Good day and welcome to the Google Inc. conference call. This call is being recorded. At this time I would like to turn the call over to Ms. Kim Jabal, Director of Investor Relations. Please go ahead.

Hello, everyone. Welcome to our first quarter 2007 earnings call. On the call with us today are Eric Schmidt, Chief Executive Officer; George Reyes, Chief Financial Officer; Larry Page, Founder and President of Products; Sergey Brin, Founder and President of Technology; Jonathan Rosenberg, Senior Vice President of Product Management; and Omid Kordestani, Senior Vice President of Global Sales and Operations. Eric, George, Larry and Sergey will provide some thoughts on the quarter, and then we will have Jonathan and Omid join us for your questions. This call is being webcast from our Investor Relations website. Our press release issued a few minutes ago is now posted on our website, as well as presentation slides that will accompany today's prepared remarks. A replay of this call will be available within a few hours. Some of the comments we will make today are forward looking, including statements regarding international growth; possible future benefits from our partner deals; growth in our headcount; future investments in partnerships, distribution and content; future product innovation; our expected operating expenses; our expected level of capital expenditures; our expected margins; charges associated with stock-based compensation and possible future pressure on traffic acquisition cost rates. 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 annual report on Form 10-K for the year ended December 31, 2006, as well as our earnings release posted 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 our effective tax rate are expressed on a non-GAAP basis and have been adjusted to exclude charges related to stock-based compensation. In addition, in the fourth quarter of 2006, we removed certain discrete tax items from non-GAAP net income and EPS. Finally, we adjusted our net cash provided by operating activities to remove capital expenditures, a measure we refer to as free cash flow. We report our GAAP results, as well as provide reconciliations of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the Investor Relations section of our website. Now with that, I will turn the call over to Eric. Well, thank you very much, Kim. As everybody can see from the press release, we are ecstatic about our financial results this past quarter. Before I start talking about how well we did this quarter, I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow. Our core business at Google remains very strong and continues to grow. We have seen excellent performance in the U.S.; performance internationally is even better. International growth across many markets confirms the validity of our business model: build the market, monetization will follow. What is different now is that everyone is thinking more creatively about monetization opportunities, simply because they have learned about our successes and failures in past rollouts. So we're getting a benefit from that. We are continuing to make significant investments in our core business. Data centers, of course, primarily for speed, comprehensiveness and usefulness and engineering to preserve our 70/20/10 model that you have heard many times before. In sales and support -- and I should say this globally by the way -- to attract and retain users and advertisers. And in partnerships of course. Our AdSense partners, content partners, distribution partners, offline partners. Sometimes I worry that we spend so much time talking about all the new things that we don't focus as much on the core business, especially in our marketing and messaging. In looking at the quarter, the most important message is that our core business is very strong. It is the core business that is driving our success. Core services are as vital and vibrant and innovative as they could possibly be. The success of our core business continues to let us take calculated risks in new markets and expand in new products. Geographic, for example, committing to our European expansion, committed to Asia. China, of course, is very important to us, but only one market of many that are now receiving great focus at Google. Expanding our business to multiple platforms and formats. In display advertising, DoubleClick, which of course was the subject of our call last week which all of you participated in. In video, YouTube, hugely successful for us; video syndication now working well for us. The BBC deal, a historic deal for us this quarter. In mobile, LG and Samsung deals this quarter driving mobile adoption for the Internet and for Google in many, many good ways; many partnerships already in place. In the enterprise business, a premier version this quarter including now Docs & Spreadsheets. We are also expanding our business to offline media, again the subject of a lot of discussion. Radio, the Clear Channel deal that we announced on Monday, again drives the definitive deal to make that business hugely successful for us. In TV, the EchoStar deal similarly announced very recently, which allows us to do targeted advertising in the television world. In print, the test that we announced a couple months ago is doing extremely well and being expanded as we learn what really works and what does not. Each of these strategies involves creating solutions that benefit both advertisers and users, and it is the synergy between them that we have been able to harness. Targeted, useful, effective advertising will continue to be our mantra; you all know that, of course. Technology and efficiency is the core of our technology approach, and it really does benefit end users. In fact, if you think about it, user benefit is the most important thing that we focus on as to how we make these decisions. Our past experiences and our failures, if you will, the learnings that we get show us what works and what does not. From our perspective, and I think the forward challenge for the company, is simply making these learnings scale globally so very, very quickly. This is why we are so excited not just about the quarter, but for the quarters that lie ahead. Now rather than me talking, maybe George, you could take everybody through the financials and a lot of the details, which are very impressive.

