Good day and welcome, everyone, to the Google Inc. Conference call. Today’s call is being recorded. At this time, I would like to turn the call over to Ms. Krista Bessinger. Please go ahead, Madam.

Good afternoon, everyone and welcome to today’s third quarter 2007 earnings conference call. With us 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 their thoughts on the quarter and then Jonathan and Omid will join us for Q&A. Please note that this call is being webcast from our investor relations website. Our press release, issued a few minutes ago, is also posted on the website, along with the slides that accompany today’s prepared remarks. A replay of this call will also be available on our investor relations website in a few hours. Now, let me quickly cover the Safe Harbor statement. Some of the statements we make today may be considered forward-looking, including statements regarding our investments, seasonality, traffic acquisition costs, increase in the cost of sales, international growth, operating margins, growth in headcount, and our expected level of capital expenditures. These statements involve a number of risks and uncertainties that could cause actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Please refer to our SEC filings, including our quarterly report on Form 10-Q, for the quarter ended September 30, 2007, as well as our earnings press release posted a few minutes ago for a more detailed description of the risk factors that may affect our results. Copies can be obtained from the SEC or by visiting the investor relations section of our website. Also, please note that certain financial measures we use on this call, such as EPS, net income, operating margin, and operating income, are expressed on a non-GAAP basis and have been adjusted to exclude charges relating to stock-based compensation. We’ve also adjusted our net cash provided by operating activities to remove capital expenditures, which we refer to as free cash flow. Our GAAP results and GAAP to non-GAAP reconciliation can be found in our earnings press release on our website. With that, it is my pleasure to turn the call over to Eric. Eric E. Schmidt: Thank you very much, Krista and in looking at 2007, we are very, very pleased with our year and also with the quarter that’s just ended. If you look at 2007, a strong financial performance across the board, reflecting a performance and a focus here at Google on both growth and profitability, with of course very strong revenue, operating income, and earnings. I want to call out strong international growth. More than half of our search traffic is now outside the United States, more than 150 domains and still growing. The international market is still very nascent with tremendous potential for what we could do over time. And of course, the model at Google about product improvements and innovation continues. Hundreds of search quality launches, greater advertiser control and transparency, obviously higher ROI as a result, lots of new ads formats, YouTube video ads, from example, contests, branded channels. We’re working hard, by the way, to promote open mobile and developer platforms and we’re completing an application suite, [inaudible] integration, presentations, et cetera, and in concert with both product and international focus, we have a global team. We now have offices in more than 20 countries. We are working on having a local presence across global markets and this global local focus is reflected both in our organization and our products and in the way we run the company. Of course in Q4, a solid quarter without a question, pleased with traffic growth across the board even in the relatively mature markets which is always exciting. And obviously we are very happy with gross revenue on both google.com and on our AdSense partners. I think we are going to have Larry and Sergey take you through product highlights. My emphasis area is search, infrastructure investments, things we don’t talk that much about, leading to improved quality as seen by end users that we can measure, and of course giving advertisers more control as the product matures and obviously, as a result, improving their return on investment. The APP strategy, which we announced earlier in the year, now fully visible -- more innovation, data portability, all the apps now either in place or coming and mobile, which we are very excited with Android, the My Location service as part of Maps and many other new features that are both out and coming. So we are optimistic about 2008. We have growing revenue streams across a broad range of verticals and markets. As I mentioned, this international market which is central to our global rule, still relatively nascent with a tremendous potential. Ad dollars continuing to move from offline to online, a trend which is not going to reverse, and of course our ability to use our strong position in markets in order to essentially offer more services to end users and get people even more to see the new benefits of the new Internet world. So with that, rather than me talking about more of the details, why don’t we hear from George and then Larry and Sergey on some of the amazing things that have been happening. George.

