Good day, everyone, and welcome to the Google, Inc. first quarter 2006 earnings conference call. This call is being recorded. With us today from the Company is the Chief Executive Officer, Dr. Eric Schmidt; the Co-founder and President of Technology, Mr. Sergey Brin; the Co-founder and President, Products, Mr. Larry Page; and the Chief Financial Officer, Mr. George Reyes. At this time, I would like to turn the call over to Ms. Kim Jabal, Director of Investor Relations.

Hello. Welcome to our first quarter 2006 earnings call. As mentioned, on the call today are Eric Schmidt, our Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; and Jonathan Rosenberg, Senior Vice President of Product Management. This call is being webcast from our investor relations website. Additionally, our press release issued a few moments ago is now posted on our website. A replay of this call will be available within a few hours. Some of the comments we will make today are forward-looking, including statements regarding the prospects for growth in online advertising and our ability to track the business of larger advertisers, the seasonality of our business, our expected capital expenditures for 2006, our expected stock-based compensation expense, possible future compression in our net and operating margins, the expected dilution related to the equity grants to employees and our ability to extend targeted and measurable advertising to radio. These statements involve a number of risks and uncertainties that could cause actual results to differ materially from those anticipated by these forward-looking statements. These risks and uncertainties include a variety of factors, some of which are beyond our control. These forward-looking statements speak as of today, and you should not rely on them as representing our views in the future, and we undertake no obligation to update these statements after this call. Please refer to our SEC filings, including our report on Form 10-K for the year ended December 31, 2005, as well as our earnings release posted a few minutes ago on our website, for a more detailed description of the risk factors that may affect our results. Copies of these documents may be obtained from the SEC or by visiting the investor relations section of our website. Also, please note that certain financial measures we use on this call such as EPS, net income, operating margin, operating income and free cash flow will be expressed on a non-GAAP basis, and have been adjusted to exclude charges related to stock-based compensation and estimated plaintiffs' attorneys' fees related to the proposed settlement of the Lane's Gift class-action lawsuit. We also report our GAAP results as well as provide non-GAAP results on a supplemental basis in our earnings release. Reconciliations of all non-GAAP financial measures to GAAP financial measures are also included in the earnings release, which may be obtained by visiting the investor relations section of our website. With that, I'll turn the call over to Eric.

Well, thank you very much, Kim. We are obviously very happy with our Q1 results. The Company is very much executing against the strategy we have told you about. We basically have good news across the board, across the whole business. We have made a lot of progress on what we consider to be our highest strategic priority, both search quality and end-user traffic. And it looks to us like we continue to gain market share. There's a recent Keynote study, for example, that concluded that Google was number one in overall user search experience and, of course, in local search and image search. Our own internal estimates show that we're gaining share in all of our key markets in the US, UK and newer markets like India. Third-party data seems to support all of the trends that we see internally. I should point out that we believe that the audience reach we offer our advertisers across Google.com and all our network sites is very much the largest in the world. We provide an unmatched audience breadth for our advertisers, and this of course is why so many are coming to Google. I don't think this is generally understood, is how big our reach really is. Our international gains were very, very strong this quarter and we expect that, of course, to continue. Europe is doing extremely well for us, much larger offices in the United Kingdom, France and Germany. We organize them by industry vertical. We brought out a new practice involving our agencies called Best Practice Funding with near 100% sign-up rate, and a whole bunch of changes in the way we work with our advertisers that are consistent with what we have done in the United States, and are producing much better performance for them and much better economics for Google. All of us, the majority of us, were recently in China, where we announced, among other things, a launch of our major R&D center in Beijing and a new Chinese name for all of our Chinese properties, and we expect lots of good news there shortly. In the area that we really focus on, which is the end user and the end user value proposition, Larry is going to talk a lot through the products that we have done. I wanted to highlight some of the progress we have made in mobile, which is another big strategic area for us. We have a transcoder now that will go from one format to another. Google Maps, of course, is incredibly successful now on BlackBerries, Google News Mobile and many, many more deals coming with leading mobile providers. A big, big new area for us and something we have been working on for about a year. We also talked in our financial analyst meeting about locally targeted ads, and that is an increasingly meaningful contributor to revenues. We just launched, for example, local business ads. There's much more coming as we combine advertising and local and mobile in some interesting and new ways. A couple of other quick things. As everybody knows, we were added to the S&P 500; we're very delighted to have been added there. Along the way, we were able to raise 2.1 billion for general corporate purposes, future investments and acquisitions. If you look in the history, for example at the AOL deal, where we ended up with a great opportunity to invest $1 billion, those opportunities come along. If they come along, we now have sufficient cash to be able to take advantage of them if they make sense. Indeed, that one did. So what you are seeing as a result of our strategy is value for end users and value for shareholders. We're excited for that, for obvious reasons. Three process comments for you. As everybody knows, we have a seasonality in our business. We have talked about this every year. It's been true for the six or seven years the Company has been around. It's more and more pronounced. Q2 and Q3 have slower revenue growth. This is basically because basically after Memorial Day, in the early part of June, traffic slows and doesn't really pick up until mid-August or so. So it the latter part of Q2 and the early part of Q3. And we are, of course, going to continue to invest during this period. We also -- of course, there's been a lot of debate about this -- are going to continue to not give forward guidance, as per our long-term policy. We are working on greater transparency for what we do, and we're going to continue to experiment with new ways that work with you and other important stakeholders in our community. We are, for example, planning to have some more informal Q&A sessions over the next year as we can arrange them. We're also going to try to shorten our comments today so we can have even more time for Q&A. Please give us your feedback about how this works and what is the right balance. We do want to do this the right way. So with that, I'd be delighted to turn this over to George.

