October 10, 2019 0

Alphabet 2017 Q1 Earnings Call

Alphabet 2017 Q1 Earnings Call


woman: Good day, ladies
and gentlemen, and welcome to the Alphabet First Quarter
2017 Earnings Call. At this time, all participants
are in a listen only mode. Later, we will conduct
a question and answer session and instructions will follow
at that time. If anyone should require
operator assistance, please press star then zero
on your touch-tone telephone. And now, I turn the conference
over to Ellen West, Head of Investor Relations.
Please go ahead. West: Thank you.
Good afternoon, everyone, and welcome to
Alphabet’s First Quarter 2017 Earnings Conference Call. With us today are Ruth Porat
and Sundar Pichai. While you were waiting, you were listening to
the infectious song “Diggy,” by Spencer Ludwig. Spencer is a new,
exciting artist on Warner Bros. Records who
is touring Europe this month. You have heard his trumpet
stylings when he performed with Capital Cities
on “Safe and Sound.” Be sure to check out
his official “Diggy” video on his YouTube channel. Now I’ll quickly cover
the Safe Harbor. Some of the statements
that we make today may be considered
forward-looking, including statements regarding
our future investments, our long-term growth
and innovation, the expected performance
of our businesses, and our expected level
of capital expenditures. These statements involve
a number of risks and uncertainties that could
cause actual results to differ materially. For more information,
please refer to the risk factors discussed in
our Form 10-K for 2016, filed with the SEC. Any forward-looking statements
that we make are based on assumptions
as of today, and we undertake no obligation
to update them. During this call,
we will present both GAAP and non-GAAP
financial measures. A reconciliation of GAAP
to non-GAAP measures is included in
today’s earnings press release. As you know, we distribute
our earnings release through our
Investor Relations website located at
abc.xyz/investor. This call is also being webcast
from our IR website, where a replay of the call
will be available later today. And now I’ll turn the call
over to Ruth. Porat: Thank you, Ellen. Our revenues of $24.8 billion
in the first quarter demonstrate our broad-based
strength globally, with revenues up
22% year on year. In constant currency, our
consolidated revenues grew 24% versus 1Q ’16. Growth in
advertising revenues was again driven
by mobile search, with ongoing strength
in YouTube and programmatic. We also had substantial growth
in other revenues from Play, hardware,
and Cloud. Our outline for today’s call is,
first, I’ll review the quarter on a
consolidated basis for Alphabet. Given the obvious seasonality
in Q4, I will focus on
year-over-year changes in our results. As a reminder, I will review
our results on a GAAP basis, which includes
stock-based compensation for operating income, net income,
and earnings per share. Second, I will review results
for Google and then “other bets.” Finally, I will conclude
with our outlook. Sundar will then discuss
our business and product highlights
for the quarter, after which
we will take questions. Let me start with a summary of Alphabet’s consolidated
financial performance for the quarter. Total revenues were
$24.8 billion, up 22% year over year. We realized a negative currency
impact on our revenues year over year
of $304 million or $87 million after the benefit
of our hedging program. Holding currency constant
to the prior period, our total revenues grew 24%
year over year. Turning to Alphabet revenues
by geography, as you can see
in our press release, we’ve enhanced the geographic
split to give you more insight into our businesses
around the world. We are now reporting
our revenues in four regions: the U.S., EMEA– namely Europe, Middle East,
and Africa– APAC or Asia Pacific,
and other Americas, which encompasses Canada
and Latin America. To help you with the transition
to our new geographic reporting, we’re also sharing the UK
revenues for this quarter. These groupings more–
align more closely with how we manage
our businesses and also with
the major currencies that affect our results. The results by region
highlight the strength of our business
around the globe. U.S. revenues were up 25%
year over year to $11.8 building–
billion. EMEA revenues were
$8.1 billion, up 13% year over year. In fixed FX terms,
revenues were up 19%. UK-reported revenues
continue to reflect the ongoing weakness
of the British pound, with revenues up 5%
year over year to $2 billion
on a reported basis, yet up 16%
in fixed FX terms. APAC revenues were
$3.6 billion, up 29% versus last year and up 26% in fixed FX terms, reflecting strength of
the Australian dollar and yen. Other Americas revenues, which include results
from Canada and Latin America, were up 34% versus last year to $1.3 billion. In fixed FX terms, revenues were
up 29% year over year, with fixed FX growth reflecting strength
in the Brazilian real. On a consolidated basis, total cost of revenues,
including TAC, which I’ll discuss in
the Google segment results, were $9.8 billion, up 28% year on year. Other cost of revenues
on a consolidated basis was $5.2 billion, up 34% year over year, primarily driven by
Google-related expenses, specifically, costs associated
with operating our data centers, including depreciation
and content acquisition costs, primarily for YouTube, as
well as hardware-related costs reflecting the continued
strong performance of our new Made by Google
product line. Operating expenses were
$8.4 billion in the quarter, up 15% year over year. Year-on-year comparisons
in part reflect the change in the timing of our annual
equity refresh cycle, with a half-year grant in Q1, which enables us to move to a single annual compensation
cycle. As discussed last quarter, this affects the timing of
stock-based compensation but does not affect
the overall size of the SBC expense
for the year. The year-on-year increase is
therefore more sizable in Q1 and Q2 compared to previous years, with less of
a year-on-year impact in both Q3 and Q4. More specifically, stock-based
compensation totaled $2 billion, up 34% year over year. Headcount at
the end of the quarter was 73,992, up 1,939 people
from last quarter. The growth in consolidated
headcount was somewhat muted by an internal reallocation of
people from Fiber to Google. Consistent with
prior quarters, the vast majority of new hires were engineers
and product managers. In terms of product areas, the most sizable headcount
growth was in Cloud, consistent with the priority
we place on this business. Operating income was
$6.6 billion, up 23% versus last year. The operating margin was 27%. Other income and expense
was $251 million. We provide more detail on
the line items within OI&E in our earnings press release. Our effective tax rate was 20%
for the first quarter. Net income was $5.4 billion, and earnings per diluted share
were $7.73. Turning now to CapEx
and operating cash flow. Cash CapEx for the quarter
was $2.5 billion. Operating cash flow
was $9.5 billion, with free cash flow
of $7 billion. We ended the quarter with cash
and marketable securities of $92.4 billion, of which