Thanks, Eric and good afternoon, everyone. At a high level, we had another strong quarter, with gross revenue increasing 51% over Q4 of 2006 to $4.8 billion. Our google.com properties increased 58% year over year, reflecting strong traffic growth during the holiday retail season and, to a lesser extent, monetization growth. AdSense revenue grew 37% over Q4 of 2006, driven by particularly solid performance among our AdSense research partners, including e-commerce and search partners. Offsetting this growth was the impact of a quality improvement to AdSense for content. This changed the clickable area around the text-based ads to only the title and URL, reducing the number of accidental clicks and increasing advertiser ROI. Now let’s look at aggregate paid clicks growth. Aggregate paid clicks includes clicks related to ads served on Google properties, as well as ads served on partner sits. Aggregate paid clicks grew approximately 30% over Q4 of 2006 and approximately 9% over Q3. Let me now discuss our international performance. International revenue increased to $2.3 billion, or 48% of revenue in Q4. Revenue in the U.K. grew 5% this quarter to $692 million, reflecting the usual Q4 seasonal slowdown in the finance and travel verticals. Revenue growth in EMEA was primarily driven by a strong performance in France and Germany, where gains were made in the retail, technology, and finance verticals. We also saw solid gains in relatively smaller markets, such as Canada, Ireland, Spain, and the Nordics. Asia and Latin America continue to show impressive growth rates as well, with Brazil, Mexico, Argentina, and China being notable performers in the quarter. Now turning to expenses, traffic acquisition costs were $1.4 billion, or roughly 30.3% of total advertising revenue, down 40 basis points year over year but up from 29.1% in Q3. The increase in overall TAC rate was primarily related to the performance of a few AdSense partner sites, for which we are required to make guaranteed payments. We have found that social networking inventory is not monetizing as well as expected. AdSense TAC was $1.3 billion, while TAC related to distribution partners and others who direct traffic to our websites totaled $125 million in the quarter. Turning to other costs of revenue, which includes $6 million in stock-based compensation, increased $75 million over Q3 to $516 million. The largest driver of the increase was the increase in costs related to our data centers, including depreciation, equipment, and operations. We continue to anticipate that other cost of sales could increase going forward. Other than cost of revenues, operating expenses in Q4 totaled $1.4 billion, including approximately $239 million stock-based compensation. Expenses related to payroll and facilities increased $97 million to $756 million. At the end of the quarter, we had a full-time employee base of 16,805 employees. We added 889 employees in Q4, with over half the new hires being in engineering, followed by sales and marketing. We have implemented and continue to follow a disciplined hiring process in all areas of our organization. Hiring in Q4 tends to be slower due to the holidays but as we’ve indicated in the past, we will continue to invest in our core business, both in the U.S. and internationally. Turning to non-GAAP operating income, which excludes stock-based compensation, increased to $1.7 billion in Q4, with non-GAAP operating margins of 35%, compared to 36% in Q3. The sequential decrease in margins was driven primarily by the increase in overall TAC, as discussed earlier. As we have said before, margins may decline in the future as we continue to make ongoing investments in our business. Turning to tax, our effective tax rate for Q4 was 25%. Our Q4 rate was more favorably impacted by an R&D tax credit in Q4 compared to Q3 as a result of stock option activity. This was the primary driver of the difference in tax rates between Q3 and Q4. And finally, turning to cash, operating cash flow remained strong at $1.7 billion, with CapEx for the quarter of $678 million. As in previous quarters, the majority of our CapEx was related to IT infrastructure investments, including data center construction, production of servers, and networking equipment. We expect to continue to make these significant investments in CapEx in future quarters. Free cash flow, a non-GAAP measure which we define as cash flow from operations less CapEx, was also strong at $1 billion. So in summary, we believe our results reflect the strength of our core business across our three primary initiatives -- search, ads, and apps, with disciplined investments that position us very well to capitalize on the long-term opportunities we see for Google. With that, I would like to turn the conversation over to Larry.

Thank you, George. I’m really excited to tell you about some key new things that we did in both search and advertising. So to begin with in search, we had over 100 launches in Q4 with focus on our internationalization and investing in our quality. One of those was universal search, which is now available in 15 languages, up six in Q4. We also launched the universal navigation bar in all languages, which gives our users easier access to all of our Google properties. And book results are now blended in all domains. We also made some behind the scenes infrastructure improvements to improve our quality, and the biggest of those was increased index size, which really improved relevancy, especially for non-English results. We also had substantial improvements in latency and freshness, particularly in Europe, Middle East, and Asia-Pacific. Now, we also made it easier for webmasters to make their site searchable. There’s two things there. The first was webmaster tools. We have several million sites now using and actually doubled our user base over last year, and that basically lets webmasters easily tell what’s being crawled from their site and what’s being indexed and so forth. And we added a bunch of new features to that in Q4. We also have our site maps product, which is another tool to let webmasters make their sites easier to crawl and we added Florida, District of Columbia, and U.K. National Archives, among many other sites, and added many, many thousands of pages there. Now in ads, that’s obviously where we get a large portion of our revenue. We launched some key features there that really drove performance for advertisers and really helped us gain traction. First of those in AdWords was call the AdWords Conversion Optimizer, which we launched in early January and that lets customers big by specifying a cost per acquisition rather than a cost per click. So for example, you could pay only when someone actually buys something rather than just when someone clicks on your ads. AdWords actually, the system actually optimizes their click-based bids to approximate that cost per acquisition for each auction, and that’s really gotten strong adoption, particularly among our larger clients and we’re really excited about that. That really improves the advertiser return on investment. That gives them more conversions which is really what they care about when they actually make money at a lower cost per conversion. In AdSense, we also launched cost-per-click on placement targeted campaigns, such as campaigns that are on a particular website. And this got really strong adoption and it really helped drive better performance and increased spend for our [directory] advertisers, so we are really excited about that too. Now I’m going to turn it over to Sergey.