Thanks, Eric. As Eric suggested, we are very pleased with our Q1 results, which again demonstrate the strength of our business model. We continue to execute on both the top line and the bottom line, as we rapidly scale and make careful and measured investments in our business. Revenue growth was very healthy, increasing 79% year-over-year to $2.3 billion. We saw strong performance in many of our verticals and across many geographies, as well as substantial growth in our advertiser base. To highlight a few verticals that did very well in North America, the retail, technology and finance verticals all increased as a percentage of revenues since Q1 of '05. We're also very happy with the continued growth in our Google site revenues, which were up 97% over Q1 of '05. We also benefited from favorable traffic trends during Q1, as well as continued gains in monetization. Our network business also performed well. AdSense revenues grew 59% year-over-year, and were also correlated with increased traffic and gains in monetization. New publishers participating in the AdSense for Content program were significant in driving revenue growth and the AdSense referrals program we launched in Q4 is supporting this growth in our publisher base. We also strengthened and renewed relationships with several search partners, and are pushing forward with international expansion of the AdSense program. Now, let me turn to international results. We were very pleased with the performance of our international operations. Revenues from our international business were $936 million or 42% of our total revenues, up from 38% in Q4. Like last year in Q1, international revenues jumped as a percentage of revenues relative to Q4. In terms of foreign exchange, rate changes had an immaterial impact on our quarter-over-quarter international revenue growth. However, had foreign exchange rates remained constant from Q1 of '05 through Q1 of '06, our international revenues this quarter would have been $65 million higher. Let's take a bit of a geographic tour through revenues now. Revenues from the UK were $343 million or 15% of revenue, up from 14% in Q4. In the UK, France, the Netherlands and the Nordic region all exhibited particular strength in both traffic and monetization. The UK also benefited from an expected rebound in the travel and finance verticals in Q1. We're also continuing to see returns on our investments in local sales offices around the world. For instance, since opening local offices in Sweden, Norway and Denmark over the last 18 months, we have seen tremendous growth in monetization in the Nordic region. This growth is largely driven by the sales and marketing activities of these local offices. Let's now move onto the P&L highlights for the quarter. Revenue less traffic acquisition or net revenue was $1.5 billion, with TAC of $723 million or 32% of advertising revenues. Other cost of revenues, which is comprised primarily of data center costs, operational expenses including depreciation expense as well as credit card processing charges, increased to $181 million or roughly 8% of revenues. Other cost of revenues in Q1 also included $2 million in stock-based compensation. Let me now turn to operating expenses, which in aggregate totaled $607 million this quarter. Operating expenses other than cost of revenues included $284 million in head count related and facilities expenses; $112 million in stock-based compensation; and $50 million in advertising and promotional expenses, of which $25 million was related to distribution deals. Also included was a charge of $30 million related to our estimate of plaintiffs' attorneys' fees we expect to pay to settle the Lane's Gifts class-action suit, which we have excluded from our non-GAAP results. Please keep in mind that stock-based compensation is now included in each of the operating expense line items, as well as in other cost of revenues. We have excluded the stock-based compensation portion of each of these line items from our non-GAAP results. For the full year, we now expect stock-based compensation charges for grants to employees prior to April 1st of 2006 to be roughly $370 million. This does not include expenses to be recognized over the remainder of the year related to employee stock awards that are granted after April 1st or non-employee stock awards that have been or may be granted going forward. Turning to profitability, non-GAAP operating profit, which excludes stock-based compensation and estimated plaintiffs' attorneys' fees related to the class-action suit, was very strong at $887 million, with non-GAAP operating margins of 39%. You should continue to expect potential for compression in net and operating margins as we go forward and invest in the business. Our total cash position remained strong at $8.4 billion as of March 31st, with net cash from operating activities of $825 million or 36% of gross revenue. Our quarter end cash balance does not reflect the proceeds of $2.1 billion from our recent offering that closed in early April, and does not reflect the $1 billion investment in AOL, as it too closed in Q2. To clarify the share count calculation, our quarter-end share count does not include the 5.3 million shares we issued in the offering. This share count increase will be incremental to the 1% to 1.5% dilution we expect from employee stock awards. On the CapEx front, we continue to invest aggressively in our global infrastructure, which we believe is one of our most important competitive advantages. In Q1, CapEx was $345 million. We expect that CapEx growth rate in 2006 will be substantially greater than the revenue growth rate for the year. We expect the majority of investments to be focused on IT infrastructure, including servers, networking equipment and data centers, as well as real estate and campus facilities. So, to close, we are extremely pleased with the results we have been able to achieve this quarter. Now, I'll turn it over to Larry.

