obviously, it reflects the growth in our revenue from toolbars and browser distribution agreements. So that's how I'd think about it.

Your next question comes from Jeetil Patel - Deutsche Bank Securities.

A couple of questions and I guess broadly two different questions, but if you adjust for FX and you look at your CPCs, they look like they were still up or flattish on a year-on-year basis when adjusting for FX, but not as much as before. I guess can you talk about, I guess, conversion rate coming off and I guess in particular which regions are you seeing more pronounced changes in CPC or conversion rates out there that could fluctuate the overall CPC trend? And then second, I guess it looks like the U.K. obviously fell pretty quickly in terms of revenue constant currency and then came back. U.S. it was, it seems like, more of a kind of steady decline, but holding its own. And rest of world is kind of a mixed bag. I guess can you characterize where do you think we are in the rest of world camp in general in terms of kind of going through this recession and seeing that impact in some of your regions? Is it probably early stages similar to the U.S. trend or does look like it'll pace similar to the U.K.?

We don't really break out the components of the RPM equation, so I'm not sure I'm going to give you a whole lot of color here. You can't derive price directly from paid clicks growth in the total amount of information that we give you. I think I did say on the call that some of what we're seeing on CPC is mix issues. It's particularly mix issues for the smaller emerging markets; it's certainly an FX component. It's certainly the lower dollar items and the issue of conversion being relatively lower than they had in the past. And as Eric mentioned, the auction working and advertisers lowering their bid. So I think that those are components. We certainly have seen a lot of CPC growth in the quarters before the economy collapsed, but I can't give you any more detail than that.

I guess in some of the nascent regions that are still ramping, if you open up more distribution or more coverage, are you seeing bid prices improve like you saw over the course of the last couple of years here or in some of the more mature markets or is it a different dynamic in some of these emerging markets?

Yes. Okay, so I think that what we're seeing there is different because a lot of those markets are sort of at the more nascent stages of the growth rate. So if you sort of map them against what we saw in the U.S. or the U.K., which was actually the leading market, and said, you know, they're N years behind us, many of them are on growth trajectories that are strong, just as we were a few years ago, but obviously that's being dampened by the economic dynamic just like things are here. And, of course, you also have the FX effects there, too.

Your next question comes from Ross Sandler - RBC Capital Markets.

One kind of high-level question then one or two accounting questions. To follow up on the pharma ads issue earlier, it looks like the FDA may actually require all these pharma advertisers to add all the disclosures to their ad creatives. Is that a fairly easy task for Google to increase the available character length on those particular ads or is that going to be a little bit more challenging given the complicated technology?

I'm not sure what we're actually going to do there. I'm not convinced that we won't be able to come to some agreement in terms of what the right solution is with respect to some of these issues. Certainly, it wouldn't be ideal if we had to modify the user interface to accommodate substantially more information. Can it be done? Yes. Is it easy? Maybe not. We're going to find a way with the advertisers to make this work in one way or another and you could do it within the existing creatives if you had to.

Just a quick follow up on that. Are the advertisers actually still doing stuff right now or are they completely on hold until this issue gets resolved or can you not comment on that?

I believe there's some things that have been shut off, but I don't know all of the details about what subset of the activity there has been shut off. And some of them are, I think, attempting to change relative to the new standards they need to try to address. It's not really as big a deal, I think, as folks are making it. I know that I said that health was a vertical that was doing particularly well and pharma is important, but it's really a pretty small segment of the whole vertical.

And then, Patrick, if we can just get a little more clarification on the accounting around the hedging program kind of going forward. The way it was explained before it was an 18 months kind of rolling forward of these contracts. So why did we see the one-time boost in the first quarter and are we to expect more of that? How do we think about the accounting around the hedging program?