Thanks, Larry. I want to talk to you about some of our relatively newer initiatives. I want to start with Google Apps and related products. G-mail -- G-mail launched an important new infrastructure in Q4 and this has really increased performance. For those of you who are G-mail users, you may have noticed how it loads a little bit snappier, you can switch between conversations a little bit faster. It’s really improved my productivity and I hope you see that as well. In addition to that, this new infrastructure has really made development easier and in fact, we were able after that to launch eight new features within a span of eight weeks. A couple of new features that also makes G-mail more open, we’ve added IMAP support, so you can use all of your favorite e-mail clients, including, of course, devices like the iPhone and you don’t have to use POP3 anymore, you can now use IMAP, which is the better way to go, if you have the choice. You can also now chat with AOL instant messaging users, so this is great now in the Google chat little screen in G-mail. You can connect not just to other Google Talk users but also AIM users, which is a really large population. I want to jump now from G-mail to YouTube. YouTube has continued to have a really strong user growth. In fact, we had a few special events that just demonstrate this. We hosted the CNN Republican debate together with CNN and in fact, almost as many people saw it on YouTube as did on CNN. We consider this a great milestone and we hope to continue to do great partnerships with CNN and others to jointly grow audience for events. We also, I should mention that YouTube is now available in 17 languages, eight more than last quarter, and so we are seeing a lot of international growth. We are really excited about that. In enterprise, we’ve gotten a lot of increased interest, trial, and adoption of Google Apps in larger companies. First of all, we’ve signed an agreement with Taylor Woodrow, which is the construction services division of Taylor Wimpey, a FTSE 100 company in the U.K. We are also finalizing an agreement to deploy Google Apps at Genentech, and those are just a couple of the really big ones we have. We are talking to many, many companies and many are adopting it all the time. In addition, the universities that have deployed this quarter includes the University of Southern California, the North Carolina Greensboro, Florida International, and Clemson. Now jumping a little bit aside in mobile, we’ve really been revving the Google Maps for mobile, among other applications, and Google Maps is just really useful on your cell-phone now. Some of you might have seen our launch of the My Location, which allows you to see where you are on your cell-phone even if you do not have a GPS-enabled phone, and that’s really amazing. In fact, even if you have a GPS in your phone, the My Location can give you a first cut much faster than you can usually get a GPS signal, and it will work indoors. I was just using this, I was at a conference in Switzerland, I was able to find a really small hotel and then even switch over to the satellite view on my phone to figure out that I needed to take a vernicular to get up there. It was just a really amazing experience and we continue to add features and reliability to it all the time. I should mention My Location is available now in 21 countries and it works on four different platforms altogether. We also launched a new rev of apps for the iPhone. We call it Grand Prix internally, but basically you get access that’s really fast and integrated to the major Google products, including search, G-mail, calendar reader, and others. And it’s really had great uptake. I use it personally myself. Many people have really been enjoying this product. It’s growing very rapidly. Last but not least, I’m going to do a shout out to Android, which is the operating system that we are developing for mobile phones, and it’s completely open, of course. It’s going to really solve a lot of the challenges the company’s in the mobile industry have. We’ve released the SDK for it. We formed the Open Handset Alliance, which has now 34 industry leaders in it, and we really think that this is going to make Internet on mobile hopefully as frictionless as it is on your desktop normal Internet experience. This is going to spawn lots more activity and what we love, it’s to see lots of great, open access to the Internet wherever and whenever you are. Anyway, that’s what we’ve been doing on those fronts and now, back to you, Eric. Eric E. Schmidt: Well, thank you very much, George, Larry, Sergey. As you can see, not only did we have a very good 2007 but we are quite optimistic about ’08 and our model continues to work very well. Why don’t we go ahead and move to your questions and I would also like to bring in Omid and Jonathan, previously introduced, to help us answer your questions on this or anything else. So could we go ahead and get our first question?

(Operator Instructions) We’ll take our first question from Imran Khan from J.P. Morgan.

Two questions; first of all, paid click growth rate declined 15 percentage points sequentially year over year, growth rate, so I’m trying to understand how much of that growth rate decline was due to the changes you made and if you see any improvement in the price-per-click because of increased customers return on investment, because your year-over-year revenue growth rate decelerated 10 points as well on your website, so to better understand the relationship between price-per-click and paid clicks growth rate. And secondly, social network monetization is difficult. You talked about that and I believe it’s with News Corp that you signed a long-term contract, so how should we think about that contract and what does that mean for your TAC rate going forward? Thank you. Eric E. Schmidt: Why don’t we start with Jonathan? Why don’t you take the first part of Imran’s question?

Sure, Imran. Basically paid click growth, which you referred to, tracks the traffic growth rate and the traffic growth rate did decelerate. The number of search ads basically grew faster than the number of content ads, so I think one of the things that you have to look at there is what is the mix issue. And then I think there were probably some secondary factors there. Some factors would include things like the focus that we’ve had on weeding out the low CPC, high click-thru rate low quality advertiser, so that’s probably a component. The other thing that we did was there was probably some impact from the non-clickable backgrounds which we launched on AdSense for content, so those were probably the biggest things. I think there was also a little bit of an issue with the timing of the holiday. Monday and Tuesday were Christmas and Christmas Eve, which are conventionally our biggest days, so that was probably a component. On the CPC side, generally CPCs have been going up, click-thru rates have been going up, and coverage has been going down. I’m not sure I could add much more there.