So let's go ahead and get started. Thank you very much, Eric, for that introduction. As you can tell, Q1 was a very strong quarter for us with truly impressive growth driven by our continued leadership in both search and advertising. Gross revenue increased 63% over Q1 of last year to $3.7 billion. Revenue from Google properties was $2.3 billion, representing strong year-over-year growth of 76%. We experienced healthy traffic growth in our Google.com business both domestically and internationally. Monetization continues to be strong, positively impacted by improvements in our ads in Q1, as well as in prior quarters. As we have discussed in previous quarters, we are constantly innovating to show our users more relevant and targeted ads, which in turn leads to benefits for our advertisers and strengthens our business. The investments in our extensive network of partnerships were also contributing meaningfully to our growth. AdSense revenues increased 45% over last year to $1.3 billion, driven by strong growth across our existing partners, as well as launching a few new partners. As on Google.com, our AdSense business experienced very strong traffic gains in the quarter, particularly internationally. I will go into more detail about our international performance in a moment. Beginning last quarter we began to disclose the growth in paid clicks. This number includes clicks related to ads served on Google properties, as well ads served on our partner sites. Aggregate paid clicks grew approximately 52% over Q1 of last year and approximately 13% over Q4. Now I will turn to the geographic discussion. We are continuing to see significant momentum in our international business as we invest in the infrastructure to address our global opportunity. International revenue was 47% of total revenue, or $1.7 billion. As is typical in the first quarter, the UK was particularly strong with revenues of $578 million and 23% sequential growth as the travel and finance verticals rebounded as we expected from Q4. Other markets that contributed meaningfully to growth were Germany, France and Spain, as well as some of our Asian markets like Japan and also Australia. In addition, it is important to note that some of our smaller markets are also performing very well, including Ireland, Brazil and Korea, which benefited from our partnership with Daum. This demonstrates the diversity of our business and the potential to grow our business even more significantly outside the United States. Turning to TAC, traffic acquisition costs were $1.1 billion. The majority of TAC is related to the amounts paid to our AdSense partners, which totaled just over $1 billion. The increase is due primarily to growth of more significant AdSense partnerships. As we grow our distribution in AdSense partner network and embark upon new initiatives, we may see additional pressure on TAC rates going forward. TAC related to distribution partners totaled $73 million in Q1. The increase in these traffic acquisition costs is associated with some of our largest distribution deals ramping up. Other costs of revenue increased $38 million over the prior quarter, primarily as a result of increases in depreciation related to data centers, bandwidth costs and content acquisition costs. Going forward, we anticipate that other cost of sales will increase as each of these line items grow. Turning to operating expenses, OpEx included $184 million in stock-based compensation and totaled $972 million. These included $506 million in payroll-related and facilities expenses, an increase of $13 million over the prior quarter. R&D decreased as a percentage of revenue, primarily due to lower expenses related to company bonuses in the first quarter relative to the fourth quarter, while sales and marketing and G&A were relatively flat as a percentage of revenue. Non-GAAP operating profit, which excludes stock-based compensation, rose to $1.4 billion with non-GAAP operating margins of 38%, up from 37% in Q4. As we have said in the past, margins may decline as we continue to invest heavily in our business. You should expect continued growth in headcount, across functions and across the world. We also expect continued investments in AdSense partnerships, distribution partners and content. Capital expenditures for the quarter totaled $597 million. While there were some real estate-related expenditures as in prior quarters, the majority of our CapEx was related to IT infrastructure investments, including data centers, servers and networking equipment. As we have discussed previously, we expect to make continued significant capital expenditure investments to drive the growth of our business as these investments have contributed tremendously to our success to date. Now turning to cash flow, operating cash flow was strong at just over $1.2 billion. Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, increased to $623 million. With that, I will turn it over to Larry.