Thank you, George. We had a great quarter with respect to our products, due to the hard work of all of our teams, and I am very excited about that. Our focus remains on providing the best user experience. The first quarter, we reached an all-time low on search spam and an all-time high on search quality. We provided more comprehensive and faster index. Structured data was integrated from Google Base into our main search. We also introduced several innovative new client applications to make Google functionality easier to reach from the desktop. Google Desktop 3 enables search across multiple computers and sharing of content through the sidebar. The Google Toolbar 4 beta allows users to build custom buttons to run queries directly on any website, create online bookmarks and receive queries directly on any website, and also feeds directly from their toolbar. We also made Toolbar 2.0 for Firefox available in the first quarter. Google Pack makes it easy for users to get essential software in just a few clicks, and aims to make it as easy as just using software on the Web. Just recently, we released Google Calendar, a Web-based application that helps people organize their busy lives and allows websites and groups to share and publicize information. We also introduced several early-release applications that push the bounds of browser capability. Now, with Google Finance, you can drag stock-based graphs around just like you can with Google Maps, you can move the maps around. Those graphs are even labeled with relevant news. It is really a lot of fun to use. Page Creator is a free and easy to use browser-based tool for creating and hosting attractive Web pages. We integrated chat into Gmail, which was a first in terms of offering users a seamless communication experience in the browser. Lastly, in terms of meeting the needs of our business customers, we introduced three new Google Mini search appliances with capacities and price points designed to meet the needs and budgets of a wide range of businesses. We got a lot done and continue to work very hard on our products. And I would like to turn the call over to Sergey.

Thanks, Larry. The first quarter of 2006 saw a significant amount of activity in opportunistic acquisitions, global expansion of our presence and notable additions to our leadership team. Our commitment to enhance our products and services via acquisition of unique and ground-breaking technologies continued in the first quarter. The purchase of dMarc Broadcasting allows us to extend targeted and measurable advertising to radio by directly connecting advertisers to radio stations through dMarc's automated advertising platform. We also acquired Upstartle, maker of Writely, the Web word processor that helps people access, edit and share their documents from any computer on the Internet via their browser. In a step toward achieving our vision of mirroring the real world with a realistic virtual world where users can see and interact with all of the world's geographic information, we acquired @Last Software, creators of the personal 3-D authoring tool, SketchUp. In the first quarter, we renewed our partnerships with EarthLink, Comcast, NTT, Nextag and [Tungsung] and signed new deals Sony Ericsson, Vodafone, SingTel, WashingtonPost.com and Clear Channel. And of course, we finalize the extension of our partnership with AOL and are very pleased to broaden and deepen our relationship with them. As part of our effort to get closer to our users, customers and top engineering talent, in the first quarter we expanded our presence on a global basis. We opened R&D centers in Moscow, Trondheim, Denmark, Tel Aviv and Taipei. In addition, we opened offices in Mumbai and Delhi, and announced plans to open an office in Tempe, Arizona on the campus of Arizona State University. Finally, I was very pleased that we were able to hire Dr. Larry Brilliant as Executive Director of our philanthropic efforts known as Google.org. Larry is a renowned physician, technologist and specialist in international health, who is uniquely suited to lead our efforts to tackle the gravest of the world's problems in the areas of global poverty, health, energy and the environment. Eric, back to you.

Thank you very, very much, Sergey. As a sort of a wrap-up, my personal view on all of this is that Google is now the world's fastest innovator at scale, and that the 70-20-10 model and the 20% time that we have talked about for a long time, combined with a broad strategy and excellent business model, is providing the raw material for an increased pace of innovation. The number of products and markets that we offer is increasing the scale, as we are just at the beginning of the Internet revolution, this bodes very well for our future and the future as a whole. We continue to invest in technology, capital and business deals to further our relatively simple goal of organizing all the world's information. This quest is not a short-term one, and we expect strong continued growth in innovation in the space for very long time to come. As life online with Google becomes more and more commonplace, we should see increasing benefits to everyone including, of course, our shareholders. And that's great news. So with that, thank you very much. We are going to be joined in our Q&A session with Jonathan Rosenberg, who is the Senior Vice President of Products.

(Operator Instructions) Our first question comes from Safa Rashtchy, Piper Jaffray.

Good afternoon, everyone. Congratulations on another great quarter. A couple of quick questions. As you all noted, you have been significantly expanding your product lines well beyond Search, of course, to a number of applications. But also on the advertising, you have embarked on providing advertising on a CPM basis, and then a graphical basis. Can you give us a sense of the revenues that you are generating from these areas and/or what you would expect over the next 12 months or so from these new initiatives? In particular, maybe a subset of that you could expand on is, what do you expect from Google Base, as well as the broader advertising network that you are working on? Thanks.

Safa, thank you very much for that question. It is correct that we are investing in these new advertising sources; you highlighted a number of them. We expect them to be a significant component of our revenue in the future. Today, they are not. They are growing from relatively small bases. The most successful new revenue sources that we get are where we take the existing ad network and apply it to something new, like AdSense for Content. Some of these even newer things like the CPM ads are still in largely a beta test mode. Jonathan, do you want to add your perspective?