I just wanted to follow-up on the social networking question. We don’t talk about individual partners’ performance or anything like that. Now I do want to highlight though, we have had a challenge in Q4 with social networking inventory as a whole and some of the monetization work we were doing there didn’t pan out as well as we had hoped. But we are continuing the efforts and we are still optimistic about future quarters.

We’ll take our next question from Douglas Anmuth from Lehman Brothers.

Thank you. My question is regarding the U.K. it looks like your growth Q2 was about 5% in the U.K. and that compares to about 11% in the fourth quarter of last year. Could you talk about what you are seeing there beyond the usual categories that you may see weakness in typically during 4Q and what you are seeing there from a macro perspective as well? Thank you. Eric E. Schmidt: Omid, do you want to go ahead and handle that?

In general, we are very pleased with our performance in Europe. And actually, I know you asked about the U.K., but very quickly we are seeing great results in France and Germany as well in the retail category. I think in the U.K., we saw the typical seasonal patterns but we were -- there are certain categories that we believe the auction is in effect fully sold out and we are working on clever ideas and conversion analysis for our partners to really improve their understanding of how they should spend and how they should price their bids. But overall, we are very satisfied with the penetration we have with the major accounts. We are at CEOCM tables. I was there throughout Q4 and overall, we’ve seen a lot of strength in the market.

And are those two categories, travel and financial, that are typically seasonally weak? I mean, do you feel like there is an additional macro impact there?

No, those two were the primary ones. Eric E. Schmidt: Jonathan, do you want to add anything to that?

I was just going to add that it was finance and travel. Maybe the only other point to look at there is if you look at the total percentage of advertising spend in the U.K., some of the public data says that it’s roughly 15%, 16%, 17% on search, whereas in the United States it’s more like 6%. So one of the things that you see there is that the seasonality, particularly in those two verticals, is much more marked because they are spending a disproportionately greater amount of money in total on search engine efforts. Eric E. Schmidt: Let’s go to our next question.

We’ll go next to Jennifer Watson with Goldman Sachs.

Thank you. Can you give us a little bit more detail on the feedback that you are getting from both advertisers and consumers on the YouTube advertisements that you guys rolled out? Eric E. Schmidt: Omid.

We were doing what I can best characterize as just a lot of touch points with our -- both publisher partners as well as advertisers. We are trying different formats. The in-video ads have been very successful. We’ve had a number of campaigns and the way we are also approaching this which I think is unique for Google is really from an integrated and scalable fashion. In the case of -- for example, if I may name some clients, General Motors, for example, Chevrolet Europe, we did what I think is a really truly possible with the advantage that Google has, you know, running the campaigns across multiple countries, delivering large numbers of impressions from YouTube to the content network to the search campaigns. Adobe, for example, ran one of the biggest homepage campaigns we’ve had in the history of YouTube. So all in all, we are doing a lot of experimentation. We are starting to do it globally and we are doing it in every integrated fashion and by adding the other key assets that we have. Eric E. Schmidt: Let me add a couple of other things. YouTube is doing extremely well, growing very, very quickly and doing so internationally as well as in the United States. There’s been an issue around standardizing ad formats for advertisers who would like to be able to do industry buys and so forth. So as these new ad formats are being developed, we are also looking to make sure they get standardized into a common buying pool and pattern so that people feel comfortable that they can get real value. The next generation of projects are actually very, very sophisticated ad products and it looks like they are going to do extremely well. Next question.

We’ll go next --

Operator?

We’ll go next to Mark Mahaney from Citigroup.

Thank you. I wanted to ask a question about mobile, particularly for you, Eric. You’ve got a very interesting perspective from two companies on what’s happening with mobile Internet usage, particularly off the iPhones. How much of a ramp are you seeing? Is there any way you could quantify it and is there a way you think about how mobile search as a percentage of overall search could be in two to three years? Thank you. Eric E. Schmidt: It’s very difficult to estimate the percentage in a few years. We have already said in a number of public statements that it is growing significantly faster on a percentage basis than other categories, and as you mentioned, iPhone is the first of a whole generation of products that will be much more search intensive, and so there’s much more likely to be many more search opportunities and with those search opportunities comes ad monetization. We have done a number of deals for mobile devices already, KTTI and DoCoMo, for example. DoCoMo just announced by Omid in Japan, which are very, very strategic for us. It’s difficult to estimate what percentage it could ultimately be long term, and when I say long term, I mean perhaps 10 or 20 years. It’s reasonable to assume that a majority of searches would be on mobile or personal devices, simply because over a long enough period of time, they will take on the tremendous power that’s represented in the PC and Mac platform. And the wireless networks are getting to the point where they can offer performance similar to the wireline. Jonathan, do you want to add anything?

