October 10, 2019 0

Alphabet 2017 Q3 Earnings Call

Alphabet 2017 Q3 Earnings Call

woman: Good day, ladies and gentlemen, and welcome to the Alphabet
third 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. I’d now like to 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 third quarter 2017
earnings conference call. With us today are Ruth Porat
and Sundar Pichai. 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 in 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 hand
the call over to Ruth. Porat: Thanks, Ellen.
We had a terrific quarter. Revenues of 27.8 billion
were up 24% year on year and also up 24%
in constant currency. Advertising revenues benefited
from strong performance in sites, which was powered by tremendous
results in mobile search. Healthy growth in network
revenues was again led by our programmatic business. We also benefited
from substantial growth in other revenues from
Cloud, Play, and hardware. Our outline for today’s call
is first I’ll review the quarter on a consolidated
basis for Alphabet, focusing on year
over year changes. Next I will review results
for Google and then Other Bets. Finally, I will conclude
with our outlook. Sundar will then discuss business
and product highlights for the quarter, after which we will
take your questions. Let me start with a summary
of Alphabet’s consolidated financial
performance for the quarter. Total revenues were $27.8 billion,
up 24% year over year. We realized a positive currency impact on our revenues year
over year of $255 million, or $64 million after the impact
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, performance was strong
in all regions. U.S. revenues were $12.9 billion,
up 21% year over year. EMEA revenues were $9.1 billion, up 23% year over year in both reported
and fixed FX terms. APAC revenues were $4.2 billion, up 29% versus last year and up 31% in fixed FX terms. Other Americas revenues
were $1.5 billion, up 33% year over year
and up 32% in fixed FX terms. On a consolidated basis,
total cost of revenues including TAC, which I’ll discuss in
the Google segment results, were $11.1 billion,
up 28% year on year. Other cost of revenues
on a consolidated basis was $5.6 billion, up 25% year over year, primarily driven by
Google-related expenses, specifically costs associated
with operating data centers, including depreciation,
content acquisition costs, primarily for YouTube,
and hardware-related costs. Operating expenses were $8.8 billion,
up 11% year over year. The year on year expense growth
in part reflects the change in the timing of our annual
equity refresh cycle from the third quarter
to the first quarter of each year. As discussed previously,
this change in SBC grant timing affects the quarterly pace
of stock-based compensation in 2017 with elevated year on year expense
growth in the first half of the year, but benefits the year on year
comparisons for Q3 and Q4. Stock-based compensation
totaled $1.8 billion. Headcount at the end
of the quarter was 78,101, up 2,495 people from last quarter. As in prior quarters,
the vast majority of new hires were engineers and product managers. In terms of product areas, the most sizeable headcount additions
were once again made in Cloud for both technical
and sales roles, consistent with the priority
we place on this business. Operating income was $7.8 billion,
up 35% versus last year, and the operating margin was 28%. Other income in expense
was $197 million. We provide more detail
on the line items within OI&E in our earnings press release. Our effective tax rate was 15.6%
for the third quarter. Net income was $6.7 billion, and earnings per diluted
share were $9.57. Turning now to capex
and operating cash flow. Cash capex for the quarter
was $3.5 billion. Operating cash flow was $9.9 billion
with free cash flow of $6.3 billion. We ended the quarter with cash and
marketable securities of $100.1 billion, of which approximately $60.5 billion
or 60% is held overseas. Let me now turn to our segment
financial results. Starting with the Google segment,
revenues were $27.5 billion, up 23% year over year. In terms of the revenue detail, Google sites revenues were
$19.7 billion in the quarter, up 23% year over year,
led again by mobile search, complemented by desktop search
and strong performance from YouTube. Network revenues were $4.3 billion,
up 16% year on year, reflecting the ongoing momentum
of programmatic and AdMob. Other revenues for Google
were $3.4 billion, up 40% year over year,
fueled by Cloud, Play, and hardware. 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 $5.5 billion, or 23% of total
advertising revenues, and up 32% year over year. The increase in sites TAC
as a percentage of sites revenues as well as network TAC as a percentage of network
revenues continues to reflect 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, reflecting an increase
in the sites TAC rate, which was modestly off-set
by a favorable revenue mix shift from network to sites. The increase in the sites