Thanks, George. I'm not only excited about our financial performance, but also our product performance in the quarter, and that's what I am going to tell you a little bit about. Now remember, we keep about 70% of our resources focused on our core business which is search and ads, and the rest of that, which is probably the other 30%, is probably primarily what you hear about. But we work tremendously hard to improve our core relevance and our focus on search, and we made many improvements this quarter in many, many different markets on just basic quality and relevance in our search. We've also made user experience improvements which are easier to see, and those are on things like when you do a search, you can actually get maps and reviews of businesses right in your search results and also in very, very many countries. We released a bunch of new ones this quarter. We are also looking a lot more at content. So things like personalized search where the results are tailored to you specifically are things we also made great strides in. Now we have also, I think, made great strides in moving people towards web computing, and things like Gmail we opened up sign-ups this quarter and had very healthy growth there, which for us we are really excited about. We also improved our Docs & Spreadsheets product, releasing 15 new languages, and we also had tremendous growth there. We also released Google Apps Premier, which is a product for companies and universities we launched this quarter. It lets you have Gmail for your own domain, and you can even use your own existing login process for your users to log in to Gmail and use Docs & Spreadsheets and all of our great products. We have a lot of great customers there, Northwestern; even customers in Kenya and Rwanda, and we have pilots with GE and P&G, and we're very excited also about the prospects there. In YouTube, we have had tremendous uptake of YouTube, and I would say the growth is accelerating even more. We have made many improvements to those sites, which increased usage of community features of people talking about videos, rating them and so on, and just generally improving the experience there and going gangbusters there. In the personalized home page on Google, we released a new, improved version of that with things like themes so you can have your personalized home page on the beach or at the bus station and see a little bit of the weather that is going on, and we had tremendous uptake with huge numbers of our users adopting that on the first day. We also released things like the Google Talk, which lets you see your friends on your Google personalized home page, and we look forward to improving those products even more. Our user experience is still a tremendous focus for us, and new products also. With that, I would like to turn it over to Sergey and have him talk a little bit about the other part of our ecosystem, which is partners and advertisers.

Thanks, Larry. I'm very excited to talk to you today and to echo a lot of the sentiments that Eric already shared with you: how key partnerships are to Google and how much we care about making our partners successful. First off, we noted some of the improvements we made to YouTube, and we also have a number of more partners there. In the past quarter we announced the BBC, the NBA, the Sundance Channel. We even have a partnership with a number of the presidential candidates this year, their video clips which we call You Choose '08. YouTube continues to grow both user-wise, as Larry mentioned, and in terms of partners. In the mobile space, we had a number of new partners sign up and a number of announcements, including Nokia and Vodafone, both two very large announcements. I want to spend most of the time, however, talking about advertising, both what we have done to help out our most numerous partners, our advertisers, as well as the other kinds of partnerships we have struck within the advertising space. First of all, we have launched Pay-Per-Action in beta, and that is the easiest way for an advertiser, in many cases, to decide how much they should pay for advertising, which is just to specify an action like a purchase and say, this is how much I am willing to pay for each purchase. We're very excited about that. Clearly it definitely speaks to what advertisers want to get most. We also have helped them out in getting more of those actions, conversions, purchases and what not with the introduction of the Website Optimizer. This lets you automatically test and refine your website to optimize adoption or conversion or whatever that may be. Another thing that will really help that is to make it easier for customers to actually transact. To spend money without fear of their credit card being stolen, without just a lot of hassle of entering the same information over and over, and we have done that with Google Checkout. In this past quarter, we announced a number of new partners for Google Checkout. We launched CompUSA and Blue Nile, and we also signed RadioShack, as well as B&H. Now we have been talking here mostly about search and certainly online advertising. Within online, we have expanded quite a bit. You are familiar with our AdSense for Content network. We have signed Daum up for that. That is the very large Korean site. In fact, now we have 75% of the top 20 social networks also in our AdSense network. The big news you have no doubt heard by now is our intent to acquire DoubleClick, and we're very excited about that because of the possibility to make it even easier for our advertisers to launch and manage their search and display campaigns, which they can now do -- or will be able to do -- in an integrated fashion. That is the Internet portion of our advertising. Of course, we also have been trying to make it easier for advertisers to advertise on other media, offline media. In television, for example, we have a partnership with EchoStar over at that DISH Network and that way we can deliver advertisements to DISH Network viewers. In radio more recently, we have signed a partnership with Clear Channel, which opens up a lot of great inventory to our advertisers who want to use the radio medium. Ultimately, as Eric said, it really comes down to end users or viewers to be consumers of this advertising. Some people feel that advertising is a zero sum game, and they shrug when they hear about all these new advertising products and the progress and what not; but that has not been our experience. In fact, fundamentally our vision is that we can make advertising better across the board, better for everyone. We don't have to have intrusive advertising to be effective. In fact, quite on the contrary, it is the interesting, relevant, sometimes entertaining advertising that is most effective for both advertisers and makes it the best possible world for the users and viewers alike. So, on that note, I would like to turn it back over to Eric.