We’ve been tracking the data very carefully. We are particularly interested in looking at the iPhone, particularly because the experience on web browsing is so good and because of the optimization efforts which we did. We saw a very significant spike in December with the optimization that we did on both the iPhone and it was well over double I think within about a month in terms of increased usage.

If I can do a quick follow-up on macro trends -- to the extent that you would see weakness related to a softening consumer, do you think you would see it more on the supply or the demand side -- i.e. ad budgets being trimmed or less consumer commercially oriented searches? Thank you. Eric E. Schmidt: Sergey.

We’ve been really studying these questions really in depth and near as we can tell, we just offer such a great ROI for advertisers that they can directly see and measures that advertisers in maybe even difficult markets and what not just have great incentive to get as much profitable inventory as they can from Google and the other different kinds of ROI advertising that we offer. So we have not been able to detect any such effects from macroeconomic trends. Eric E. Schmidt: Jonathan.

I think some of you have observed that direct marketing tends to be less affected by economic downturns than brand marketing, given a time measurability. I think that’s been true in past recessions. I think we’ll probably see that again. I think one thing we may see is consumers comparison shopping more and that would certainly create more clicks. It might create modestly lower conversion rates but we think overall, if people are doing more comparison shopping and looking for bargains, that’s probably positive. Clearly if there’s less overall commerce in the economy in general, then that could adversely impact overall demand, but we really think that relative to most organizations, we are pretty much tracking the diversity of the overall economy and search-based efforts will fare pretty well. Eric E. Schmidt: Let’s move to our next question.

We’ll go next to Christa Quarles from Thomas Weisel Partners.

The main question I guess is on the C-block I guess passed the reserve price today. Obviously you can’t mention whether or not you are bidding, but can you just talk about what those open access measures ultimately mean for you, and especially with Verizon moving toward open access toward the end of 2008? And also, if you can kind of highlight your WiMax stance. And then a total separate quick question -- I was just wondering if you could give the impact on checkout to COGS in Q4. Thanks. Eric E. Schmidt: On the first part of the question, we’ve concluded we cannot answer any questions in that category because of legislative rules with respect to how the auction is working, so I’m afraid we’re going to only be able to answer the second question, so could you repeat it again?

Well, can you make any comment on WiMax at all, with a separate -- Eric E. Schmidt: As I indicated, I think it’s best practice for us just to move to the second question.

The second question was just on Checkout and whether it had a big impact on the COGS in Q4. Eric E. Schmidt: Jonathan.

I think it’s the same answer that we’ve given in the previous calls -- the impact was immaterial. I think one of the strongest observations that I could give you there is that the organic growth in terms of Checkout overtook the promotion efforts this quarter, so I think that’s a good sign in terms of the general traction that we are getting. The other things that we are seeing there, that the click-thru rates on the [badge] are up as much as 10%, so I think that’s going pretty well.

If I may, also in addition to the click-thru rates, I think we are starting to get some anecdotal and some actual real studies that demonstrate that the conversions are also up, very substantially and hopefully we’ll be able to share more of that with you in the coming weeks. But there is really good evidence now that Checkout is able to get consumers through the process more quickly and more reliably.

Okay. Thanks. Eric E. Schmidt: Why don’t we go ahead to our next question?

We’ll go next to Robert Peck from Bear Stearns.

As we think about the margin levels this quarter, should analysts be thinking that based on what you are seeing as far as the social networking side, is this more of a new run-rate level, or do you think the margins were somewhat suppressed by the MySpace relationship in Q4? And then number two, could you also talk to us about timing of a DoubleClick closing and any sort of impact you can see to the numbers for 2008? Eric E. Schmidt: Let me do the DoubleClick question. So everybody knows, we had FTC clearance in the United States in December, which is great, and we are working with the European Commission. We are obviously very hopeful that they will clear as well and that’s probably all we can really say about DoubleClick at this time, but we are certainly hopeful that it will get cleared. We are working with them pretty closely. George, did you want to answer the first question?

Bob, could you repeat the question again?

It’s really more of was the impact of social a one-time impact for 4Q or should we think about this as being more of a normalized EBITDA margin run-rate going forward, particularly as other projects continue to build --

We’re still in the learning stages of how we monetize social networking and this is going to evolve over a period of months, so this is sort of early stage at this point.

Any idea on a replacement for CFO?

Maybe. Eric E. Schmidt: We’ve got a number of very good candidates and we are very happy to have George is still doing the job here and has agreed to continue to do this until we find the right replacement and it’s a hard position to replace, given George’s incredible performance. Let’s go to our next question.

We’ll go next to Benjamin Schachter from UBS.