TAC rate year over year was driven by changes
in partner agreements and the ongoing shift to mobile,
which was carries higher TAC because more mobile searches are
channeled through paid access points. Google’s stock-based compensation
totaled $1.7 billion for the quarter, up 2% year over year. Operating income,
including the impact of SBC, was $8.7 billion,
up 29% versus last year, and the operating margin was 32%. Accrued capex for the
quarter was $3.6 billion, reflecting investments
in production equipment, facilities, and data
center construction. Let me now turn and talk
about Other Bets. For the third quarter, Other Bets
revenues were $302 million, primarily generated
by Nest, Fiber, and Verily. Operating loss,
including the impact of SBC, was $812 million for the third quarter. Other Bets accrued capex
with $77 million, primarily reflecting
a reduced investment in Fiber due to the pause in expansion
we announced in 3Q ’16. We’re pleased with our
progress across Other Bets. A couple of updates. Nest continues to drive
ongoing product expansion with a number of notable launches, including the Nest Thermostat E, which is offered at a lower price point
than the Nest Learning Thermostat. Nest also announced
a home security solution that includes the Nest Secure
alarm system, Nest Hello video doorbell, the Nest Cam
IQ outdoor security camera, and corresponding
software and services. Waymo continues to expand
its geographic presence. It announced this morning
that it will commence winter testing in Michigan
to build on our progress to date addressing
the challenge of autonomous driving in cold weather, particularly with snow, sleet, and ice. Michigan is the sixth state where Waymo is testing
its self-driving vehicles. Over the last eight years, Waymo’s cars have self-driven
in more than 20 cities. With Loon, we were pleased
to announce just last week that the team
is collaborating with AT&T to deliver emergency
internet service to the hardest-hit parts of Puerto Rico. Let me close with some
observations on the quarter and our longer-term outlook. First, in terms of revenues,
results this quarter again reflect our relentless
focus on innovation, which is growing
our advertising revenues. I frequently highlight
our culture of innovation. In that regard, the most important point
is that we are data-driven with an extraordinary
team of engineers, product managers and designers
who constantly challenge assumptions and run thousands
of experiments annually to enhance user
and advertiser experiences. This approach enables us
to find new opportunities, given that the way consumers
seek information continues to evolve. Our teams work relentlessly
to anticipate and adapt to the expanding capabilities
of both software and hardware. Further, our culture
of innovation is building our non-advertising
revenue streams in Cloud, Play,
and hardware. Earlier this month, for example, we launched our expanded
line of hardware products, bringing the best AI, software
and hardware together and building on the first
generation of Made by Google products
we introduced last year. Longer-term, we remain excited about
the opportunities in our Other Bets with ongoing progress. Second, with respect
to profitability, we continue to remain focused on long-term dollar
growth versus margins. Pressure in our total
cost of revenues reflects our product mix shift with
a number of our higher-growth businesses also carrying higher
cost of revenues. In our advertising businesses, TAC continues to increase
as our highest-growth areas, mobile search and programmatic,
carry higher TAC. We expect sites TAC
to continue to increase as a percentage
of sites revenue. As we’ve frequently stated, we remain focused
on profit dollar growth, and these areas are
additive to our growth. The other cost of revenues associated
with our non-advertising businesses is also affected
by product mix. In the fourth quarter in particular, the impact of our
growing hardware line will be more accentuated
given the early stage of this business
and holiday seasonality. On operating expenses,
we remain committed to investing to support our
growing product areas. The more modest opex
growth in Q3 reflects both the timing
of stock-based compensation and the timing of sales
and marketing spend with the reality
that not all investments fall neatly into
a single calendar quarter. In particular, we’re committed
to sales and marketing investments in Q4 for the important
holiday season. The most significant
uptick in marketing will be to support our
new expanded hardware line, which was just announced at the
beginning of the fourth quarter. In addition, we are investing
to support YouTube and our other platforms. Third, as to capex, we continue to
invest to support business momentum, including increased
compute power for machine learning which is an asset
across Alphabet, as well as to support Cloud,
Search, and YouTube growth. In conclusion, a great quarter. Thank you, and let me now
turn the call over to Sundar. Pichai: Thank you, Ruth.