Well, thank you very much, Sergey. As I listen to this, I am very impressed that the global growth strategy of Google continues to work very, very well. Our innovation model is clearly working; lots and lots of new products coming out and no end in sight. The partnerships that we reviewed, in particular the ones that Sergey and Larry just highlighted, are now really working, they are really running globally. The core business in search and ads, we're still at the beginning of that business. A lot of people have said that well maybe this is not such a big business. It is a huge business, and we have a lot of room to grow there. The complementary strategies, things like offline ads, some of the new ad initiatives, YouTube again complements our core search and ads business. There are other examples, obviously our enterprise business. They are working, too. I'm personally impressed with the way in which the management team and employees of the company have managed the growth from an operations perspective. You can imagine the dials and everything else that has to be tuned here, and yet we have been able to take advantage of the opportunity before us, and I believe we will be able to do that for the foreseeable future. So with that, why don't we go directly to your questions? We are going to add Jonathan and Omid as previously announced, because they do such a good job with Q&A. Operator, are you ready for the first question?

Absolutely. (Operator Instructions) Your first question comes from Mark Mahaney - Citigroup.

Great, thanks. Two quick questions, please. A housekeeping question: it looks like the change of the lowered tax yield on stock-based comp maybe added $0.03 to $0.05 to the number. Could you just walk through that math a little bit? Secondly, a broader question just on display advertising. Larry and Sergey, when you started search, you clearly had something different in mind, something more targeted than the normal advertising that was out there. What generally changed in your thinking that made you think either that the display advertising market was big enough or that you had a targetable solution that was good enough to make you want to make the moves you made, like buy DoubleClick?

Let's have Larry and Sergey answer the second question while they are figuring out the answer to the first.

There were a number of things that made us excited about this area. First of all, of course, the success of our own products within the broader advertising space, not just search but for example, AdSense for Content and more recently even including image ads and things like site targeting. I think we realized how much inefficiency there really was in online advertising. Because at the face of it, you would think well, how complicated can it be? You just pick a good site for your ads and you just run them, what could be inefficient about that? But, in fact, it turns out there are many different websites. There are many different users who use those websites in their different situations. Advertisers, in many cases, don't have all the metrics information they need to decide which ads to run where. So we have seen good success with that, and we think we can expand that more to broader kinds of media, not just static images and what not. Of course, with this intent to acquire DoubleClick, we think we can make more advertisers much more efficient.

Larry and Omid and Jonathan, do you want to add a little bit more to that?

The other thing I would add is that we are, as we have said in the previous quarters, very busy actually with all these initiatives, including display advertising. In the last couple of quarters, we've had a lot of customer success stories where they are taking advantage of the content network, the different formats we already support, the targetability. Customers include companies like REI that, for example, use Google's display network to promote new store openings. They utilize geographic and site targeting functionality to reach both mass media sites like NewYorkTimes.com, as well as niche audiences like specialty sites like rockclimbing.com. This has proven so effective for them in driving in-store traffic that they are really going to utilize it as part of their ongoing marketing initiatives. So based on what we saw here, we just know that the same principle we applied to search targeting can really extend to these new initiatives and that we are going to place a lot of emphasis on that.

I was just going to add that we are still in the very early stages of display ads and branding ads and that whole area. Much of the technology we have already developed for our search ads and AdSense for content and so on can be used for those markets. People do very sophisticated things around time of day and types of users with these things, and also the sites already with our AdSense network, the sites where you just choose to run your ad or not and so on, the content of those pages, all of those things apply to the kind of spaces we are now going after.

Could you ask the first part of your question again, the housekeeping question?

Yes, just on the tax, it sounds like there may have been a little bit of a change in the tax rate you are applying to determine the shield on the stock-based compensation; or maybe there wasn’t a change, but it looks like there was. It looked like it was a very modest change. Could you walk through that, or you can just say there was no change.

It was a very, very modest change from the 134 to the 183 here.

Thank you very much.