A few questions; I was wondering if you could go into a little more detail on the social networking issues and specifically maybe talk about differences you are seeing with your non-text-based ads versus your text-based ads on social networking. And then another question on TAC associated with Google.com revenue. It continues to move higher, it’s about 4% now. I was wondering if you could talk about the key drivers and if there is a target rate internally for where that may go. And then finally, on healthcare, in the past, Sergey, I think you’ve specifically said that you don’t really think about Google's efforts in healthcare as really a driver for P&L and Eric, I know you are speaking at a healthcare conference in February. Any updates to that? Any change in how you are thinking about healthcare, how it might be a business opportunity? Thanks. Eric E. Schmidt: On the healthcare side, we don’t have any products to announce at this time, so why don’t we answer the first part of your question, Jonathan and Sergey -- social networking and TAC.

I’m afraid I’m not sure off the bat what the stats were on the image versus text ads. We did have some changes relating to allowing certain kinds of CPC ads, which were only allowed to be bid on a CPM previously, which may have contributed to some cannibalization, or at least for now. But as I said, on the whole I’m not sure what the data is for image versus text.

I don’t have too much to add. We’ve certainly seen adoption of both the text and the image ads on social. I think the thing we have to figure out there is how to optimize the look and feel of the ads against the inventory that we have, how to slice the inventory up in alternative ways to try to figure out how to make it work and we’ve got some demos that we’ve just developed that are going to change the way we are doing some of the targeting, so I think we are basically going to have to look at that and try to figure out how do you find people of particular demographics that are comparable to what you might find in the New York Times or in a particular publication that you might have been previously familiar with.

If I may summarize on the whole, we have a huge amount of social networking inventory, including the MySpace relationship, including of course Orkut, our own network, which is very, very successful and probably like 20 others, or something like that. I don’t know the exact number. But we have an incredible amount of this inventory and in fact, it varies quite a bit in how it all monetizes, based on a number of factors, some of which we understand, some of which we don’t. I don’t think we have the killer best way to advertise and monetize the social networks yet. We’re running lots of experiments. We had some significant improvements but as I said, some of the things we were working on in Q4 didn’t really pan out and there were some disappointments there. I hope to be able to report more progress in the future but it’s a big opportunity because it’s so much inventory. Eric E. Schmidt: Why don’t we move to our next question?

We’ll go next to Mary Meeker from Morgan Stanley.

Thanks. Dave and I wanted to revisit Imran’s question from the beginning of the call. Our worry going into the fourth quarter about Google was related to monetization levels, or cost-per-click growth, given what was going on in financial services, retail, and travel. We weren’t worried about query growth. Now you’ve reported your numbers and by our math, the cost-per-click growth was about 16%, so very robust, the highest we’ve seen in a long time, but by your math, the paid click growth was only about 9% sequentially in what is typically a seasonally strong quarter. And as we were thinking about it, just as we read in the press release before the call started, we thought issues might relate to the fact that it’s tougher to gain share, given how high your share already is, given there might be some share loss, issues about a recession, something geographic, or much slower market growth. And George mentioned then changes in the algorithm impacted, reduced accidental clicks. So our question, and it may be for George, is 9% sequential growth the kind of growth to potentially think about in the December quarter, or did the algorithm have a really material effect on the sequential query growth, or was it something else? Eric E. Schmidt: Again, we have to be very careful here not to project any guidance here with all the math, so Sergey, do you want to try to describe what you thought the components of all of this were?

I should mention that we were reluctant to even start reporting that particular metric and it’s because unfortunately, there’s just a lot of complexity in our business and as we try to get the best possible, most useful ads to our end users, and hence get the most promising customers to our advertisers, we trade off a lot of things. So one example is the one that George mentioned, the one that you just talked about -- for example, getting rid of the clickable backgrounds. But there are also factors like we might want to reduce the number of low cost clicks, or perhaps low likelihood to convert clicks, in favor of a smaller number of higher quality clicks. There are many, many trade-offs that we make. So I just -- I would hesitate in inferring too much from just that one metric alone.

But was some of the -- was the change or some of the unusual things that happened that related to what you just mentioned and what George mentioned, were they global and did they take place through most of the quarter, or were they U.S. based? And then I’m done. Thanks. Eric E. Schmidt: Jonathan.

I’m not sure to what degree I can separate out the international component. It certainly is true that prices rise as advertisers get higher conversion rates, particularly over the holidays, and Hal Varian posted a blog that sort of takes you through some of that. The other thing which I think you said which I’m pretty clear is not the case, we’re generally doing very well from a market share perspective domestically and internationally, so the trend there is almost uniformly a gain in market share.

I guess the one last observation is given that the changes probably had impact throughout most of the quarter and were perhaps global, that potential slowdown could be -- it could be a blip. Eric E. Schmidt: Again, you’re using the term potential slowdown, which is not a term we have used on this call, so again that’s your view, not necessarily ours.

Mary, the click growth in the quarter beat our internal forecast.

Yeah, and it was certainly strong. Eric E. Schmidt: Why don’t we move on? Thank you very much. Next question.

We’ll go next to Sandeep Aggarwal from Oppenheimer.