approximately $55.7 billion or 60% is held overseas. Let me now turn to
our segment financial results, starting with
the Google segment. Revenues were $24.5 billion, up 22% year over year, which includes the impact of FX. In terms of
the revenue detail, Google Sites revenues were $17.4 billion
in the quarter, up 21% year over year. The biggest contributor to
growth again this quarter was mobile search, reflecting the secular shift
to mobile due to the greater utility
of smartphones for users and advertisers, but obviously also benefiting
from our focus on continuously enhancing
features and functionality. YouTube revenues continue to
grow at a significant rate, driven primarily
by video advertising. Network revenues
were $4 billion, up 9% year on year, reflecting the ongoing
strong growth of programmatic and AdMob. Results benefited from
a slower rate of decline in the traditional Network
business than in prior periods, although it continues to be
negatively affected by both the ongoing shift
by advertisers to programmatic and our ongoing
policy efforts. Other revenues for Google
were $3.1 billion, up 49%. Last quarter we talked about
our bigger investment areas, and you can see
the strong momentum here, reflecting contributions
from each of Play, hardware, and Cloud. Specifically, Play benefited from both
broad-based app strength but also from all the work
we have done in areas such as direct carrier billing, which helps more people globally
access and buy their favorite apps and games
on Google Play. Hardware continues to have
strong growth and remains an important area
for us, with our family of products
extending geographically. Google Cloud continues to drive
sizable growth, with Google Cloud Platform remaining one of
the fastest-growing businesses across Alphabet. Finally, we continue to provide
monetization metrics to give you a sense of the price
and volume dynamics of our advertising businesses. You can find the details
in our earnings press release. Total traffic acquisition costs were $4.6 billion, or 22% of total
advertising revenues, and up 22% year over year. The increase in both
Sites TAC as a percentage
of Sites revenues, as well as Network TAC as a
percentage of Network revenues, reflects the fact that
our strongest growth areas, namely mobile search
and programmatic, carry higher TAC. Total TAC as a percentage of
total advertising revenues was up year over year
as a result of an increase in the Sites TAC rate,
driven by the shift to mobile, which was again
partially offset by a favorable
revenue mix shift from Network to Sites,
which carries lower TAC. Google’s stock-based
compensation totaled $1.9 billion
for the quarter, up 40%
year over year. Operating income,
including the impact of SBC, was $7.6 billion, up 22% versus last year, and the operating margin
was 31%. Accrued CapEx for the quarter
was $2.4 billion, reflecting investments in
production equipment, facilities,
and data center construction. Turning to “other bets.” For the first quarter, “other bets” revenues
were $244 million, primarily generated by
Nest, Verily, and Fiber. Operating loss,
including the impact of SBC, was $855 million
for the first quarter. “Other bets” accrued CapEx
was $170 million, primarily reflecting
a reduced investment in Fiber due to the pause in expansion
we announced in 3Q ’16. Let me conclude. First, we’ve benefited
from our teams’ innovations that continually enhance
our advertising business, as evidenced by the ongoing
growth of Sites revenues. On a dollar basis,
the increase in Sites revenues reflects the healthy growth
in mobile search. As we discussed in prior calls, even though mobile revenue
growth requires
an increasing investment in the mobile ecosystem
in the form of higher TAC, our strength in mobile search is adding meaningfully
to profit dollars. Second, the strong performance
in our advertising business allows us to take bigger bets
within Google to fuel the growth
of additional revenue streams, including those from Cloud,
hardware, and YouTube subscription
offerings. Cloud is one of our most
important strategic priorities given the scale of opportunity
in a rapidly evolving sector and the fact that
the requirements for success align with many
of our strengths. We will continue to invest here
for the long-term opportunity. Similarly, hardware remains an exciting growth opportunity
for us, and you’ve seen the early
indicators again this quarter. Finally in other bets,
we’re determining the size and pace of investment
appropriate to each bet, given their stage
of development and achievements
against milestones. We expect to increase near-term
investment in certain areas while continuing to calibrate
the pace of investment in others as they move along a path
to commercialization. For example, as I hope you saw
earlier this week, Waymo announced
it has commenced a trial of its self-driving cars
in the Phoenix area. Waymo also announced it is
expanding its fleet of minivans to support this trial. These actions reflect
the tremendous accomplishment of our team over many years,
leading with safety, and now beginning to bring
the experience to consumers. I will now turn the call over
to Sundar. Pichai: Thanks, Ruth. It’s been a terrific start
to the year. This quarter was notable for the fantastic momentum
across our products. Advances for
the Google Assistant, the launch of YouTube TV,
and lots of new features launched at
our Google Cloud Next event. In the next few weeks,
there’s much more to come. We’ll host our annual developer
conference, Google I/O, our advertising event,
Google Marketing Next, and our YouTube upfront,
Brandcast. I hope you’ll join us. Today I’ll discuss
three things. First, how our continued
investments in machine learning are fueling innovation
across Google, and particularly how it’s
helping drive our core mission of providing access to
information for everyone. Second, progress in three
of our biggest bets: YouTube, Cloud,
and hardware. And, third,
our platforms, such as Android
and our advertising platform, which power businesses
and computing experiences around the world. Now, turning first
to machine learning and access
to information. I’m really happy with
how we are transitioning to an AI-first company. The Google Assistant
is one of our first steps towards that future. This quarter, we brought
the Assistant to your wrist with Android Wear 2.0, announced that it’ll soon
come to Android TV, and began rolling it out to
hundreds of millions of people with Android phones running
Nougat and Marshmallow. We also continue to announce
new integration partners for the Google Assistant, so you can now ask it
to do things like dim
the living room lights. Stay tuned for more to come. Advances in machine learning are helping us make
many Google products better. One example from
this quarter is the launch of parking
predictions in Google Maps. Beyond that,
we continue to set the pace in machine learning
and AI research. We introduced
a new technique for training deep neural
networks on mobile devices called Federated Learning. This technique
enables people to run a shared
machine learning model while keep–while keeping
the underlying data stored locally