Sure. With respect to the CPM ads, we're definitely seen a lot of progress, particularly with some of the large brand advertisers with site targeting. We have also added some capabilities there to do some demographic-based targeting efforts, and they have the option there on our AdSense network of using a variety of these graphical ad techniques. The main customers who seem to be having the most success with this tend to be in the entertainment business. I've seen lots of examples of companies such as Paramount and a number of other movie studios; I think Fox did a great campaign with the Fantastic Four. So I think we're just getting started there. I think the real challenge is in the auction. It's hard to come up with ways for those graphically oriented ads to trump the traditional word and text-based ads in the auction, simply because of the relative probability that they are going to be clicked on versus a number of good small text-based ads. No one has really conquered the economics there to get more of the graphical stuff moving aggressively.

Our next question comes from Mary Meeker, Morgan Stanley.

Thanks. Eric, you talked about your mobile transcoder, and this may be a strange question to have at the beginning of the call, but could you talk a little bit about the competitive landscape there? It seems like this provides you with a big competitive advantage in what could be a very, very large market. When you think about it at a high level, the way Google Search kind of transformed the way people use the Internet and sort of reignited growth in the Internet, do you think that the products and services that you are offering in the mobile market that will allow people to get content easily, more effectively, in the right format for the user interface that's there could do something similar in the mobile market in the next 12 to 18 to 24 months?

Well, of course, this is why we did the transcoder. It makes a lot of sense to try to get all of that information that is out there automatically and, in fact, dynamically translated into a format that will work on your phone. There are multiple formats that are available on phones. There's an older phone called WAP technology, and there is a newer technology called XHTML, and there are others coming. It is strategic to us to make sure that all the content is available on all the phones. Indeed, we have entered these partnerships. The notion of a transcoder is not a new one, we just think we have a better one than anybody else.

Should we expect to see more partnerships announced in the coming months?

Absolutely.

Thank you.

Our next question comes from Imran Khan, JPMorgan.

Eric, you talked at the beginning about UK market share and the US and across the world, and I was wondering, in one of your conference calls, one of your competitors said they have been seeing consistent query volume growth of 15% to 20% in the US market. Can you just confirm on this call, are you getting query volume at a range in the US market of faster that, or have you seen any deceleration in the query volume growth?

I think all I can really say is that I see the same external data that you guys do, and obviously we have our own internal data that we don't actually share. What we can see is that the external data seems to us to be directionally correct. So it appears that we are gaining market share in virtually all markets, and that is consistent with the external trends that have been publicly stated.

Actually, I think Yahoo disclosed that they grew the query volume 15% to 20% on the call, so it's actually coming from the Company. So I was wondering if you guys can give some range, maybe for the first time, or additional ones like Yahoo! on query volume growth you are seeing?

I appreciate your interest. I cannot narrow down the range specifically.

Our next question comes from Mark Mahaney, Citigroup.

Thank you very much. Maybe I would like to ask about one market where you may not be gaining share, and that's the China market. Do you think you're gaining share in queries there? I guess the third-party data probably doesn't indicate that. I know it has been a major emphasis of yours recently. Are there new initiatives we should look for out of that market?

Having just returned from China, I think the market is up for grabs. Most of the surveys indicate that we are not in the number one position, we're in the number two position, and roughly holding and/or maybe gaining share in a small amount. Part of the reason that we're investing so heavily in China is because we think that the now 110 million people online in China, and soon to be many hundreds more than in the United States, will ultimately be big consumers of Google information. In order to do that, we felt that the most expeditious thing is to, in fact, have an R&D center; in addition, obviously, to having a presence in the country and working on connectivity and those sorts of things. The quality of the technical talent that's available in China is just phenomenal. So in the short term, you'll see the formation of the R&D center, which we have announced. Those engineers will be improving query performance, services and in fact new products for the Chinese market. We believe that the sum of those will materially change the dynamics in the Chinese market.

Our next question comes from Christa Quarles, Thomas Weisel Partners.

I was wondering if you could discuss your philosophical approach to being a destination site, versus a place where people kind of figure out where they want to go and then go there. Obviously, you launched Finance, you have Video. Are you in a position where you eventually would think about paying for content, or would it be better to kind of go the vertical search route, for example?

I'll try to address that. We really don't think about it that way, and we are trying hard, all of our teams are working hard to find user needs that are not being met at all. I think there is a natural tendency to keep about the Internet and computing space as largely discovered; we're going to develop products that are similar to what other people have. But if you had asked me to predict five years ago, even when we were fairly far along as a Company, the kinds of things that we would be doing now, I wouldn't have been able to predict very well. Many of the things that you see of the Internet with respect to advertising or other areas have been very innovative and have not been predictable. So in general, we're looking for areas where we can innovate, where we can meet really substantial user needs. Those are general areas that are not being addressed well at all now. So I don't think we think about it that way in terms of destination. We're looking for places where we have leverage that will matter to our users and will be a good business for us, and we expect to be rapidly expanding that innovation.

Our next question comes from Ben Schachter, UBS.

Hi guys. Congratulations on an outstanding quarter. Just a quick question on the experiment that you are running with Dell right now. I was wondering if you could talk about how large that may or may not be, how the accounting works for that and how is it different from deals you may have done in the past with other OEMs. Also a question on the pay-per-call model . Understanding that you have negotiated some things with AOL and that AOL, arguably, with their partner, Ingenio, has been a leader in that. I was wondering if you're going to be working with them on a pay-per-call, or if you think you are going to go out on your own and be more a competitor with them?