Your next question comes from Robert Peck - Bear Stearns.

Eric, I wondered if you could comment a little bit about some of the tweaks to the algorithm during the quarter. In particular, do you take something like the words Bear Stearns and you type them into Google versus typing them into Yahoo!, you notice that you're not monetizing as much as you did. You go back a year or so ago, there was a lot of buzz around a third link. I think you have made some of these changes maybe in the middle of the quarter. Could you talk about what you saw as far as impacts on CPC, pricing, as you sort of scale back your inventory on keywords you were selling, click through rates and ultimately revenue. Part of that as well is, you also reduced some of the minimum CPC pricing to more tail-like turns. If you could quantify how you see those changes impacting maybe a more full Q in Q2 and going forward?

Jonathan, why don't you handle it?

I'm not sure I can quantify it too much for you, but I can try to give you a sense philosophically of what we have been doing and some of the changes that we actually implemented. As you know, we have been upgrading the quality component into ads from the start, and we have been building on that with fairly robust quality improvements almost every quarter since. This quarter was obviously no exception. Some of the type of changes that you're talking about, specifically the ones that we implemented in mid-February which we announced, were the quality-based bidding changes. Basically what those did was improve the quality score algorithm that generates more accurate quality scores and predictions, particularly in some of the cases where we have limited data. So there are a lot of situations maybe a lot of people don't search a lot on Bear Stearns. We have done a better job of figuring out for some subset of those words how to tweak the quality-based scores. That was certainly significant. One of the things that made it even more significant was that we added to the front end of AdWords the ability to give advertisers transparency into their quality so that they could see whether or not particular words were poor, okay or great. That actually allowed the results to improve pretty substantially. That certainly had a real impact during the quarter, although it was only implemented midway through the quarter in February. There are just a couple of others which I can touch on real quickly. We also announced that we changed the background color on the top ads to yellow. We also changed the area in which people click so that people are less likely to click if they are not actually trying to click on the ad. These types of things are also important. Landing page quality I think is another thing we have been working on. Beyond that, it is basically just many changes to the ad systems. You can derive the CPCs to the extent that you want by looking at the paid click number which George announced.

Your next question comes from Anthony Noto – Goldman Sachs.

Thank you very much. Eric, I was wondering if you could comment at the management level as you make investments, what measurement do you look at holistically for the company as a return-based measurement to ensure that the overall business and overall shareholders are seeing an aggregated return from each of the individual investments? The reason for my question is I know that you have launched a lot of initiatives: Google Checkout, Gmail, Google Finance, that may not necessarily have a unique revenue stream tied to them that is large, but does provide ancillary benefits to the overall platform. Are you incented on that return metric? The second question is, we tracked your revenue per employee on a gross basis. Up until the fourth quarter of 2005, gross revenue per employee had been growing in the single-digit range. Since then it has been declining, in fact down 12% year-over-year this quarter. I recognize that is because you're adding more new employees that are not productive. At what point do you think your existing employee base is large enough that your new employees do not cause your gross revenue per employee to decline?

An interesting series of questions. We don't approach the questions quite the same way that you phrased them. Our primary focus is on end user happiness, end user traffic, end user growth. So what we look at is we look at what will drive even more end users using our product globally. So, for example, if we could bring out a product that will cause people to use Google and its various applications that much more and they spend more and more of their day using Google services, that allows us to eventually monetize that. So we do not insist on a direct link from say a product that does not get revenue to one that does. In the cases that you cited, we look at the revenue contribution. But the primary focus and the primary management focus is around end user happiness, end user growth, end user everything. With respect to the revenue per headcount, again we are not very focused on that. We are much more focused in total growth of the platform, total growth of the number of advertisers, total growth of the monetization. It is easy enough for us to dial any particular metric like employees per gross revenue up or down as we see fit. It is more important to focus on end user happiness. A lot of the people we are talking about are, for example, coming in for customer service globally. We are also way, way investing in engineering because we believe this is a time where our model is scaling that products that we are going to bring out in a year or two are going to have huge impacts to the investments we're making in data centers, and we need the engineers to build the great products to do so.

Your next question comes from Douglas Anmuth - Lehman Brothers.