We had another great quarter. I’ve been really proud
of the progress this quarter, launching popular new products and continuing to grow
our business in new areas. It’s been particularly exciting
to see our early bet on artificial intelligence pay off and go from a research project to something that can solve new problems
for a billion people a day. Even though we are
in the early days of AI, we are already rethinking how to
build products around machine learning. It’s a new paradigm compared
to mobile-first software, and I’m thrilled how Google
is leading the way. Consumers can already experience
how AI allows them to interact with computing more
naturally than ever before. Computers are adapting to people rather than people needing
to adapt to computers. Fundamental to this experience
is Google Search and Assistant. We introduced
Assistant last year, and it continues to
get better every day, helping people get things
done in the real world. Walmart and Target have recently
integrated with Google Home, which means you can order everyday
items from them much more easily. 500 million people
now use the machine learning smarts of Google Photos
to manage and share their memories. The billion-plus people
using Google Maps now get thoughtful
contextual information like how to find parking
where they are going, and businesses are seeing
how AI can help them grow. Our open-source software TensorFlow
is allowing anyone to use machine learning to solve problems,
even in industries like agriculture. Researchers recently
used TensorFlow to make smartphones able to identify disease
in cassava plants, a major food source in the developing world. We made TensorFlow
open-source and free because we fundamentally believe
in creating computing platforms that developers can
customize and build on. I’m really pleased with the way our computing platforms
like Android and Chrome have continued to grow, enabling great experiences
for people all over the world and powering devices for more than
a thousand brands worldwide. This quarter, we released
the latest operating system, Android 8.0, and released
a preview of ARCore, which brings augmented reality
to existing Android phones. Last week, we announced
a partnership with Samsung to bring ARCore
to all Galaxy devices. Even though it’s been
an incredibly busy few years and technology’s
moving rapidly, at our core we remain
an information company. Our mission to provide
useful information to people in every corner
in the world is unchanged. We care deeply about the quality
of information we provide and constantly work
to get this right. As technology evolves,
we have to evolve with it to ensure quality
information can flourish. Our teams are making a big effort
to support journalists and other people who produce high-
quality information around the world. We are supporting publishers
as they decide the right approach to free articles
and subscription content. We are moving away
from First Click Free to a more flexible model
of content sampling, and we are working
with publishers to build a frictionless payment
solution for subscriptions that can help them grow
revenues and find new readers. As new trends arise, we are committed
to protecting journalists and media organizations from hacking and
denial-of-service attacks. For example, we just launched
an advanced protection program for Google accounts
which is designed to protect the accounts of those most
at risk of targeted attacks, including journalists
and other public figures. To wrap up my overview, I’m thrilled with how
Google is solving big problems and making products that billions
of people use every day. Now let’s review
our three big bets, starting with YouTube. YouTube continues
to see phenomenal growth as the premiere
global destination where people go
to watch video. Three of the key areas
we are focused on are strengthening
the existing community, continuing to drive growth, and expanding our
subscriptions business. On the community side, we are helping create
meaningful interactions that bring creators
and fans closer together. This quarter, we launched
a new feature that lets viewers share
videos directly in the app. So the minute you see a video
from a creator you love, you can share the fun
with friends and family. We’re also seeing significant
growth in other areas. As I mentioned in
the last earnings call, YouTube now has over
1.5 billion users. On average, these users spend
60 minutes a day on mobile, but this growth isn’t just
happening on desktop and mobile. YouTube now gets over
100 million hours of watchtime
in the living room every day, and that’s up 70%
in the past year alone. We are continuing to invest in new
subscription-based monetization models. YouTube Red, our first foray
into the subscription market, is on track to release over
40 original shows this year, and YouTube TV, our live
TV subscription service, continues to expand
into new markets. It now covers 2/3rds
of U.S. households and is available
in 50 metro areas. Now onto Google Cloud. We continue to make progress
winning over enterprise customers. Customers tell us they are switching
to the Google Cloud platform because of our prowess in data
analytics and machine learning, our commitment to being an open
platform with tools like Kubernetes, which runs in both
Cloud and hybrid environments, and our leadership
in security. Just yesterday, we announced
a new partnership with Cisco. We are collaborating
on an open solution that gives customers an easy
approach to the Cloud, enabling them to run apps
that span both on-prem environments and the Google Cloud platform. G Suite. Our collaboration
and productivity applications are leading the industry. We have made improvements
to Drive, Docs, and Gmail, launching new features
to help teams work better together. Nielsen recently
moved to G Suite and said it’s a great productivity
and collaboration tool for the modern workforce. All of these things
are driving momentum with customers and partners. Companies like Kohl’s, PayPal,
Rolls Royce Marine in Europe, and popular messaging app
Hike in India moved to Google Cloud. We also announced a new
partnership with Marketo and expanded our relationships
with Pivotal and VMware. To support a growing
global customer base, we introduced two new regions in
the quarter in Sao Paolo and Frankfurt and continued to grow