I wanted to discuss our Dell experiments, and then someone else may take the pay-per-call question. On the Dell side, we're continually working with computer manufacturers to make Google more quickly accessible to end users. With the Dell experiments that have been underway for a while, we actually have probably pushed larger amounts of software than some of the others, including Desktop as well as Toolbar and the start page and things like that. I'm excited that we continue to try things like that. I believe that computer users should have as great an experience out of the box with a new PC as possible, and so we're trying to bring that great software to manufacturers, so just right out of the box you have Google in a way that works and works well. The Google Pack is also another vehicle for allowing new computer users as well as old to have a good out-off-the-box experience by making it easy to download some of the key components that you might need. So that's the basic strategy. I don't have any relationship or business deals to report. The accounting George might speak to, if he has anything to add to that. I will leave it at that. Jonathan.

On the click-to-call, I think you are basically referring to just some very early alpha testing that we have been doing with this product that lets you speak directly to an advertiser that you can find through the results on a Google search page. Its basically free; you do it over the phone. We've really only just started on trying to test this. I think it's a very exciting model, because it's a model where you are much closer to consummating the transaction when you actually engage in the activity and go to the advertiser. So advertisers are very excited about it, because it's actually a model where you're delivering a customer that has very high odds of engaging in a transaction. In terms of working with our partners, as is the case with all of our products, these are going to be opportunities for our partners to make a choice with respect to whether or not they want to work with us. We've had great success with AOL; they have been one of our biggest long-time partners. We will generally offer this kind of functionality to a partner, and then let them decide what they want to do from a product perspective on their own.

Our next question comes from Robert Peck, Bear Stearns.

Hi guys. Great quarter. I just have a question on spending and how you look at it going forward. First of all, are you able to give any more detail to us, even geography-based or more specific, on the CapEx? Following up on the previous question, are you able to give us a little more detail around the economics of the Dell deal? Lastly, would Google be interested in any of the wireless Spectrum coming up this summer?

I'll take the first part of it. As we have discussed the topic of CapEx over the last two to three years, what we believe and have believed for a long time is that these investments will pay off very handsomely, and it will further strengthen sort of the competencies that we have. So we're going to continue to invest at a rate that is substantially higher than what we did last year, and we believe it will pay back in spades.

I'll address the wireless piece. We have started some experiments in San Francisco and Mountain View to provide Wi-Fi access. In general, we're interested in any way we can provide better, more transparent access to the Internet to our users, thinking that will be good for our business and generally a good thing. We have not announced any plans with regards to Spectrum or anything like that. But like I said, we are generally interested in improving access to the Internet.

Any economic details on the Dell deal?

Let's just say that in the trial, both companies have done well.

Our next question comes from Anthony Noto, Goldman Sachs.

Thank you very much. We hear from advertisers about unspent budgets quite a bit, and we have heard a number thrown around in the advertising community of about $1 billion for Google that people put into the system and don't get spent. Could you talk a little bit about initiatives to unlock that value? I know you are not going to quantify that number, but do you think there is a lot of potential there in different formats and new verticals, et cetera? Second question, George, housekeeping. By my math, I can get into EBITDA of close to $1 billion, a little over $1 billion. There has been some other numbers thrown around the Street that are below that. I just want to clarify that that's correct, which would imply a pretty healthy EBITDA margin of about 65.4%. Could you give us any sense on margins throughout the year? The CapEx number is significantly higher, it creates a range that is pretty wide. I was just wondering if you could give us any sense for what is the downside of margins? Could it be below 64 or not?

Let me start with the budget issues and sort of just generally some of issues with respect to head room and opportunities for garnering more of those dollars from our advertisers. The first issue with respect to the budget is a little bit of a legacy of the way the systems are architected. Advertisers have a strong incentive to put in a budget that is substantially greater than their actual spend. They do that, of course, because the gross margin on each of the clicks that they receiving from us are positive, and the rate of change in terms of that margin on incremental clicks is pretty close to constant, because it's such a large system. So what the advertisers tend to do is put in an artificially high budget that ensures that, on any given day, their campaigns continue to run. Now, that said, there are lots of opportunities for us to spend larger fractions of that budget. Certainly, one is to expand the scope of the network and the reach of our sites. But probably the most significant opportunity is just improving the statistical algorithms associated with how we target ads. So anything that we do to ensure that we serve a better ad to one of those advertisers is going to get us more budget and more budget from whichever advertiser is the best advertiser. So I think, if you run a lot of searches, you'll see actually that although we have the strongest monetization systems in the industry, the ads are actually still pretty primitive. There are a large number of ways, we believe, to continue to target the ads a lot better.

The answer to your question, EBITDA was about $1 billion.

How about the margin portion of that question relative to CapEx?

The margin portion relative to CapEx? Can you --?

Your CapEx guidance basically says that it's going to increase significantly faster than revenue. As we think about CapEx throughout this year, that gives us a ballpark to range CapEx. We don't know what you're going to spend outside of CapEx, and so we can forecast revenue pretty well, or think we can forecast revenue pretty well by all these third-party data sources and our own channel checks, but we can't forecast what you are going to spend. Are you willing to give us something on CapEx or give us something on other spending?

Anthony, what you're asking for sounds like a little bit of forward guidance that I don't really want to get into.

Basically, I was basically looking for other expenses, other than CapEx, to try to get to an EBITDA margin.