Okay, so the fundamental issue that you have is it's not one time. It just happens that as every quarter we set up another tranche of hedges, some for the immediate short term that we don't have covered yet but cover it more and all the way to 18 months out. Think of it as kind of you're building the equivalent of a ladder every quarter, kind of filling the pipeline as every quarter retires. And so in Q3 of '08 that's when we actually put originally the first set of pound hedges that we've built over a couple of quarters and that now will have, you know, a full 18-month ladder built over the coming quarter. So that will just be rolling, that entire set of hedges, every quarter going forward. But in Q3 we put in a bunch of them for the next quarter and the next quarter and the decreasing exposure levels all the way down to 18 months, and it happened that the ones we put in Q3, because of where the pound went, gave us a substantial gain for Q1. I mean, next quarter we'll have more hedges that will kind of come to fruition and we'll have to decide what to do with the options that we got. So it's not a one-time item. The real item that happened is the ones that we had put in September, because of the wild fluctuation and variability of the pound over the last six months, we just happened to gain a lot. Had we had - I'll give the extreme of a case where assume that the pound had gone nowhere, it'd been very stable through the entire period, right? We would have spent the money and we would have had no benefits because there's nothing to capture because there's no volatility. So it really was driven - the last six months - and in a way I really feel for the investment community and the analysts trying to run these models, I really do feel for everybody because you have such high volatility in the last kind of nine months and because that is compounded by the FAS 133 that says well, you know, if you're in or you're out, you've got to book it all or not the minute that you get a decent amount of volatility, it just swings the numbers all over the place. So what we have to think about from our perspective is we continue to have a very stable hedging program in place. It continues to deliver us the value when there's high volatility, which is what happened. And, you know, because of the forced marked-to-market you have a decent amount of numbers floating around, but you shouldn't worry about that too much.

And then one last question - I promise, the last one - on the bonus accrual issue, a couple years ago Google used to accrue for bonuses with kind of a progressive growth manner so 1Q the accrual was kind of the lowest and it ramped up throughout the year and 4Q was the highest. And then in Q2 '07 you kind of went to more of a flat quarterly accrual program. Are we now back to the progressive? Like how do we think about, you know, just take $100 and spread it out over the course of four quarters? Is that going to be $25, $25, $25, $25 or does it start at $10 and then go up higher on the bonus accrual issue?

Yes. I mean, we try to, if you think about it, right, we try to - when you start the year you have a plan in place and in that plan you accrue according to what you think the year's going to unfold and that's all we do. And then as the year unfolds we would, if we had more information to raise the accrual, would do so, so that's how we plan the year. That's why the number has gone down relative to Q4 because, I mean, if there's a good proof of how uncertain an uncharted territory we live in, look at Q4 and our results in Q4 and the economic activity that was really - in all of the turmoil that was happening, we had a very strong revenue quarter in Q4. And that created a bonus accrual that, if you had thought even in September or August, we hadn't foreseen. So we were really happy with the results and therefore happy to take the accrual and celebrate with all the Googlers, and now we're back to our regular territory of here's the year and here's the plan and away we go. I mean, that's why variability because the world is very uncertain and we're living through it right now all of us together.

Your next question comes from Sandeep Aggarwal - Collins Stewart LLC.

Jonathan, one question is we are seeing a little bit higher traction for search engine optimization and the question to you is does that mean the ecosystem of paid search is expanding or does this mean there's some potential threat to the paid search campaign?

I guess I'm not sure what is the perceived threat that you're articulating as a result of search engine optimizers?

Well, I mean, you know, if I'm running a Google Adwords campaign and then I'm also running searching and optimization and instead of Google and saving the money I'm running model for [inaudible] and maybe optimizing my website, landing pages, etc. In that case, am I likely to cut my paid search budget and I look at some money for searching optimization?

I honestly don't have any idea. You're basically saying is there going to be a shift in Adwords spending, spending on [inaudible], and I don't know.

And just one question, Patrick. On the sales team side, just one thing, you know, I think [inaudible] just happened too quickly. I know Omid tried to address some of those things in the previous call you hosted, but is there any other [inaudible] - should we expect some more changes in the sales structure, sales channel or anything else of that sort?

We have no plans right now. I think that the work that was done by the team was very well done and that's why, as you can imagine, for any organization the last thing you want is an announcement every two weeks of changes. That just drives everybody nuts. And so we had an opportunity in the sales group to do the things that we announced and so, you know, we did announce them a few weeks ago. And right now we have no more plan. I mean, it's obvious that the world continues to be quite uncertain, right? So in that kind of world you've got to stay flexible, but right now we have no other plan.