our go-to-market team. Next, our hardware business. Earlier this month, we launched our
second-generation family of Made by Google hardware products
built with AI at the core. Last year, we focused
on building the foundation to launch a line of
devices made by Google. This year, we have–we are focused on
bringing together the best AI software and hardware to give people
a great user experience. For example, the new
Google Home Max is a smart speaker
powered by the Assistant. It has AI-based smart sound, which adapts the audio experience to the user’s environment
context and preferences. The new Pixel 2 has the world’s
best smartphone camera and a useful feature where you can
summon the Google Assistant by just squeezing the phone. To get these devices
in people’s hands, we’re also focused on scaling
our go-to-market strategy. We are investing more in marketing,
we are launching in more countries, and we are offering these
devices in more retailers, and we are already
seeing results. Preorders of Pixel
on day one this year were more than double
what they were last year. Also this quarter, we signed
a deal with HTC in Taiwan that will help accelerate
our hardware business by bringing on a team
of talented engineers. This deal lays the foundation
for our continued efforts next year. And our advertising platforms continue
to drive great results for our partners. While mobile has given rise
to an unprecedented amount of data and complexity
for advertisers, we think that machine
learning will help make it–will help make it easier
for advertisers to reach consumers, but even as we give
advertisers incredible scale and reach across
our ad platforms, we know consumer
attention is scarce. That’s why we are
pleased YouTube ads continue to deliver the highest
viewability rates in the industry. YouTube now has a 95%
ad viewability rate, which is significantly higher than the average 66% viewability rate
of other video ads. We continue to see
the industry shift to six-second bumper ads and saw greater option this quarter
from brands like Bayer, Ben & Jerry’s,
Louis Vuitton, and Volvo. And Google continues to be
the platform of choice to help small business
owners get online and grow their business. On our last earnings call, I mentioned a free website
builder for small businesses. During the quarter, more than
1 million small businesses used it to build websites, helping many of them get
online for the first time. We also introduced local posts, which allows small business owners to easily post their latest
updates like upcoming events, special offers, and new arrivals
right on Google Search and Maps. Our commitment to both large
and small advertisers shows how we build products that
all businesses can succeed with. That mission also has
a geographical dimension, and I wanted to say the world, but at the moment
we are seeing it in Asia. Our revenues are up
significantly in the region, driven by great results we are driving
for existing and new advertisers. That holds true across
developed markets like Japan and emerging markets
like the Philippines and Vietnam, all of which have seen the number
of active advertisers grow by 25% or more in the past 12 months. And this growth is bringing tremendous
benefits to our partners there. In the past three years, we have paid out more than $24 billion to our publisher, creator, and app developer partners
in Asia-Pacific, and to help millions of people, we are building products specifically
designed for local markets in Asia. In India last month, we launched
a mobile payments and commerce app that already has more
than 7.5 million users who have made more than
30 million transactions. I’m really excited
about the potential this brings for India’s
mostly cash-based economy. As I said at the start, it’s been
a great quarter for Google. Just two weeks ago,
I was in Pittsburgh launching our new Grow
with Google initiative, which provides digital scales to millions of people
and economic opportunity to countless businesses. It was amazing to see first-hand
the transformative impact that information
is having in schools, in the workplace,
and for local business. As I said then, I remain
a technology optimist, not only because
I believe in technology but because I believe in people. I want to thank
all the Googlers who continue to work so hard
to advance our mission and to help people everywhere. Thank you. Porat: Thank you, Sundar, and we
will now take your questions. woman: Ladies and gentlemen
on the phone lines, if you would like to ask a question
at this time, please press Star and then 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. And our first question comes from
the line of Eric Sheridan of UBS. Your line is now open. Sheridan: Thanks for
taking the question. Maybe two if I can. One, we’ve seen a lot of
partnership announcements intra-quarter on the e-commerce side
with Google Express and voice-assisted
shopping on Google Home. I wanted to understand
better your ambitions in e-commerce as a marketplace or a platform and how that might also feedback
into the advertising business. Second question would be about
the cash on the balance sheet and sort of how,
philosophically, you think about deploying that cash against either shareholder returns or some of the big opportunities
you laid out today. Thank you. Pichai: Maybe I’ll take
the first question and give it to Ruth
on the cash question. You know, we are very excited about
the partnerships we are getting here, you know, with large retailers, and, you know, we are
seeing traction globally. You know, we have obviously
partnered with them through our, you know,
advertising products, but with shopping,
especially as we move on to making shopping more
seamless across mobile and newer computing categories
like Google Home, I think there’s
tremendous interest here. So, you know, we are
just getting started, and, you know, I think you will see us
make a lot more progress and have a lot
more announcements, and I think we’re gonna
be relentlessly focused on making the buying experience
much more seamless for users. So, you know, there’s
a lot more to come. Porat: So in terms
of your second question, there was really no change
from the approach we’ve talked about previously as we think about
capital allocation. The priority is organic.