Thanks. Two questions; one is can you talk about how you are viewing the partnerships you have with some of the big AdSense partners? And basically, it’s clear that you did see some impact in that -- acquisition cost because of the minimum guarantees. I just wanted to know how would you hedge that kind of situation going forward? And secondly, George mentioned about investments which may drive down the margins. I just wanted to hear from you or get some sense of where these investments will be made -- will this be more of enhancing your existing products and infrastructure, or some new initiatives? Thank you. Eric E. Schmidt: Omid.

I’ll take the first part of the question. I think in relation to partnerships, we enter all of these with a view to having very successful [inaudible] before going to the partner, as well as ourselves. We would like to have very profitable deals. I think in certain areas, as we’ve been talking about social networking, we make bigger bets to be able to understand that space. We think that’s an important category. We have our own products in that space and we want to understand the monetization, which is again more challenging area for us to figure out, but we are confident given the innovation model that we have and the roadmap that we have that we’ll be able to perform better there. So our goal in all of these deals is to again make the proper levels of investment, proper levels of guarantees and over time, in areas that are newer to us, to understand them better and have better products.

I was going to add we’ve had I think in many of these areas with great partners, we’ve had very significant improvements in monetization and social networking in different areas. And like Sergey mentioned, I think there’s large opportunities still there. There’s tremendous amounts of inventory and the monetization levels are relatively low compared to other things. And we’ve seen the ability to make significant gains, so we are very optimistic about those areas still.

I’m sorry, what about the investments, future investments? Eric E. Schmidt: You might want to repeat your question, because I’m not sure I agreed with the premise of your question. Go ahead.

I just wanted to hear basically in terms of I -- basically if you can provide some color in terms of future investments. Are they going to be more focused in terms of the enhancements to the existing product portfolio and improving your infrastructure versus some of the new initiatives? Eric E. Schmidt: Well, the general answer is that’s where we see big opportunities and our primary focus on investments is in fact in our core business, and you see the success we had in 2007 and in Q4, the vast majority of that was actually not in all the things that generates all the exciting new announcements that we are happy to talk about, but in investments in core search and core advertising globally, which I’m incredibly proud of. George, do you want to add anything on this?

So in terms of your comments around margins going forward, as you know we don’t give guidance. We are going to continue to higher the talented people that we always have. We are going to continue our investments in CapEx and we are going to be very careful around how we proceed with making investments.

Thank you.

We’ll take our next question from Brian Pitz from Bank of America.

Can you provide some additional color on why we observed more of a deceleration in Google AdWords versus AdSense? And maybe this is a point of clarification but I think we heard you say that quality changes were made to AdSense and in addition, our assumption is that it was the social networking revenue also falls in the AdSense bucket. And then just a quick second question to Larry on licensing revenue -- should we assume most of the increase is due to the Postini acquisition? And that’s it. Thanks. Eric E. Schmidt: Jonathan, AdSense and --

I think we’ve pretty much answered that with the discussion that we had earlier on the mix issues. I’m not sure I can offer you anymore color. We said that the Google.com traffic was stronger than our own internal expectations. We also -- if you look back at Q3, which I think we talked about on the call then, Q3 was a very, very good quarter, so if you are looking at the sequential growth rate, you are comparing it to a quarter in which we did disproportionately well, relative to what we’ve done in the past but I’m not sure how much color I can really give you there.

Perhaps it is worth mentioning, I do believe that we include the social networking revenue within the AdSense for content bucket, which is within AdSense as a whole. And perhaps it’s worth [also a note on the side], it’s not necessarily a financial metric, but we have had great partnerships with these social networks now. We’ve now launched Open Social and we have now at least 20 partners on that. We have applications being developed so we have networks who are participating, so we are really excited about all the progress innovation there and even though Q4 for us was a little bit of a disappointment in terms of the kinds of improvements in monetization we were able to generate, that’s -- Q3 was fine for us in that light, as was Q2 and we are optimistic about the future. Eric E. Schmidt: And remember that the Google model is one of experimentation. We keep trying and we keep trying new ideas until we find the ones that really generate phenomenal ROI and not only do we go with them but they grow very quickly.

I didn’t want to miss your second question, it was about enterprise growth and Postini?

Yes.

And what specifically were you looking for?

Well, should we assume that most of the growth in licensing was due to the Postini acquisition in the quarter?

I think we’ve had a lot of success to date with small businesses. We added a lot of ISPs, which tend to drive a lot of the traffic. We also pushed a lot of the education efforts, which I think had a pretty significant component. Beyond that, it’s hard to -- Eric E. Schmidt: The answer to your question is yes. It’s easier that way. Why don’t we go to our next question?

We’ll go next to Marianne Wolk from Susquehanna.