on mobile phones. DeepMind is bringing AlphaGo
to China in May, pairing AI with
the world’s best players at the Future of Go Summit. And it’s very exciting
to see the incredible things that developers
and researchers are building on the TensorFlow
platform. There are more than 6,000
GitHub projects and counting. Search remains at the heart
of our mission to make information available
to everyone, and we are laser-focused on
making Search even better. In March, we introduced tappable
shortcuts in Google Search to help you easily access
topics you care about, like sports, entertainment,
and weather. And earlier this week,
to improve our results further, we introduced algorithmic
ranking improvements, as well as easier ways for people to provide
data feedback in autocomplete
and featured snippets. Last week,
we made big improvements to one of our longest-standing
and most loved products, Google Earth. It’s really beautiful
and easy to use. Now you can experience
breathtaking locations in virtual reality, like the top of Table Mountain
in South Africa. Moving on to three
of our biggest bets: YouTube, Cloud,
and hardware. First, YouTube,
where we continue to see extraordinary growth
and opportunities. People around the world are watching more content
on YouTube than ever before. In 2016, we passed
a big milestone that continues to grow. Every day, users watch over
a billion hours on YouTube. YouTube continues to be
the most popular destination for online video globally, and we are focused on building
awesome experiences. This quarter we announced
YouTube TV, which offers live TV from major broadcast
and cable networks, a cloud-based DVR
without storage limits, and streaming
on all of your devices. We have launched
in five cities so far, and the positive feedback
from customers has been really incredible. Our destination for family
and kids’ content, called YouTube Kids, also recently celebrated
its second birthday. There have been
more than 30 billion video views in the app to date. Next, our growing
Cloud business. Our Google Cloud Next
conference in March was a great opportunity to
highlight core areas of differentiation
for GCP, like new security products
and the recognition that we had the highest cloud
availability in 2016, according to CloudHarmony. It was attended by five times as
many people as last year. We also demonstrated
new machine learning services and announced our acquisition
of Kaggle, the largest community
of data scientists focused on machine learning
and AI. We introduced dozens of new
products, including Spanner, a database optimized
for distributed computing that can reliably update data
across multiple data centers. And our G Suite team introduced
a major expansion of our collaboration platform with Hangouts Meet
and Hangouts Chat. To give you a taste of the kinds
of large enterprise customers and partners we are now working
with across GCP, we were joined on stage by
major companies like HSBC, Home Depot,
Schlumberger, and SAP, as well as large new
G Suite customers, including Colgate-Palmolive. We continue to see tremendous
momentum in education, where our products
are leading the industry thanks to their simplicity,
security, and low cost. Chromebooks are now used by
more than 20 million teachers and students,
and more than 70 million people actively use
G Suite for Education. Over the last
several months, we have noticed a change
in the types of conversations that Diane and her team are
having with customers. Increasingly, we are
being asked to partner for mission-critical projects
and full migrations, moving data from–from on-prem
data centers to the cloud. We are seeing
a meaningful shift, and this momentum is resulting
in a fast-growing business. On to our next big bet,
hardware. Last year, we debuted
a beautiful new family of hardware devices, including the Pixel,
Google Home, and Google Wifi, bringing together
the best of Google across hardware
and software. We are finding that people
who buy products like Pixel
and Google Home are not only incredibly happy
with their purchase but also very likely to
recommend it to others. Sales continues
to be strong, and we are actively working to
bring these great devices to more people
around the world. Just a few weeks ago,
we announced that Google Home and Google Wifi are now–
now available in the UK. Speaking of
Google Home, last week we made it possible
for up to six people to connect their accounts
to one Google Home, and thanks to a leading
voice-recognition technology, it can recognize
who’s speaking to it. It’s really
a game changer. And finally, we are continuing
to invest in our computing and advertising platforms. Our platforms have had
great success over the years, creating incredible
user experiences, as well as real opportunities
and economic success for partners, creators,
and developers around the globe. To illustrate, in the past
three years in Europe, the Middle East,
and Africa alone, we paid out more than
$15 billion to our publisher, creator,
and app developer partners. That’s across AdSense,
YouTube, and Google Play, and it doesn’t even include
device sales by many hardware partners
who build on Android. There’s tremendous momentum in
the Android ecosystem, as evidenced by
the great reception of the beautiful
Samsung Galaxy S8. We’ll have much more to say
at I/O next month. In March, we introduced
the first developer preview of Android O, featuring
improvements for battery life, notifications,
and picture-in-picture display. The Android platform
is also seeing great growth in emerging markets. In 2016,
nearly 300 million new users adopted Android devices from countries
like India and Brazil. We also announced the public
launch of Android Wear 2.0, with two new flagship watches
from LG. And thanks to partnerships
with major–major brands like TAG and Fossil, there’ll be more than 20
different Android Wear watches available this year, doubling the number
from last year. Our virtual reality platform
Daydream, which debuted
almost a year ago, continues to gain traction
with more devices and more great content,
like VR video. More than 50% of time in
Daydream is video consumption, and YouTube VR is Daydream’s number one app
by time spent. Lastly, I’ll talk about
the highlights and trends we are seeing across our growing
advertising business, where there are still
enormous opportunities. As you can see
from our results, we continue to experience
remarkable growth worldwide. Not only are
existing advertisers choosing to spend more as they
see the value of our ads, but many more businesses
around the world are just getting started
on our ad platforms, from India to Brazil
and many more. Our momentum continues to be
driven by the shift to mobile. Our great properties, like Search, Maps,
YouTube, and Google Play, are the prime time
for the mobile world, where people are actively
engaged and interested. We have increased our investment
in machine learning in our advertising business,
with efforts like Smart Bidding, where our systems predict
the performance of an ad and adjust advertisers’ bids
in real time to maximize their results. Two areas where we are seeing
particular strength are retailers