As you said in your question, we have a host of really
exciting opportunities and ensuring that we’re
investing to support long-term growth
remains number one. The second is strategic, continuing
to add on where it makes sense. We’re pleased to have added on,
you know, HTC this quarter. Acquisitions have obviously been
an important part of our history, and then the third
is the return of capital and, you know, no change or update there
in terms of how we think about that. Sheridan: Thank you. woman: Thank you.
And our next question comes from Mark Mahaney
of RBC Capital Markets. Your line is now open. Mahaney: Great, thanks.
Two questions please. Sundar, you talked about APAC. You called out Asia,
and we noticed that too, that year over year growth rate
was higher than– was the highest at least since
you’ve been disclosing that, and you provided
some of the whats, and but any whys behind why
that growth is accelerating? Is that something that has just
naturally reached a tipping point? Is there something different
that Alphabet Google has done in Asia to accelerate that growth? And then Ruth, could I ask you–you
talked about the factors driving TAC, and you mentioned changes
in partner agreements. Is there any way you can
give us any more color? Did you just renew some
major partner agreements and there’s nothing of that
magnitude into next year, or should we just assume
that this is just part of operations. There was nothing major recent,
but you could have major ones coming up? Just something to help us
qualify–I don’t think you’ve used that
language before, what that indicated. Thanks a lot. Pichai: You know, the Asia question,
you know, largely, I think, you know, we’ve been laying a foundation for a very, very long time. Our products are
very heavily used there, and so we worked hard
to build a userbase, and then the mobile translation–mobile
transformation is a secular shift there. That’s definitely driving
accelerated growth, and, you know, it creates
a virtuous circle. We see new advertisers coming on. We are investing more in Asia
as well in relation to our go-to-market teams. We are building out great
product and engineering teams. That’s what has led us to improve
core products like Search, Maps, YouTube, et cetera to work better
in those regions, you know, and also launched
region-specific products like Google Tez in India. So I think, you know, overall
that’s creating a good virtuous circle, and, you know, I’m looking forward
to having more momentum there. Porat: And on your TAC question,
as I indicated in the opening comments, there were a couple
of drivers here. One is changes in partner agreements, and I think the main point
is we’re very pleased with our strong partnerships
across the mobile ecosystem, and the other was
the ongoing shift to mobile, which we’ve talked about a lot and, you know, the fact
that it carries higher TAC because more mobile searches are
channeled through paid access points. You know, I think the most important
point is that what you’re seeing is we have a very healthy mobile
business, search business, and it is growing
substantially, and our focus remains
on long-term revenue and profit dollar growth. Mahaney: Okay. Thank you. woman: Thank you. And our next question
comes from Douglas Anmuth with J. P. Morgan.
Your line is now open. Anmuth: Thanks for taking the question. I have two. First, Ruth, you talked about
the ongoing advertising innovation, and it’s pretty clear that
that’s happening in mobile, which seems like it probably
accelerated in the quarter. So I was hoping you
could comment on that, but then also, how do you think about where you are in terms of optimization on mobile relative to desktop? And then just second on YouTube. I was hoping you could
comment on the extent to which you’re seeing
marketers return to the platform post-the brand
safety issues of 2Q, and for a few of those
that may not be back on yet, what are they looking
for to fully return? Thanks. Porat: So I–you know,
it felt like a number of calls talked about the fact
that there was no one item that was driving the momentum
we saw in our sites revenue, and that was the point of giving
you a bit more color here. You know, we are really pleased
with the momentum in the business, excited about the opportunities we have given the ongoing strong
underlying secular trend, but I wanted to give you more color on
what we mean by a culture of innovation, and that’s really why I tried to go into a bit more about
the rigor of the process, and one of the key points
is that we do have the opportunity and we anchor this in data. We’re constantly
challenging assumptions. We’re running a lot
of experiments to enhance user
and advertiser experience, and the approach continues
to be productive, especially because the line of inquiry
evolves as user behavior evolves, and so what users wanted in
the earlier days of smartphones when screens were smaller
is obviously very different from expectations
users have today. Each quarter, the ads team
introduces more than 100 enhancements out of a much larger pool
of assumptions that they’ve tested. Machine learning is at the center
of our processes and systems, and we do remain excited
about the potential. You know, desktop
I commented on. You know, we are pleased with the
ongoing strength of the business. It delivered solid
revenue growth. It remains an important form factor
for certain more complex tasks. We’ve talked about that
in prior quarters, things like planning vacations
or assessing insurance options, and so I think the strength
here underscores the important of desktop
for many users in many tasks, notwithstanding the growing
utility of mobile for users. And then in terms of YouTube,
you know–I think you asked it. Well, we’ve been doing a lot
to protect the ecosystem and do the right things for advertisers
and users and content creators, and the overwhelming majority
of advertisers never left, and those who did, many are
already back on the platform. Anmuth: Thank you, Ruth. woman: Thank you.