I was hoping you could comment on toolbar activity. If we look at third-party data, it suggests that toolbar growth is driving north of 40% of total growth in search queries, which clearly validates your distribution strategy. But I'm wondering what you're seeing in terms of the behavior pattern for users with downloaded toolbars, not just right after they get the toolbar but over a little bit of time. Does it make you concerned at all that we could be seeing sort of a one-time spike from this initial bigger distribution of toolbars? Thank you.

Certainly a big story in the quarter is traffic, and a component of the traffic performance is certainly toolbar. No question toolbar users search more than non-toolbar users. I can’t really comment on the degree to which the growth rates would be dependent on the number of remaining users out there who could also use toolbar, but we can certainly say that your hypothesis is correct, that toolbar users search significantly more.

I was just going to add, we have been distributing toolbars for a long time and have had a very successful product there for a long time. I don't think there has been any huge changes over the last quarter or two in people's behavior or those mechanisms.

Your next question comes from Mary Meeker - Morgan Stanley.

Thanks. One of the things that we are seeing in the market right now is it feels as though we are seeing an acceleration in the migration from offline advertising to online advertising. Eric, you talked in your opening remarks about your deal with Clear Channel, your deal with EchoStar; obviously others. Obviously they are early stage. But we are frankly surprised that you're able to announce such large deals as quickly as you have been able to do that. Do you think that we will see a lot more of those in the next six months? When we add them all up at the end of 2008 and we look at the financial impact to Google, do you think it could be at a level where it is actually material as quickly as the end of 2008? Thanks.

Your observation is correct. We are very busy in the partnership area and very much so also globally. I think what we are seeing is that again the power of the platform and the interest in tapping into, depending on what kind of partner you are, both the advertiser network and the publishing network is very, very interesting for people. That again, this push to a more efficient measurability is of great interest to everyone, be it in the print sector, audio or TV. I think what everybody is really trying to figure out is where do their put their own resources, just like Google did awhile back where we focused our field operations on more Fortune companies. I think the TV companies, print companies, they are all trying to apply their resources to their area of their own expertise and then utilize our ability to drive a lot of revenue and targetability and measurability. So we're finding great interest. It is very competitive, the market is very competitive, and on a global basis, we're just again doing the best we can to staff up both partnerships with legal and finance to be able to model these deals and be able to have the right partnerships in place. So yes, I would say you are going to see us be very much focused on this space.

Your next question comes from Ben Schachter - UBS.

Congratulations on a nice quarter. Can you talk at a high level on Google's view of cookie data and third-party ad serving? Now that you own DoubleClick, do you think it is more likely that you will open up the network to third-party ad serving? Thanks.

I will let Larry and Sergey.

I think that in general we are really excited about opportunities to improve some of the practices that are in place there with regards to people's privacy, but also while improving targetability and the kinds of information you need to really provide good information to everybody involved in the process. So I think we're excited about our ability, our technological strength and how it can be applied to some of those issues. We're not ready to go into any specifics on that yet.

Your next question comes from Justin Post - Merrill Lynch.

Could you talk a little bit about TAC? Obviously you saw the percentage or the percent of network increase quarter over quarter. Is the mix of who your partners are changing a lot? Did a couple of partners ramp up, and how do you see that going forward? A little more comment on that. And then on the distribution partner side, is that fully in your numbers now, or are there still more partners ramping up there for future quarters?

The answer is that we're doing a lot more deals and the deals are, in fact, carrying a disproportionate amount of TAC. So, at the end of the day and I think I suggested that in my earlier comments, TAC as a percentage of revenue is likely to increase given the deals that we're doing these days.

Was there a partner that specifically ramped up in the quarter?

I can’t comment on that. Generally I think the TAC rates are going up directionally.

Your next question comes from Imran Khan – JP Morgan.

Thank you very much for taking my question. Your paid click growth rate in Q1 was 52%. I think it was down from 61% in the fourth quarter. Can you please help us to understand if that growth rate decline was due to query volume growth rate decline or click-through improvement? Also, do you have any contra revenue from Google Checkout?

George could specifically answer the contra-revenue question with respect to Checkout. From a marketing perspective, Q4 was seasonally more significant in terms of the marketing efforts that we were doing. He can give you the specific accounting implications. The other specific question relates to paid clicks and click-throughs?

Yes, so basically paid click growth rate declined from 61% to 52%. Is it driven by query volume growth decline, or there was an anniversary of click-through improvement that you made in the past?