Why don't we take that one off-line. Sergey, do you want to answer the other part of it?

Yes, I wanted to speak briefly about this issue of budgets. In fact, we see the greater opportunity is not the people who are under budgets, but rather the people who are budget-limited currently. Because for those advertisers, all we need to do is get them to increase their budget limits, which oftentimes they just set it a long time ago, or they didn't really think about it. There are a lot of weird reasons. They will right away start spending more. So we actually view the budget-limited advertisers as a great opportunity.

Our next question comes from Youssef Squali, Jefferies.

Can you theoretically, fully participate in the growth of branded advertising or display ad revenues, which arguably is seeing a nice acceleration, over the next several years, by only really leveraging your network, not the Google properties? So historically you have said that you will not have these display ads on your Google properties.

I may let Larry follow-up philosophically on this, because he probably is the one with the strongest vision in terms of how we will monetize our own site. I think there are lots of opportunities, particularly outside Search, where some of the branded efforts might make some sense, and we would certainly be open to looking at branding efforts in some of those areas. Within Search, the dynamic tends to be that the value and the tell, with respect to what the user is interested in is so great that there is not a lot of value in trying to substitute a branded-based advertisement for a search-based advertisement, given the amount the advertiser is willing to pay. But in terms of other properties I think there is certainly lots of opportunities, potentially, in the social networking space and potentially in other products that we have yet developed. So certainly I would not rule it out. I'll let Larry cover his philosophical issues here.

I don't think we have any philosophical issues with respect to branded advertising on our own sites. Certainly, anything we gave to network sites we would be happy to use ourselves in the proper places. Search itself, as Jonathan mentioned, is maybe not the optimal place for that. But we have many, many other properties now, including Video and Orkut and e-mail and many other types of things, too, that would we would be open to. We should note, too, that the network that we have is very, very large. And that's part of our strength as a business.

On the Wi-Fi initiative, you have a deal going on with EarthLink. That deal, from what we understand, has a low-end portion that is ad supported and then a premium. Do you have a preference for what a model in Wi-Fi environment should be? Do you have a preference for it being ad-supported, or you are encouraged by bringing an AOL or an EarthLink to do the access part and you just kind of take advantage of the traffic and try to monetize the traffic?

I think we created quite a stir when we released the proposal to do ad-supported Wi-Fi in San Francisco with EarthLink. I'm excited about the possibilities there. We said before that it's a trial and an experiment for us. We are doing it at a relatively small scale. I think we and everybody else in the world would be very excited to see good Internet access that was free and ad-supported and profitable. That would be tremendous for our business, and in fact for the Internet as a whole.

Our next question comes from Jordan Rohan, RBC Capital Markets.

I have gathered some data points recently which I hoped you would be able to comment on. Related to the Japanese market, where I have heard that the market share for Google is actually on the rise, that you guys could end up with 25% search query volume share by the end of the year, up from 15% at the end of '05. While I don't expect you to have any idea, really, whether the entire market is growing, can you talk about your relative presence in Japan, whether you think you may be gaining share? Also, is Japan today a material percentage of revenue, however you want to define that, for Google?

In the Japanese market our primary competitor is Yahoo Japan, and of course Google, there is some evidence indicates that we are gaining share. Japan is absolutely a material contributor in revenue to Google. I would encourage you not to look at any specific country but rather to try to look at whole regions.

Our next question comes from Mark Rowen, Prudential.

I know you don't give out click-through rates and pricing, but could you just give us a sense on trends for that? You talked about presenting better ads, and I assume if you're actually delivering more targeted ads and putting the right ad in front of the right person at the right time that you are going to get higher click-through rates. Are you in fact seeing that, or are click-through rates starting to fall over time? Second, there's been a lot of talk recently about social network search. I was wondering if you could talk about how you view that. Are you working on anything in that area? Do you think that, for certain types of search, that that's a better form of search than algorithmic?

Maybe I will address the first part of your question and leave the second for someone else. The click-through rates and CPCs and things like that , I was just in a meeting yesterday where we were reviewing some changes we were thinking about. We had a good hour-and-a-half discussion about all those factors with regards to the experiments we were running. Each one of those things was very nuanced and actually, depending on the experiments we were running, apt to move in an arbitrary way, up or down. It's going change in some way, based on what we were trying to accomplish with regards to the quality or revenue or the way the particular algorithms work or not, or what the advertiser behavior is likely will be. I've said this in the past, that I would really caution the analyst community here to not be too fixated on any of those particular metrics, because I know that we make changes all the time that cause them to go up or down. It's very easy to make more money by reducing CPCs, by running more ads and so on. So we look very carefully at the revenue we are generating per query, and that's a combination of click-through and cost-per-click. But those things are all heavily inter-related, and so we haven't released any stats on those. It's very, very complicated.

So you would not agree that over the long-term, if you are delivering more targeted ads in front of people at the right time, that click-through rates should go up?

It depends on the UI that we run on, it depends on how good the search results are, it depends on what countries you are talking about. There's a lot of parameters there.

And on the social networking?

I think social networking is a really exciting new area. Don't forget that we have a very successful social networking site of Orkut that's obviously much better known in Brazil than in the US. It's been very successful. I think it's interesting, from a broader perspective than just Search, but in terms of communication, in terms of meeting people, in terms of lots of other aspects than just Search. From a Search point of view, we like to be really comprehensive. I think that our main Search can include the information that is also found on the social networks. That is really the way that we see it.