And our next question comes from Heather Bellini
of Goldman Sachs. Your line is now open. Bellini: Thank you so much. Sundar, I was wondering
if you could share with us your thoughts
on voice search, and I guess in particular, how do you think about
maintaining Google’s lead as the way we search changes
and as we see increasing adoption of these voice-enabled digital
assistants in the home. And, you know, part of this
I guess I’m also wondering about is how do you think about your
relationships with the partners, and if the device
space broadens out, does your leverage
with the partners change? Thank you. Pichai: That’s a good question, Heather.
You know, voice–you know, it’s important to remember,
you know, voice is one input. When you look at how
customers interact, they obviously, you know,
are interacting more and more naturally, seamlessly, across a set of screens. Computing works
in context for them, and even when they
ask voice queries, the response always what
they need is not voice alone. Think about walking into a store
and if you could only ask using voice, and the person has to reply in voice
what all is in the store, you know? So that model applies. So we expect, you know,
a lot of, you know, continual experiences
across screens, across modalities. So it’s a big opportunity. I think it’s opening up newer ways
in which we are working with partners. I spoke earlier about
the kind of experiences we are now able to drive
with Walmart and Target, which we couldn’t have
done a year before, thanks to voice, how we are using it
in the Google Assistant and how we are driving
these partnerships. So there’s a lot of excitement about
how we can do all of this differently, so we are using this as a good way
to rethink everything we are doing with the caveat
that voice still, you know, overall is an emerging category compared to how users
use our products. So there’s a lot of room ahead. Bellini: Thank you. woman: Thank you. And our next question
comes from Justin Post of Merrill Lynch. Your line is now open. Post: I’d like to maybe discuss
a couple of your growth businesses. First, on Cloud, maybe you could talk
about some of the wins you’re seeing and why people are
necessarily choosing Google and the momentum there. And then secondly,
on the hardware business, it’s a little confusing on what
your–what your real goal is there. Is that to build a real independent
separate hardware business? And how the Android relationships
are going around that. Thank you. Pichai: You know, first, on Cloud, you know, effectively we
are seeing strong momentum, and we already hear from customers
that we have outstanding technology. So the reason we win
deals in many cases is because we have
superior technology, and people also see the room ahead
thanks to a lead in machine learning, and, you know, that’s an area where I
think we’ll continue to drive advantage. The main area where
we need to get better is to scale our go-to-market and be in more places
to effectively get more customers, and we are doing that a few
different ways. You know, Diane and the team have really
scaled our global sales force, but more importantly I think, we are striking a lot
of important partnerships with leading technology vendors
to scale and reach more customers. And so–be it the partnership
at Cisco that we announced, or in this quarter we also teamed up
with Pivotal and VMware, and earlier in the year
you saw us partner with SAP, and all of this helps
customers more easily run their apps both on-prem
and in the Cloud, and we are doing this all
in an open way with Kubernetes. So that’s
the overall strategy, and I think it’s really
beginning to pay off, and you will see us scale across
all these dimensions for Cloud in the year ahead. In terms of hardware, you know, we are very seriously committed to making hardware. A few reasons. You know, hardware is–the intersection
of hardware and software is how you drive
computing forward, and, you know,
historically, hardware has been maybe
a single-device business. For a long while it was PCs,
and then maybe smartphones, but you’re clearly entering an era
where you’re going to have, you know, different types
of computing experiences, and so to do that and to
stitch all together across, I think it’s important
we thoughtfully put our opinion forward. We are equally committed
to working with the ecosystem, and we provide the same
basis on both sides, you know, be it
Android or Chrome, and it’s going really well.