and app developers. Mobile has transformed
the shopping experience. In the past year, local shopping queries
have increased by 45%, and the number of retailers that provide us with their local
inventory feeds has doubled. Our investments
in innovative ad formats, improved targeting,
and better measurement, are really helping retailers who see us as an ally
in their corner. Brands like Williams-Sonoma have seen a 70% increase
in mobile sales year over year with Google’s mobile shopping
ads playing a big part. Secondly, developers use us to help their apps stand out
from the crowd. Thanks to our app install
advertising products, developers have already driven
more than 5 billion app downloads. Our flagship product here,
universal app campaigns, allows developers
to easily promote their apps across Google Search,
Play, YouTube, and the Google Display Network. It incorporates machine learning
to improve campaigns and drive great results
for advertisers. We recently announced
new innovations at the Game Developers
Conference, including an interactive
playable ad format in universal app campaigns that lets users play a
lightweight version of your game right in the ad. It’s really effective in driving
installs from engaged users. Now, on to our growing video
advertising business. Brands love the reach
and engagement that they get across YouTube,
along with the effectiveness of formats like
TrueView skippable ads and our new bumper ads, which are snackable
six-second videos that drive incremental reach
and frequency. We recently did research on more
than 120 bumper ad campaigns, and the data showed that they
drove a significant lift in brand awareness
and ad recall. Under Armour used both bumper
ads and TrueView together to promote a new product
launch recently, resulting in double the lift
in product interest among people
who saw both ads compared to those who
only saw the TrueView ad. We work incredibly hard
to get the–create– to create the best environment
for brands on YouTube. The cornerstone of our offering
is Google Preferred, which allow brands
to advertise against the top 5%
of our content. We also announced new safeguards
for advertisers through a combination of updated
ad policies and enforcement, new default settings around
where ads can appear, improved controls
for advertisers, and third-party
brand safety reporting. Brands and agencies understand
how hard we work to create the safest possible
environment. We do this while
also being very careful to ensure YouTube’s innovative
creators can earn money to support their unique
and popular content. We’ve been actively engaged in
conversations with clients about the new tools and controls
we are providing, and we are having
very productive discussions ahead of Brandcast
next week. Finally,
programmatic advertising. As marketers continue to shift
towards programmatic ad buying, our DoubleClick platform
makes it easy for them to effectively reach
the right audiences. We’ve been focusing on making
more inventory available to more advertisers,
especially premium inventory. For instance,
we recently expanded our Programmatic Guaranteed
reservation product to advertisers globally, and we made traditional TV
inventory available to buy in DoubleClick Bid Manager. So that’s a run-through of some
highlights for the quarter. Thanks to every Googler
for making Google such an exciting and inspiring
place to work every day. Over the last few days, we have had Take Your Child
to Work Day at Google, which is one of my favorite
events of the year. We have had thousands of
excited, screaming kids running around
the Googleplex, which is how I feel
some days, too. What motivates us at Google is
building the technologies that’ll be central to all
of their computing experiences, to give them opportunity–
opportunities to learn, to be heard,
and to succeed. And with that, I will hand it
back over to Ruth. Porat: Thank you, Sundar, and we
will now take your questions. woman: Thank you. Ladies and gentlemen
on the phone lines, if you would like to ask
a question at this time, please press star
followed by the number one key on your touch-tone
telephone. If your question
has been answered or you wish to remove yourself
from the queue, you may press the pound key. Again, that’s star one
to ask a question. And our first question
comes from Douglas Anmuth of J.P.Morgan. Your line is now open. Anmuth: Thanks for taking
the question. I had two. First, just,
you talked about Cloud as a huge
strategic priority. Could you just talk more about
the go-to-market strategy for GCP and how you
plan on building up the reseller channel there
going forward? And then secondly, Sundar,
on Waymo, I was curious on some of your
thoughts, I know it’s early, but on the timing for Waymo to
become commercially viable. And then what are
the key guideposts and requirements
along the way? Thank you. Pichai: You know,
on the Cloud stuff, you know, talking about
go-to-market, you know–you know,
as Ruth said in Q1, our largest growth in headcount
and CapEx was in Cloud. So we are thrilled with
the progress we have made there since Diane arrived,
building our world-class sales, marketing,
and engineering teams. The heavy lifting,
I would say, is around how we meet
enterprises in the market. We have reorganized so we have
one face to the customer. So it’s not just
sales reps. We’ve been thoughtful
about how we have built out the entire go-to-market
organization. So we created
two new areas that customers can now take
advantage of. One is the office
of the CTO, which helps customers solve
difficult technical problems. And the second is
our Advanced Solutions Lab, where customers can get help
from machine learning experts. And on top of that, now we have
a phenomenal support team that helps keeps customers’
applications up and running. So, you know, I think
what we have done– our approach
is one Google. You know, when a customer
signs up for Google Cloud, they get more than GCP
and G Suite. They have access to the ads
and analytics teams, YouTube teams, and resources
within our organization. So I think it’s
coming along quite well. Porat: And then
on your question on Waymo, we view Waymo as a great example
of a graduate from X that’s addressing
a sizable problem and builds off of
tremendous technology here. We started with safety,
we remain a leader in safety, and we continue to view that as
the foundation for success. And at this point,
we’re exploring many options enabling ride sharing,
personal-use vehicles, logistics
and deliveries, and we also see opportunities
to work with cities to address
public transportation. So the announcements this–
that we made this week are a continuation of
the progress the team has made. We do have a strong relationship
with Fiat Chrysler, increased our core–car order,
given the opportunity. They have been
our primary partner to date, but to note we’re in active
discussions with others around the globe. And then, you know,
I think, importantly, the trial in
the Phoenix area is something that’s been
in the works for some time, and we do look forward
to that trial. So it’s still
in the early days, and we’re excited
about the upside from Waymo. Anmuth: Great.