I just wanted to add a little bit on the click-through rate question. Larry's point about the dynamics of the whole equation being complicated are well-taken. And if you think about it in the [limit], if you assume that the percentage of queries that people run that are commercial versus non-commercial isn't going to change, but our ad systems are going to get much, much better at targeting them, then the dynamic that you would see ultimately would be coverage could be a lot lower because, if we were smart enough, we would not serve ads on many of the pages where an ad isn't particularly appropriate. On the other hand, on the subset of pages that are really commercial, we would probably be serving very, very good ads and you would see very, very high click-through rates. So if you are just looking at that one RPM equation and trying to look at each independent variable and ask whether or not it's going to go up and down, you are going to be somewhat misled, because the system has additional effects in terms of the relationship between those variables and the relative improvements in the system.

Our next question comes from Doug Anmuth, Lehman Brothers.

Eric, you mentioned earlier in the call about the switch to Best Practice Funding in the UK and that you had a 100% signup rate there. Can you give us a sense of how much incremental revenue that generated during the quarter, and then also a sense of how your relationships are with the agencies in the UK? And I think you mentioned that they are benefiting from the switch as well. I was hoping you could provide some color on that.

We have modeled some impact on revenue positive, but that's not why we did it. We did it because it's a better way to leverage the skills and the talents of the largest agencies. What happened was, over the last few years, we had invented a model which was much more direct engagement with agencies in the United States. We brought in some new and very dynamic leadership in Europe that thought this was an opportunity that would work well in Europe, given our strong market share and strong monetization, and indeed, it has done so. We began to preview this in October, and Q1 was the first full quarter. All the indications are that it's extremely successful and that those benefits will accrue for eternity.

Our next question comes from Heath Terry, Credit Suisse.

I'm just wondering if you could just talk a little bit about what you're seeing in Google Local, to what extent, as you have ramped up the advertising within the channel, what kind of a reaction you are getting from consumers, what monetization looks like relative to the core Search product, and what the strategy is going to be for that as you try and add advertisers?

I'll start initially, and we'll see if Larry and Sergey have something to add. As Eric mentioned, Local is definitely becoming increasingly important in terms of advertising revenue. There's a little bit of confusion about the local business ads product that we recently introduced, and where we are in terms of product functionality. You could already target, prior to this launch regionally, basically by defining a radius around a single business. That's the mechanism via which the majority of the local advertising is coming. It's a little bit complicated to optimize a campaign. Many of the advertisers who are advertising locally still have one set of keywords in one campaign which they are doing locally, and then another campaign which they are doing nationally to try to pull in additional customers. Then, what we most recently introduced was what we call local business ads. And basically what that is is the capability within our Local product to enable these direct on-the-map ads with the custom map pin and the company image on the map in a balloon. So those are the kind of things that you would see if, for example, you run a search on Barnes & Noble, New York. You'll see the actual pins locating the stores; you can hover over them and then get more information. I think in the very long run, the thing that's going to fundamentally change here is when in addition you're actually linking inventory availability into local systems, you are really going to see a significant increase there. But we are already seeing that it has become a material component of our business. So with that, I'll see if Sergey or Larry has anything to add.

Let's move then to the next question.

Jim Friedland.

A question regarding your new partners. You mentioned Washington Post and Sony and some others. Are these new partners that did not have pre-existing partners, or are you gaining incremental share from your competitors? And the second part of that question is, have you lost any meaningful search partners, large search partners, in the past six months?

This is mostly adding new partners. The Washington Post that you mentioned, it was actually an interesting case where they used to be a partner a while ago, and for a while they weren't, and now we have regained them. So I don't know how you count that one. But for the most part, we are adding partners. And I can't think of any significant losses; that's pretty rare.

Our next question comes from Marianne Wolk, Susquehanna.

I had two questions. One question would be, you have all of these new opportunities we are looking at, such as Local and the content side advertising and even the enterprise business, which looked like it had a very good quarter. Could you rank these in terms of largest to smallest? As Google Base becomes more and more popular, is there any chance you would consider moving to more of a revenue-sharing model versus a click-through model? Can you talk to your philosophy on that?

We run the Company with the 70-20-10 model, and we don't typically score the opportunity for each of the innovative groups. We'd rather see how fast they can grow. So each of the ones that you named, Local and Content and so forth, are all doing well because they are prioritized right and have the right amount of resources, consistent with our operating philosophy. It's hard for us to make a prediction as to which one will grow faster than the other. They are all big markets, and there's always something that slows them down. You know, we need to get a deal done, or we need to get some content, or we need to get more tools to the advertisers and that's what we work on. So there's no simple way of prioritizing one against the other; they are all consistent with our strategy. With respect to the question on Google Base and rev share, Jonathan, you have thought about that a little bit.

Sure. Basically, the intent of Base is to improve the quality and breadth of Google Search and our results by collecting a lot more information, and also a much wider diversity of content. It obviously gives content owners and producers a better way to submit the information if it's not a web page or it's not online. The way we have been describing it so far is you get free distribution; it's flexible, you can upload anything, you can do it through any file format, you can create custom item types and attributes, you can define the metadata as it relates to your content. I don't think that we have really planned on monetizing this as something like a traditional classified product. The goal is really more to improve search.