Query volume was very healthy. I think we already mentioned that. Q1 is typically a somewhat weaker seasonal quarter from a monetization perspective, although George mentioned in his prepared remarks that there are some exceptions internationally, particularly in the UK. Beyond that, I would not be too much into an aggregate CPC measure as we have talked about in the past. Country mix, property mix as the previous question alluded to, had significant impact on how that shakes out. Clicks are extremely healthy as well.

On the Checkout question, you have to sort of stand back. We really peaked seasonally in the Christmas season and right now the business is going, but it is not going at a seasonally strong rate at this point in time. So we are bullish on Checkout, and the contra revenue range will probably be somewhere around 1% of revenues or thereabouts.

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

Thank you. First, a broader industry question. When you look at the UK market, a lot of data suggests that market is growing very substantially and north of 40%, and now represents about 11% of total ad spend is now online versus the U.S., we estimate about 5.5%. Can you talk about what is fundamentally different about that market or what is going on there that is driving those higher growth rates? Just a quick follow-up: you mentioned earlier on the call growth and investment in content. Any sense there what type of content or areas you may be interested in? Thanks.

In terms of the UK question, we're definitely seeing very strong performance there. I think it is driven by our leadership team and having put a lot of focus in both reaching out to our clients, as well as advertising agencies, focus on named accounts. We're seeing increases in average spend, significant increases in that focusing on the different vertical strategies and making sure we understand the seasonality of those just as we mentioned earlier. Probably saw finance and travel bounce back, and in Q4, for example, we very much paid attention to how to deal with that seasonality and that helped us in Q4 as well. So we just think again the economy is very strong there. The sales team and the leadership is very strong, and just our ability to execute our strategy is working well. There is also strong interest in the new ad formats and also, as we mentioned, deals like BBC, were some of the very interesting deals we were able to establish. In terms of content, I think in general some of the spending we're doing is improving our product areas. For example, spending in mapping services and mapping data and some of the partnerships we established. But I don't think there is anything unusual there other than just our focus in improving both the products and expanding partnerships.

Just adding to Omid's comments, the two other things that I have noticed in the UK are that early on the agencies were particularly aggressive with the online medium, and that really helped spur the early growth when it was in its more nascent stages which has carried over. I think some of the other observations that I have seen just in the marketing literature are that there is a relative lack of TV advertising there because the BBC is so popular. And so they were much quicker to move their spending to other outlets and try things more quickly and then discovered that the ROI was high.

And George, you wanted to add something, didn't you?

I just wanted to clarify that comment on Checkout. On Google Checkout basically we are less than 1% of where we were in the holiday quarter.

Your next question comes from Christa Quarles - Thomas Weisel.

I was wondering if you could discuss some of these offline ad partnerships with regard to your view as to whether or not you can get beyond remnant? Clearly the Clear Channel deal was less than 5% of their inventory. Or it is a really just about redefining remnant for some of these markets? Clearly we have also seen the eBay upfront auction not working very well. So I was just wondering if you could discuss that. And then also I think last quarter you indicated that coverage rates were down. I was wondering if you could comment on them this quarter.

One thing to clarify is that the Clear Channel deal includes a lot of premium inventory. It is not a remnant deal. That is a misperception. Maybe we did not communicate that very well. The EchoStar, similarly, those our primary spots. That is why those two deals are so important. It launches these two new initiatives right in front of the primetime viewer.

I would add that we really look for also how the partnerships would like to start with us. I think we are confident that we are very good at monetization given the diversity of our network and the ability of targetability. So each partnership is different, depending on their own sales capabilities and how they like to work with us. We really want to be flexible and find where we can add value to these partnerships.

I'm sorry, what is the other question?

I think you guys indicated that coverage was actually down in Q4, and I was just wondering if you could characterize what it looked like in Q1?

Coverage of what?

Ad coverage on the site. It sounded like you were reducing the coverage as a whole.

Sure. We're showing fewer ads, and those fewer ads are worth more because they are better targeted. Jonathan?

Yes, I think what Eric said is correct. Many of the improvements that you are seeing from a quality perspective are improvements that are basically reducing the total number of ads and increasing the click-through rates. That has really been the hallmark of the ad's quality initiative. We have been layering them on, as I have said each quarter, quarter after quarter. So the improvements that we came out with in quarters past are further implemented in future quarters and then again this quarter, as I mentioned, we implemented a number primarily in the middle of the quarter.