Thanks. I wanted to focus back on the economy. Can I confirm that when you called the weakness in the U.K. related to travel and finance seasonal, that you have already seen the normal seasonal rebound here in January? And then as a follow-up, a few retailers we actually spoke to in Q4 said that they increased their spending in online advertising as a way to bolster the slower offline sales. Have you noticed any counter-cyclicality in the business? Could a weaker economy actually accelerate the shift in ad dollars online? Eric E. Schmidt: Again, you have a thesis here which we don’t necessarily agree with and in any case, we are not going to talk about the current quarter. We are talking about the quarter that ended in December. I’m happy to say that we have not yet seen any negative impact from the rumors of future recessions. We’ll see what happens.

But if I may add, I do think that certainly like you’ve seen from several of your contacts, it makes a lot of sense for advertisers if they want to be careful about their spending and they want to make sure they are getting a good ROI, to use the exact kind of advertising that we are offering. I think that makes a lot of sense and I think lots of advertisers recognize that.

We’ll go next to Justin Post from Merrill Lynch.

Thank you. Most of my questions have been asked, but one about your future -- when you think about revenue sources beyond search, what do you think your biggest opportunity is among software as a service -- video or display? Do you prioritize those? And do you think any of them could be material within the next two years?

I think it’s hard to prioritize the exact ones. I think we are making tremendous strides in apps, as we talked about. There’s tremendous -- those are of tremendous importance to people and we are also getting revenue from multiple sources there from advertising and from people paying for the service itself. And we’ve obviously seen tremendous growth in YouTube, which we already mentioned, which is great. I think we’ll be -- there’s going to be significant amounts of advertising there also. I’m pretty optimistic about all the new areas we are pursuing and the opportunities there will take -- you tend to underestimate the long term and overestimate the short term for any new thing and I think you want to be careful about that, but I’m very optimistic long-term. Eric E. Schmidt: There’s reasons to be optimistic about all the categories that you described. The display business is literally right in front of us and the DoubleClick acquisition is an essential part of that strategy, so we’ll see. But of course, we have a sales force that is perfectly capable of selling those, customers are purchasing those already, and it’s a market that would benefit from the kind of technology that Google can bring to market. In the case of YouTube, you have a huge forward opportunity just because of the scale of the audience, globalization and so forth, so to the degree that we can develop the ad formats that we describe, it again should become very significant -- exactly when is very difficult to predict. Some more questions?

We’ll take our next question from Heath Terry from Credit Suisse.

I was wondering if first you could update us on the local business and exactly where you are in continuing to try and attract advertisers to monetize the tremendous traffic that you’ve built within Google Maps, particularly what kind of progress that you’ve seen out of the local business referral model? Eric E. Schmidt: Jonathan.

I guess the biggest thing that happened this last quarter was the Local Plus Box, which we launched I think in late November. Basically that was an improvement to the local ads on Google.com. I think it’s only available for the top ads but basically what happens is we show a plus box for the local ads and it expands and basically gives you the advertiser’s address, the phone number, a map, and this is the kind of thing that you’ll see us moving more towards as we try to make our efforts there and our ads more consistent with what is going on with universal search, convey as much information as we possibly can in the ad related to what happens if you click through to it and try to figure out how to capture the local opportunity.

Great, and on the local business referral program?

We’re not breaking any of those components out now. We are right now really focused on getting the right content, as Jonathan mentioned. A lot of the success of these areas will depend on having the most comprehensive listings and the right format and we are experimenting with all that, building the right relationships, and it’s still kind of early for us to break it out and really talk about the revenue performance.

The one other thing that you could look at is I also believe that we have pretty much completely revamped the regional targeting system and how that works for the advertisers, and I would expect that there will be significant improvement from that as well.

We have time for just one more question.

We’ll go next to Jeffrey Lindsay from Sanford Bernstein.

We’d like to ask two things. First of all, could you give us any breakdown of the 889 new staff, geographically and/or by function? And then second, it looks like the TAC rate increased in the fourth quarter to 88%. Why did the TAC rate go up? What were the drivers behind this and were they one-off factors or were they factors that you expect would continue? Thank you. Eric E. Schmidt: On the hiring question, the first part of your question, you’ll remember that we hired a little ahead of ourselves maybe six months ago, so we’ve returned to our normal hiring process -- more international over time, a balance -- maybe 50-50, or close to it, technical and non-technical. We are a very difficult place to get a job at and so we continue to look to the very, very top talent in each and every position, and we do that worldwide and it’s working very well. And I don’t think any of that is going to change. I think that model for hiring and building the organization has worked for us for many years and I think it will continue.

Our TAC rate is not 88%. We are looking at TAC as if it were a percentage of advertising revenue, which is roughly 30%. So as we’ve said, primarily this is all related to our AdSense partner sites and that’s -- which is where we are required to make the guaranteed payments and social networking is also something that is coming online pretty strongly. Eric E. Schmidt: So with that, I want to thank everybody. Thank you, Krista, thank the Operator and thank all of you for spending so much time once again on your afternoon/evening covering Google and we look forward to talking to you in our next quarterly earnings call. Thank you very much.

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