In our close partnership this quarter across a set
of Android partners, you know, you see
great momentum with the recently
launched Samsung Note 8. You know, we announced
ARCore on Samsung devices. So we have strong
momentum there as well. So we’re committed
to pushing forward hard on all these areas. Post: Thank you. woman: Thank you. And our next question
comes from Ross Sandler of Barclays. Your line is now open. Sandler: Great. I have a question
for either Sundar or Ruth. It’s just a philosophical
question on TAC. So as the mobile
search market matures, particularly in
the Western markets, the question is why does
Google feel like it needs to pay any TAC
to partners at all? If the lesson learned
from the Firefox desktop, you know, partner loss
a couple years ago was that you didn’t
lose any revenue and you stopped paying
TAC on that agreement, why wouldn’t the same logic
apply to mobile search, if not now at some
point in the future? Pichai: Look–I mean, first of all, we
have a lot of experience in this area. We’ve been doing, you know,
distribution deals for search for well
over a decade, and I’ve personally been involved all the way from the toolbar
on the Chrome days. So by now, first of all, we want
to construct a win-win construct. So we–you know,
we always want a construct in which we do better
when our partners do better, and so doing TAC well
aligns us in that way and historically has driven
a lot of growth, and so it’s a model
we understand. We understand the key
economics behind it, and so we are very thoughtful
about how we drive it forward. So we are driving it forward
in a way in which we know it’s going to give strong
both revenue and earnings growth. And so I think, you know, we’re pretty
comfortable with how we’re approaching, and so we’ll continue to do that. woman: Thank you.
And our next question comes from Brian Nowak of Morgan Stanley. Your line is now open. Nowak: Thanks for taking my questions.
I have two. The first one, a little bit on growing
Alphabet’s multi-app ecosystem. So how do you think about the
strategic importance to drive Chrome and Google Assistant app
installs and user growth on non-Android mobile platforms? And maybe talk about how you evaluate
how you’re doing there so far. And then bigger picture, you know, you have many large
and exciting investment and growth opportunities
across Google and other bets. I’d be curious to hear,
philosophically, how do you evaluate
these opportunities? And talk about some of the ROI
thought processes or evaluation you make when making
large capital allocation decisions. Pichai: So on the first one,
you know, one of the unique things about how we approach
product development is, you know, we’ve always,
at Google, cared about, you know, building
our products for everyone, and be it Search or Gmail
or Google Photos or Chrome, you know, we work hard to drive
it across all platforms. Obviously, some products, you know, the ability to make it work
well on other platforms versus our native platforms.
There are differences, and so–you know,
so we understand that. That’s partly why
we are very committed to driving success
on our platforms, both through the ecosystem
and our hardware efforts as well. So we think about
it holistically, but you’ll continue to see us put a lot of effort
into other platforms as well. For example, over the
past couple of years, I think we’ve meaningfully
improved our products on iOS, as an example. On the other part, maybe–Ruth,
do you want to give color? You know, I would just say
at a high level we drive our investments because we think about it
from a user perspective first. We see areas where there
are clear user problems, and we think about whether
we can use computer science and our technology advantage
as Google and Alphabet to, you know, give a differentiated
offering for users. So we do that, and then
we think long-term. But that’s how we go about it. Maybe Ruth can give
more color there too. Porat: And then the numbers
flow out of that, which is we look over
a multi-year period. A lot of the things that we’re doing
are multi-year investments, and that’s why, you know, we stress
repeatedly that we’re looking at what are the long-term needs and opportunities
that we can be addressing. If we’re doing that well,
we’re delivering long-term revenue
and earnings growth, and those investments
need to be seeded early for them to continue to grow
and flourish around the globe. Whether that response
to the first question on what’s going on in APAC
or across Alphabet more broadly, we take a multi-year look,
we look at the business, technical, financial
milestones along the way, and we allocate resources
in order to make sure we’re maximizing the long-term potential
to deliver as we see as appropriate. Nowak: Thanks. woman: Thank you.
And our next question comes from Michael Nathanson
of MoffettNathanson. Your line is now open. Nathanson: Thank you.
I have two for Sundar. One is on HTC. It’s kind of interesting
that you didn’t buy the company, but you bought talent, and I wonder what does
that move directly give you? And what did you think was lacking, I guess, from the product side
before you made that move? Then one on YouTube. Pichai: You know, on HTC, you know,
we were–you know, as we were, you know, working on
our hardware efforts, we’ve been working with HTC
very closely on the Pixel phones. So across the two companies,
we saw a win-win construct by which we could bring the team and the IP and other assets
related to the Pixel business in-house, and it also allows HTC
to focus better on their phones and the other products
they’re working on. So it just made a lot
of sense to do it, and I would also think about the
overall capability we are getting, not just to make phones but as we get into
other product categories like Google Home,
VR and so on, right? And so it’s important
to continue to build that out, and, you know, the talent we saw
there is definitely best in class. Nathanson: Okay, and then
on DIRECTV–sorry, YouTube TV, it’s clear that you guys
have pretty good momentum. 50
markets are ready. I wonder what has surprised you
about the early consumer engagements? Anything you can share
about early findings on the rollout
of YouTube TV? Pichai: You know, main thing
I would say is, you know, the consumer feedback–I think
there’s always been this promise on being able to–just
like today on Google Search. When you want something, we make it
so easy for you to find it. You know, bringing that kind of
a seamless experience onto TV. When you think about something
you want to watch, making it seamless, and so improving
that process I think is really what people
positively comment on. Other things are being
able to personalize it. You know, machine learning-based
recommendations over time, so that’s another
area people noticed. They get content which
they’re interested and surfaced
much better. So I think, given where we are, I’m really excited with
the initial reception, and we are gathering a lot of feedback,
bringing it to more markets, and are gonna work hard
at making the product better. Nathanson: Okay. Thanks, Sundar. woman: Thank you.