Thank you both. woman: Thank you.
And our next question comes from Heather Bellini
of Goldman Sachs. Your line is now open. Bellini: Great.
Thank you. I also wanted to ask a question
about Cloud as a follow-up. I was just wondering, Sundar,
if you could share with us what’s the feedback been
since Next from your–
from your Cloud customers? And could you share with us
how qualitatively– something so we can gauge
just kind of whether this is starting to see–
whether this–this business is starting to see
an inflection in growth or not? Is there anything you could give
us qualitatively about how the pipeline is
building in this area? And I guess just
what I’m interested in is also the types of
conversations you’re having with customers now
versus maybe six years ago. Oh, I’m sorry,
six months ago. Sorry about that.
Thank you. Pichai: Time flies fast. You know, I mean,
Next was– you know, I mean, having done
Google I/O many, many times, you know, I was surprised
to see the scale and growth of Next from even
last year to this year. You know, we had five as many
times as people. I think, you know–I think
everyone really appreciated seeing large customers, very sophisticated
customers, like HSBC, eBay,
Colgate-Palmolive, et cetera, discussing use
of Google Cloud, GCP. You know, along with Diane,
I did follow-up lunches with those sort of people, and, you know, so the feedback
has been very positive. You know, people sense
our commitment to the area. They understand the pace at
which we are investing. They see that we are committed
to machine learning and AI at a deep level. They appreciate how we are
open-sourcing things. You know, Fei Fei’s talk was
extraordinarily well-received. They are noticing
the acquisitions we are making. Kaggle and AppBridge
are a couple of acquisitions which–which happened
around that time. So, you know, all that–
you know, all those details, I think clearly
made an impact. You know, I just spoke about
the go-to-market progress, and, you know,
I think that’s– that’s beginning
to get traction as well. In general, you know, I think there is a, you know,
very strong recognition that we have pivoted to being
a deep enterprise company, and, you know, our conversations
are very strategic. We are engaging at the highest
levels within companies. And so,
you know, overall, I can see qualitative leader
momentum there. You know, when we are
in the middle of deals, you know, we–we find
we are very competitive, and there are areas
where customers perceive us as best in class already. So it’s been exciting to see. Bellini: Thank you. woman: Thank you. And our next question comes from
Eric Sheridan of UBS. Your line is now open. Sheridan: Thanks for
taking the question. Sundar, you mentioned Google
Assistant in your remarks. Wanted to know,
what have you seen in terms of consumer adoption
of Google Assistant, whether at the Pixel level
or the Google Home level, what does it give you
in terms of sense of how people want to interact
with the Assistant? What it might do
in terms of putting artificial intelligence
capabilities down to the consumer level
and improve consumer experiences over the next couple years? Thanks so much
for the [indistinct]. Pichai: Good question, Eric. I mean, you know,
Pixel is a good example, because I think, you know,
it–it’s the place where we do
the leading work here. And, you know,
how we presented the Google Assistant
and the Pixel, you know, well-received, both qualitatively in terms of
consumer feedback we get, quantitatively in terms of how
we see people using Voice, how we see people
interacting with overall Google Assistant
and Search better. So, you know,
we find that when we drive the Assistant
experience well, it works overall in helping
people engage with Google at a broader level. You know, it’s always
surprising to us– you know, always said,
even with Search, every single day we see
so many new types of queries. When you bring the Assistant
into mix, you start getting even more
different types of queries, and, you know, queries are more
casual, more conversational. You know,
and so over time, I think it starts
breaking down the barriers
to computing people have, and that’s what makes it
very, very exciting. Now, artificial intelligence
will help us push all that further. Just to give an example,
you know, we will make Text-to-speech
much, much better over time. You know, yesterday,
we announced our Neural Machine Translation is launching
in nine new languages. So, you know, all that starts
accruing to the Assistant, and I think–I think
will overall improve the consumer experience
pretty dramatically. We’ll talk about all this
a lot more at Google I/O, so stay tuned. woman: Thank you. And our next question comes from
Mark Mahaney of RBC. Your line is now open. Mahaney: Great, thanks.
Two questions, please. One on YouTube
and one on Google Maps. Sundar or Ruth, there was some press
about some of the pushback or some of the controversy
around content in advertising and monetization of that. Are–were those–
are those technical problems that can be solved over time? Or is it just the magnitude
of the volume of content and trying to keep, you know,
bad content off the site, however that’s defined, and keep
it from being monetized, is that–
is that just– is that an ongoing
technology challenge or did you already
find a solution? And did you see any
material impact to advertisers’ budget interest
with–with YouTube? And then if you could also
comment briefly on Google Maps. This is one of those massive
properties that you’ve owned that’s highly used
by almost everybody, and I think the monetization to
date has been really de minimis. Is there anything
that’s changed for you in terms of your thought
about the ability to monetize Google Maps
over time? Thank you. Pichai: You know, on advertising
and monetization in YouTube, you know–you know–you know,
we talked a bit about it. You know, we have–we have
taken it pretty seriously, and we are taking
significant steps. And, you know, obviously
as part of doing that, you know, we have brought new
technical solutions into place. Machine learning is
a great example of it. you know,
it helps us enforce– as we improve our policies, it helps us
enforce it better. And, you know,
we are in early days, so as machine learning
gets better, I think–I think we’ll be able
to do all of this even better and create that
virtuous cycle. Overall,
I’m pretty confident at the–at the rate at which
we have made progress. And we’re going to continue
investing a lot here. It is super important to us that
this ecosystem works well. It matters
for advertisers. It matters
for content creators. And so we take that
responsibility very seriously. I would say, you know,
advertisers have clearly noticed all the improvements
we have made. Our conversations with them
are very, very positive, and, you know, so I’m–
I’m pretty optimistic about how we’ll continue
to make progress here. On Google Maps,
your question is– you know,
it’s a good question. You know, I get surprised at,
you know, for a property which we had
launched many, many years ago, even now that, you know,
it’s showing strong growth, especially in
emerging markets. Maps is an integral part of
your mobile phone. And as we get more– as users get more interested
in the real world around them, you know, with–
with AR and–and so on, I think Maps will continue to
play a bigger role. We take
a long-term view. It’s already impacting
monetization very significantly for us
with local search. So today,
when you use Google, a lot of the information
we are able to do is because of Google Maps. But I’m sure you’ve noticed
changes within Google Maps over the past few months. You know, if you open
Google Maps, you’re traveling or you’re about
on a Friday evening, we start surfacing a lot more
interesting information about what you can do,
places to eat, and so on. So those are beginning to get
good feedback from users, and I think that gives us
an opportunity to add value there
over time as well. Mahaney: Thank you, Sundar. woman: Thank you. And our next question
comes from Peter Stabler of Wells Fargo Securities. Your line is now open. Stabler: Good afternoon.