Your next question comes from Heath Terry - Credit Suisse.

I was wondering if you could give us an idea -- to the extent that you have this data and can share it -- of your search users, what percentage are actually using multiple Google products? Using Mail, using Froogle, using Orkut, one of the other offerings that you have got? How much, when you look at usage of that entire Google universe as a whole, what percentage of it at this point would you qualify as being non-search?

Probably the most significant change that we have seen there is that we have done a much better job recently of providing a unified login across all of the Google properties. So now what we're seeing is that users who log in tend to use their Google login regardless of which property they are logging in with, and that has manifested itself in terms of one experience that lets us really add a lot of value with personalization, which Larry mentioned, we're doing significantly. So we're seeing much, much better integration. In terms of actual percentages of use on different products, we really don't separate the data out that way. But we're starting to see much, much better integration and we are also starting a number of efforts that will make things like one box show up more frequently, as Larry mentioned, so that you will see the information in context and sharing of things like addresses and other functionality across all of the products to make it a much more seamless and integrated experience.

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

Great, thank you. Reports out of the National Association of Broadcasters Conference indicates that Google was supposedly very close to introducing a content filtering system, perhaps called Claim Your Content for use on YouTube and Google Video. Does this keep copyrighted content from being posted or make it easier to remove? How might major studios or content producers prove ownership of intellectual property? Thank you.

Those reports did not quite get the gist of what we -- and in particular I -- said. Google is building a tool which is called Claim Your Content, and it allows publishers to somewhat automate the takedown process. It is not a filtering system. The technology does not block uploads. It makes it much, much more effective and much quicker to download, essentially to get us to remove inappropriately uploaded content. It is very much compliant with the DMCA, and we believe we will address many of the operational complaints people are making about the workload that the DMCA has put on them. So we're trying to make that work, and we think it addresses the vast majority of all those complaints.

How do studios prove ownership of the intellectual property?

There is a mechanism where they work with us to show that, and again these tools are just beginning and over the next year, those mechanisms will get better and better.

Due to time constraints we have time for one final question. Your final question comes from Youssef Squali - Jefferies & Co.

Thank you very much. I was wondering if you could speak to the disparity in monetization between domestic and international, outside of the UK? You may not want to quantify it, but if you can just look at the disparity that you had last year versus this year, by how much has it shrunk, if it has? I'm assuming that it hasn’t. Can you get to parity over time? Because if that is the case then you guys may be in position to actually show revenue growth – [inaudible], sorry.

I'm not sure I completely agree with some of the premise of that. We do expect that the international percentage of our global revenue will eventually be greater than 50%. International is getting close already, and that has been one of our strategic goals. It is fundamentally a function of the distribution of worldwide ad dollars, and there is only so much of a percentage in any particular market of worldwide ad spending that we can get. Do you want to characterize, Jonathan, the difference in international between leading markets like the UK and some of the other ones, is the gap getting closer?

Yes, I think the way I would look at it is I would look at the strength of revenue in the U.S. and the UK as a proxy for the opportunity set in each of those other countries. The next best thing to look at is the total amount of e-commerce which exists in any individual country. Obviously the more e-commerce, the more likely you're going to see significant monetization opportunities. We have done a lot of effort looking at the correlation between GDP, Internet host, number of computers. My impression is it is generally driven by the big macroeconomic factors and that is where you're going to see the highest correlations. Some of the much more nascent countries still do have very, very low monetization rates.

It is time to finish up. So let me end first by saying thank you all for spending so much time listening to what we are up to, covering us and helping us get the message out. Again, as I reflect on the quarter and as I reflect on what we have talked about today, Google is very much benefiting from the growth rate of the industry and the model that we are using to grow with it or ahead of it. The industry is large. It is growing quickly. All of the players are doing a great job of making the Internet and the online and offline experiences even more effective. We have also benefited from the very, very hard work of an awful lot of publishers, agencies and advertisers who are using tools that can be improved over time. We are investing a lot of money and time to build better platforms, better communities for them. All of this is in pursuit of our goal around end users, making the information that people want accessible to them exactly when and where they want it on the device and in whatever country and language that they choose to be in or that they just care about. So the model is working, and this is a scale business and the scale looks very, very good to us. So with that, thank you very, very much for all your time and let's go ahead and we will talk to you in three months.

That does conclude today's conference. You may disconnect your lines at anytime.