And just one thing about, is there going to be any future revenue contribution from that discontinued audio business?

No.

Sandeep, I'm just thinking about your original question a little bit and I think the one comment that I could offer is I don't tend to think of these advertisers that we have as having fixed budgets. And I think it's kind of unlikely that someone who's running an Adwords campaign, where they're measuring the ROI on an incremental basis and experiencing positive ROI from each incremental Adwords click, it seems unlikely that they would throttle that budget back if they're making positive gross margin on each of the Adwords clicked. So what you're proposing seems unlikely to me, but plausible.

Your next question comes from [Brian Volen] - Sturtevant & Company.

I want to touch back on the idea that Eric brought up, the ROIs moving more into Google's favor. As we look at the moving parts in there we just look at clicks and searches, the cost and conversions. With the market pretty much moving costs lower, isn't that going to be the major factor or what is really driving the ROIs up anything more than just the costs coming down as advertisers are moving out of the space? And is there anything that will, other than keeping the costs low, allow for advertisers to actually really stage up and spike into the market to push ROIs higher?

I think really the main thing that drives ROI is the degree to which we're able to develop better ads and ad systems that target more efficiently and deliver an ad such that if the user clicks on it they're more likely to consummate a transaction. I think the conversion rate is probably the most significant component and that's a function of targeting the ad and the creative on the ad. Also some of the tools that we offer with respect to optimizing users' websites, you know, analytics, the website optimizer, things that allow the advertiser to get higher conversion rates on their site. I think that's basically the kind of thing that we're going to do that will continue to improve ROI.

You talked about the optimizer there. About what percent of customers are using the optimizer?

I don't think that we've said. You'd have to talk to customers directly yourself. There is a blog post if you type conversion optimizer [on Google] it describes some of the detail in the study that we ran with a bunch of advertisers for which I got the percentage of [inaudible] different pieces. But we don't release that number. A pretty large portion of our advertisers are using some subset of the various tools that I mentioned - the website optimizer, the keyword piece, the conversion optimizer with analytics.

Your next question comes from Robert Haley - Gabelli & Company.

I wanted to just ask one question on your paid click growth and if you could talk about what's driving that growth, whether it's growth in the number of advertisers using Google or maybe talk about paid click growth on a per advertiser basis and how that's impacted by changes in budgets allocated to Google versus changes in consumer click through behavior.

I'll make just a broad statement and then let Jonathan complement, if you wish. There is, I mean, our traffic continues to grow, so if you think of general principles of what's going in our favor, our traffic continues to grow and we continue to have paid clicks to our network. There are different effects within that which obviously at the macro level, if you're in a mature market like the U.S. versus an emerging market like India, you get mix issues, you get vertical issues and you get value issues and that's basically how kind of we think about it and manage it. And so I don't know if Jonathan you have additional information you want to share or if I've missed something big.

No, I think Patrick got the biggest thing. I mean, clearly query growth is the primary driver there and beyond that I don't think we really go into detail on the other components of the equation. I don't think that there's significant activity with advertisers withdrawing themselves from a budgeting perspective altogether. I would echo what Omid said there, that to the extent that we are impacted by budget reduction, it tends to be the larger organizations where a CFO, somebody in Patrick's role, basically says we want to cut budgets N% across the company and that impacts the CMO. That's much less a factor in the small and medium businesses and, interestingly, it's less a factor even in some very large companies that really understand the concept that Omid mentioned about Google being a sales channel as opposed to a marketing expense. And I would take to heart the comments about the auto industry, where I think you're otherwise seeing relative shrinkage in overall marketing budgets and yet some robust growth in paid search and online advertising. So I think there is still value. I think we're seeing a lot of value in terms of shift in markets like that one from a budget perspective. By the way the one other obvious area there is I don't think you're seeing much budge reduction at all in the pure play online companies who really understand and measure the metrics of a lot of this traffic. I think they're much less prone to adjusting their budget.

Great. So thank you, everyone, for your time today. If you have any further follow up questions, please don't hesitate to contact either myself or [Rhea]; we're happy to answer your questions. And thanks again for your time.

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