Thanks for taking the question. Wanted to follow up
on Mark’s question on the local opportunity. Assuming that you agree
it’s–it’s a large one, what kind of steps
are you taking to educate the smaller
businesses out there on the opportunities
you have? You’ve mentioned increasing
take-up of local inventory ads. We understand that. But more generally,
a go-to-market strategy on how you reach the millions
of SMBs out there in terms of
educating them on the growing opportunities
on a local basis. Thanks so much. Pichai: It’s a–
it’s a great question. You know, and I think there’s
a lot of opportunity for us. Today we have many
touch points. Obviously people–
you know, we reach out to SMBs. They want to get listed in
Search and in Maps. You know, AdWords Express
has been a big part of how they want to, you know,
advertise on our platforms. We obviously provide things like
Google Apps to SMBs. So we have a lot of
touch points, and internally we are beginning
to do a much better job of, you know,
reaching out and having a more thoughtful
go-to-market approach. I think there’s a lot more
work there–work there, but, you know, the rate at which
we are seeing advertisers– small, medium businesses– on our platform has been growing
very, very strongly as well. So indications are that it’s already currently
working at scale. You know, we have millions
and millions of SMBs on our platform, and the number
continues to grow very well. But you’ll see us invest a lot
more here in the years ahead. Stabler: Thank you, Sundar. woman: Thank you. And our next question comes from
Brian Nowak of Morgan Stanley. Your line is now open. Nowak: Thanks
for taking my question. Could you talk
a little bit more about the retail search
category? Any high-level commentary on
consumer search query trends in retail, either in area of
strength or otherwise? And then you talked about the real-time
local inventory integration, but, Sundar, I’d be curious if
you could talk about any opportunities
or areas of innovation in the retail search space
that you see to really continue to improve
users’ retail search experience. Thanks for the color. Pichai: You know,
I think– you know, obviously,
you know, when we– when we–when we see what users
are looking for in mobile, you know, how shopping
is evolving, it’s an area we’re
continuously working on. You know, I’ve been happy
to see the evolution in our shopping
experiences. Retail overall, you know,
also happens to be an amazing category for us from
a Google Cloud standpoint, so in some ways we are
developing deeper partnerships with retailers
around the world. And so as we start
doing that, and, you know,
I think as we get a better understanding of
their inventory and the data, how we can translate all of that
into our core experience is–is a bit–
a bit of the work ahead. I think that–
that’s what excites us about the longer term. Shorter term,
I think, you know, it’s a space
we continue to invest in. We are actually seeing strong
trends in that category. Nowak: Great, thanks. woman: Thank you. And our next question
comes from Dan Salmon of BMO Capital Markets. Your line is now open. Salmon: Hey.
Good afternoon, everyone. I’ve got two questions
on YouTube for Sundar. First, this morning
on the earnings call, WPP’s CEO,
Sir Martin Sorrell, noted that the company
is being very responsive, I think were his words,
to some of the recent concerns that we’d talked about earlier
in the Q&A. We’ve also seen some
official policy changes, things like that. I’d be interested, Sundar,
to hear a little bit more about some of the softer
outreach that you may be doing, thinking of
Philipp Schindler’s team, maybe the agency
relations team, and–and how your people are
reaching out and connecting with their clients, especially
as you go into Brandcast? And then the second follow-up
on YouTube was, I’d be interested to hear
your updated thoughts on the role of
the YouTube Spaces. I think Ruth’s prepared
comments on CapEx mentioned some investments in
production equipment. I don’t know if that
is related to that or–or something
related to Cloud, but it does seem that
the Spaces remain an important part of YouTube
and continue to grow. And I’d love to hear
an updated view on them. Thank you. Pichai: You know, on the–
on the first part, you know, I mean, I think you
kind of [indistinct]. One of the things
I’ve noticed is, you know, the depth of relationships
we have with our advertisers, you know, was very evident to me
as we went through– through this
over the past few weeks. you know,
I would estimate– I think Philipp Schindler’s team
has probably made literally thousands
and thousands of calls, in-person conversations, and I
think that deep relationship is what allowed us
to respond thoughtfully. And–and I think the feedback
from our partners were–were very positive
and constructive, and I think we are evolving
overall to a better place. And so I think to me that shows
the long-term investments you make in these relationships,
et cetera, you know– you know, plays–plays well
at times like these. And, you know, Brandcast is
again an important touch point and, you know,
and I, you know– the excitement
ahead of Brandcast, both internally
and from our partners, you know, all has
the right indications for us. On YouTube on Spaces,
you know, I visited
the YouTube Space. I took my family to
the YouTube Space in New York, and we had a lot of fun. You know, our creators
love these spaces. They are something we are
thoughtfully building out. You know, they have a good
return on investment for us, you know, but we are
very thoughtful about it. And I don’t think
that’s a major factor in any of the CapEx
we talked about here. Porat: Yeah, exactly. In the CapEx, when I talked
about production equipment, we were talking
about machines, and that was the–
the primary driver here. We’re investing
more machines given both
our growing requirements and the higher cost of
the new generation of machines and accelerators. So that will be more expensive
in the short term, and we are continuing
to build our inventory. But it does increase
performance, and we believe reduce total cost
of ownership in the longer term, so just to clarify that
on–on CapEx. Salmon: Okay, great.