Our next question comes from Bill Morrison, JMP Securities.

It looked like your employee growth in the quarter was healthy, north of 1,000 employee additions. Revenue per employee was down, it looks by our analysis, for the second quarter. I was wondering if you could comment on whether we should expect that trend -- well, first of all, I guess, do you plan to continue to accelerate hiring into the second and third quarters, beyond the 1,000 you hired this quarter? Secondly, should we expect revenue per employee to continue to trend down? That's it. Thanks.

If you have been watching us over the last few quarters, we have in fact been growing, hiring pretty aggressively, which, as I've said the bunch of times, is very consistent with the agenda that we have before us, which is not only a lot of broad expansion domestically but also a lot of expansion internationally. So we're going to continue on that aggressive path, and we're going to do that sort of in a way where we balance the revenue side of the equation with the cost side. But make no mistake about it, we really are in investment mode at this point.

Our next question comes from Martin Pyykkonen, Hoefer & Arnett.

Eric, first on pricing, we have talked about this a lot. You have been pretty clear and adamant that we in the investment community really don't have the granular detail to understand the underlying trends here and the headroom that you might have. But a question along those lines and at the risk of oversimplifying this, which admittedly is the case; if you would look at the kind of smart advertiser that has been in this for a while versus the newer advertiser coming in, and particularly in some of the newer markets, I'm curious if you are getting more of the pricing leverage from the newer, less experienced advertisers, or if it's fairly well-balanced between the savvy and the less experienced advertiser. Then on the tax rate. You had mentioned 30% for the full year '06 was a good range for modeling. Obviously, you had some benefit with the lower tax rate this quarter. I'm just curious what kind of quarterly variations you might foresee, or how we might model that going forward for the remaining three quarters of the year.

I'll take the first half of the question. I think there's actually a bunch of factors going on there. One thing to note, when we enter new markets, there's generally not a lot of competition for advertising. So the initial prices are quite low, given that we sell through an auction. This is actually a great way for us to get people excited about our model, and to get a lot of people into the system, and for those early trendsetters to get rewarded for trying out something new and taking some risk. In those new markets, I think probably the prices are pretty low initially, and then increase over time as people really understand that they are getting sales through this thing. That's the other part of this, is that we are seeing much wider adoption of tools to track conversions, with people actually buying. We love that. We think that's a great thing for our business. It helps our advertisers understand precisely which keywords to advertise on, how much they make from each one and what customers are really doing. Obviously, if somebody buys something, they know how much money they made and it becomes a very well-calculated kind of expense, where they know that they are making money on it. So I think, as our markets get more experienced, there is a lot more use of tools for tracking this information. We have also released some of those tools to really help our advertisers do that.

Back to your question on taxes and the tax rate, last year we projected a full rate of 30% for the year. We're pretty much on that same track now; that's our view. I think what we all collectively need to understand is that taxation is subject to discrete items that can come up from quarter to quarter. So our best assessment of the rate at this point in time is 30% for the year, and it came a little bit lower than that this quarter.

Are there any major discretionary items that we could track in terms of assessing that as you kind of go forward through the year?

I doubt it, because it is such a technical area, where we are continually assessing it each and every quarter and setting the rate appropriately on that basis.

Let's get a couple more quick questions, and then we'll have to finish up, operator.

Our next question comes from Justin Post, Merrill Lynch.

You mentioned seasonality over the summer. Outside of growing internationally, is there any reason to believe that could be different year-over-year? Then, a strategic question. You have a great asset with your search traffic, do you see integrating that into your verticals like Finance and Base? What is the opportunity there?

Let me answer that. On the seasonality, the seasonality we're seeing is the same we see every year, and I'm sure that that seasonality would be true as long as the Internet is primarily predominant in the Northern Hemisphere. The summer is, of course, we are in the summer here. So I don't see a change in the next few years; we're going to have this structure for the foreseeable future. In terms of the great traffic that we have for Search, we don't think of it that way. We think more about taking wonderful properties like Base and introducing their content and structure into overall Search, so it's the inverse of what most people think. We want to have fewer verticals and better integration with better signals and better quality.

Our final question comes from Derek Brown, Pacific Growth Equities.

A quick question -- I'm actually surprised it hasn't been asked yet. But it relates to TAC. It is something that has obviously been trending down over time, and I'm wondering if there's a rationale behind that. Is that something that you would anticipate seeing going forward?

Historically here, going back a year, year and a half, we haven't seen all that much pressure on TAC. Where you do see discrete and explicit tension points with TAC is when you get large, hotly-contested deals. Of course, in those instances, you would end up paying more and bidding up TAC. But generally speaking, we have a very thriving and vibrant publisher network; they have good economics, we have good economics, and the model works.

I went to thank everybody for spending an hour with us. Again, let us know how this works, whether we're communicating effectively. We very much thank you for coming, of course, to the next financial analyst meeting; many of you came in February. We look forward to talking to you before this, and we'll also be looking forward to talking to you at our next conference call, which will be in July. So thank you very much.

Once again, ladies and gentlemen, that concludes today's call. Thanks for your participation. You may disconnect at this time.