Thank you both for the color. woman: Thank you. And our next question comes from
Ross Sandler of Barclays. Your line is now open. Sandler: Great. I’m not sure if this is for
Sundar or Ruth, but a question about regulatory. You guys recently reached
an agreement in Russia around the Android bundling
issue, where you’re gonna provide
options for other browsers and search engines
and app stores when a new Android phone
is activated. So I was just wondering if–
if this is the right way to think about
these kinds of disputes in other areas
of the world, where you may be under
some regulatory pressure around Android bundles, or if that was kind of
a one-off, isolated agreement. Thank you. Pichai: You know,
I think– you know, without
getting into specifics, you know, I think
when we deal with, you know,
regulatory issues, I mean, the concerns
vary differently depending on local laws
and what the concerns are. I think
in the case of Russia, I think there were
some specific issues. And I’m glad we were able to
work together with the regulatory agencies
there, with our partners there,
to come to a good solution. You know, I’m not sure
that’s the right template, but as much as we are
very committed to making sure we work with–with
all the right agencies in all the countries
we operate in, and I’m–I’m confident
we’ll get to a good place. woman: Thank you. And our next question comes from
Justin Post of Merrill Lynch. Your line is now open. Post: Great.
Thank you. Sundar, you know, ahead of this
advertising conference, I was thinking about
Search innovation. And over
the last four years, you’ve had an acceleration
with PLAs, a really acceleration
with the third ad link. And I’m just wondering, maybe you could talk about
what excites you, or do you think there’s
still a lot to go on Search monetization
or coverage? And then from Ruth, obviously so many areas
you can invest in. You could cut price
on Cloud. You could really, you know,
ramp up engineers in the core or Cloud. Just a lot you can do. And just how does
the management team think about balancing
profitability versus driving market share
and long-term growth? Thank you. Pichai: On–
you know, on Search, you know, I continue
to get surprised by the kind of things users
reach out to us for and how that keeps evolving
and changing. So that, you know–and with
the Assistant now, too, you know, just exposes
a whole new surface area. And so I think there’s
a lot of innovation ahead. In terms of monetization,
you know, I think about it. You know, it still looks like
there is a lot of– you know, for example,
if you just look at retail, 90% of retail
is still offline. So there are many, many
secular trends like that, which we look at and we see a huge opportunity
to help connect users to the information
they are looking for. So structurally, you know,
I do think, you know, we still have lots of both innovation and growth ahead
for the long term, and, you know, that’s how we
think about it. Maybe to Ruth
on the second part? Porat: Yeah, and–and really
actually building on that answer to the second part
of your question. When we look at the ongoing
momentum that you’ve seen here in Sites revenue, it really does
go to innovation. No one change
tends to drive results, it’s–it’s really
the combined benefit of all that we’re doing
across the franchise, continuing to invest
in the business and the benefits that–
that we see there. And that’s the way
we look at it, is we have tremendous
opportunity continuing in–in,
you know, mobile search and in YouTube
across the business there. And as we’re looking at these
newer opportunities, all that we’re doing in Cloud,
in hardware, YouTube
subscription businesses, we–we analyze each one
of those individually, working very closely with
the leaders and the milestones that are established there. We do, you know, very much
across the–the business have an operating principle that
too many resources and too few can lead to suboptimal decisions
and execution. And so what we’re looking at
over a multiyear period is the pace of innovation
that’s appropriate, given the sizable
opportunity. But the key point, and I’ve said
it on so many different calls, is that we remain focused on
long-term value creation. And we’re excited about
the growth opportunities, not just within Google
but across Alphabet with all that we’re doing in
“other bets.” And so we’re looking at these,
again, individually, over a multiyear period,
looking at milestones, and appropriately calibrating
the pace of investment that is logical. And at the same time,
we continue to–to have a focus on enhancing efficiencies
where we can. But overall, as I keep saying,
our main priority remains revenue
and profit dollar growth. woman: Thank you.
Post: Thank you. woman: Our next question comes
from Michael Nathanson of MoffettNathanson.
Your line is now open. Nathanson: Thanks.
I have two for Sundar. The first is, now that you’ve
launched YouTube TV, I wonder if
you’d tell us about the advertising opportunity
there. And then what are you going to
do, given all the assets, to maximize an inventory
for marketers? And then secondly, I wonder,
with that focus on brand safety you hear now from agencies
and the bigger marketers, what’s gonna be the long-term
impact, do you think, to YouTube programmatic
from a more focused–you know, more focused view on finding
the right places to advertise? Pichai: You know,
on your first question about you know, YouTube TV,
we’re just getting started. You know, I love–I think
the product is really intended for the YouTube generation. It’s really great to see
a take on how to consume TV, which is mobile first
for that generation. And I think–I think–
I’ve been using the product and enjoying it,
and I think that gives– as we rethink that experience
and make it work better and scale it up, I think it’s–
your question is valid. The delivery of ads on TV has also not evolved
at the same speed as the delivery of ads and media
content on the Internet. So I think–we think we have
a significant opportunity to improve their experience,
and especially for advertisers to be able to think
across all these surfaces. So I think there’s
a lot of opportunity, but I think we have–we are–
we are very focused on the consumer experience
first. On your second question around,
you know, longer-term impact, look, you know, these types of issues are not
new for us, you know. Over the past
many, many years, as we’ve built services,
scaled it up on the web, you know,
constantly things evolve, we adapt to it, be it from spam in email or, you know,
how we do search ranking, and, you know, all the efforts
we put into it. You know, these are
the classes of problems our engineers are really,
really good at working. These are large-scale
system problems. And especially with machine
learning and AI, over time, I think we can really put in
the right– right systems in place. And–and, you know, our teams
work very thoughtfully with the external ecosystem, with our advertisers,
agencies, and partners. And I think that balance will
help us get it right for the very long term. Nathanson:
Okay, thank you. woman: Thank you. And our next question comes from
Anthony DiClemente of Nomura. Your line is now open. DiClemente: Thanks for
taking my questions. I have one for Ruth
and one for Sundar. Ruth, Sites TAC as a percentage
of revenue grew sequentially in year over year. I totally understand
that mobile search is contributing meaningfully
to the profit dollars, but as we look at the Sites TAC
as a percentage, is there a quarter or is there
a point in time looking forward where that sort of elevated TAC
growth rate will anniversary or fall back into line with Sites revenue growth
as a growth rate? Is there anything
you can do to proactively manage
that TAC growth? And then for Sundar,
on YouTube, as the competition
out there for video content
really intensifies, to what extent
is YouTube providing more favorable economics to
its content creators in order to ensure that YouTube
remains the leading platform and, importantly,
and in a lot of cases, an exclusive platform for
your most popular channels? Thank you. Porat: So on Sites TAC,
as we’ve often discussed and as you said
in your question, there are a number of factors
that affect Sites TAC as a percentage
of Sites revenue, and the primary driver has been
the strong growth in mobile and the fact that more mobile
searches are subject to TAC. The other factors include
the mix of paid versus organic, as well as changes in partner,
mix, or agreement terms. And, you know, when we look
year over year, the primary driver
of the increase is, very much to your question,
the strength in mobile search. And we do expect Sites TAC
to increase as a percentage of–
of revenues. But, again, our focus continues
to be on growing profit dollars. And I think the main point is
we’re very pleased to have a very strong business
in a rapidly growing area. And that’s benefiting
our profit dollars even as the TAC percentage
increases. Pichai: And on
YouTube, you know, when I look at it from
a content creator’s standpoint, I think there are a lot of
factors which are working well. So, for example,
when we recently invested in original shows,
you know, we find that, like,
over half the time people spend watching originals
is on their mobile phones. We find that creators
who are featured in originals you know, experience
a significant boost in YouTube subscribers
and watch time on their main channels as well,
often from new fans. So all of this shows us that,
you know, the enthusiasm which is there
for the platform, how creators can do unique
things which are different from what they can do
on other platforms. And I think that’s what gives us
the differentiation here. And in–in these areas,
we are just getting started, and so there’s
a lot more to come. And I think
that’ll help us provide, you know,
better economics to them, better engagement for them,
and I think positions as well. DiClemente:
Thank you both. woman: Thank you. And our next question comes from
Ben Schachter of Macquarie. Your line is now open. Schachter: Sundar, when
we think about virtual reality and augmented reality,
from–from your point of view, what are the key steps
that are needed to see more mass market appeal
and usage? And could you help quantify
the amount of investment that you are willing to place
in this area before you expect
to see a payoff? Thanks. Pichai: So, you know,
I think– you know, obviously,
you know, you’re seeing– you know,
we are very happy with the progress we have seen
with Daydream. Just like we built Android,
you know, and we–we are good at building
platforms and ecosystems, and–and I think
we’re a bit– taking the right first steps
with VR there as well. When I broadly look at VR
and AR, I think there are–
you know, I think all of us clearly understand
the potential, you know,
and–and technically we are making the breakthroughs
that are needed. And all of it
needs to converge, you know, from a hardware,
software services standpoint, to a stage where it has
mass-market appeal. And I think that is still
some ways away. The thing which
gives me excitement is, you know, all these changes
start happening with a set of early adopters
and moves mainstream, and so we are engaging at that
level with the early adopters. And that’s where Daydream is
working well. We are learning how to write
great content on top of VR. YouTube, Google Earth VR,
these are–Tilt Brush, these are all
great examples. So we–and underlying
technology-wise, be it all the kinds of sensors
and tracking you need to do, the machine learning
and AI you need, things like voice recognition,
everything, it’s just
a computing evolution. So everything
we are investing today in machine learning
and AI, as well as what we are doing
in our computing platforms, transitions well. So, you know, I think we are
already well-positioned to play this, and so I think
we’ll thoughtfully approach it. And we’ll approach it
more holistically. woman: Thank you. And our final
question comes from the line of
Colin Sebastian of Robert Baird. Your line is now open. Sebastian:
Thank you. I guess just as a follow-up to
the question on voice interfaces and personal assistant,
something that Larry also– also called out
in his founder’s letter. It appears there are more tests
around monetization, including transactions
and integration with Shopping Express. I wonder if–if there’s
a view internally now as to how best
to make that transition in a voice-first world
towards monetization, towards voice and less tech
spend and video-centric? Thank you. Pichai: You know, we are
very focused, actually, on– on the consumer
experience now, and, you know, and–and,
you know, it’s a good question. And we’ve always had
these questions, you know, be it
the early days of Search or when YouTube
was first built out. You know, how do I see
experiences created, like, you know, will YouTube
ever make money? And, you know. And so I think–I think if you
go and create these experiences in a way that works
at scale for users, the monetization
will follow. And obviously–and the models
will be different than what we have today, but I think we are squarely
focused right now on delivering a world-class
experience through Voice and through Assistant. Sebastian:
Thank you. woman: Thank you. And that concludes our question
and answer session for today. I’d like to turn the conference
back over to Ellen West for closing remarks. West: Thanks, everyone,
for joining us today. We look forward to
speaking with you again on our second quarter
2017 call. Thank you
and good day. woman: Ladies
and gentlemen, thank you for participating
in today’s conference. This does conclude the program,
and you may all disconnect. Everyone have a great day.

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