And our next question comes from Dan Salmon
of BMO Capital Markets. Your line is now open. Salmon: Hi. Good afternoon, everyone. Sundar, I’d like to just follow up
on an earlier question about e-commerce and specifically a trend we see growing
across the ecosystem of applying e-commerce data
to targeting advertising. Maybe if you could describe
how you view that at a high level and whether that’s
important to you and growing that opportunity
across all of your platforms, and perhaps shed
some light on areas where you may be able
to tap into that. You discussed partnerships
with retailers, Android Pay. You’re tracking offline
conversions more. Even a product like
Customer Match would seem like it’d be an opportunity
to have your advertisers bring that type
of data to the table. Would love to hear a little bit more
about your thoughts on that. Pichai: That’s a good question, Dan.
You kind of partially answered it, so you’re welcome to come and work
on our e-commerce team any time. You know, to us as a,
you know, vertical, you know, we see
huge opportunities there. There’s a lot of
flywheel effects we see. Almost all e-commerce providers, like, are really interested in,
like, Cloud, for obvious reasons. So we see tremendous traction
by which we are–you know, we can talk to them about Cloud. They’re already advertising partners. They’re beginning to work
with us much more closely on driving a seamless
shopping experience. We’re working on payments. And so it creates
a nice flywheel effect, and we can do this globally across
all the countries we do it in, and so we are treating it, you know,
more thoughtfully, you know, and investing in addressing
the vertical opportunity we see in front of us, and we’ll continue
working on that. Salmon: Great. Thank you. woman: Thank you.
And our next question comes from Colin Sebastian
of Robert Baird. Your line is now open. Sebastian: Great, thanks. Maybe a couple
of follow-ups, first on TAC. Wondering if changes
in partner agreements, since those are one of the key
drivers of the increase in TAC–could we then see the rate of
TAC growth moderate as you anniversary those deals? And then secondly, as it relates
to voice and visual search inputs, I know it’s still early
for Google Lens, but overall, I’m wondering
what portion of those search queries are proving to be incremental
to the search experience, or are they largely substituting
for searches on screens? Thank you. Porat: So in terms of TAC,
as I indicated, we’ve got a couple
of things going on. We’re pleased with
our strong partnerships. We continue to stress the impact
from the shift to mobile, and again, both Sundar
and I have said it, our focus remains on
the profit dollar growth, and we’ve got a really nice position
in a strong growth area. So that’s what–that’s
what you’re seeing here, but as I also said, we do expect it
to increase some from here. We’ve got a couple
of factors going on. Pichai: You know,
on the second thing–look, you know, I think,
based on every metric we see, users’ information
needs are only going up and, you know, the amount of information
they deal with are increasing, and as we add new modalities, it really drives, you know,
a better experience for them. Google Lens, you know,
there’s a long way to go, but, you know, today, us humans,
visual input is really big for us. I mean, it’s a lot higher bandwidth
than everything else, and so bringing that
to computing I think is a really important step
in advancing how users can, you know, process information. And so I see that
as an important step, and thanks to machine learning, we’ll be able to do these things
a lot more powerfully. All of this I think overall
adds to–adds to the search experience and–you know, so I view
that as all incremental, but it’ll play out
slowly over many years, and so we see this
as a big opportunity ahead, and we are investing for it. Sebastian: Thank you. woman: Thank you. And our next question
comes from Brent Thill of Jefferies. Your line is now open. Thill: Thanks. Good afternoon. The revenue growth was one
of the highest growth rates you’ve seen in five years. I’m just curious if there was something
that surprised you in the quarter or something that perhaps was an anomaly that we should be thinking
about modeling going forward. Porat: So I tried to give you a bit
of color going across the major lines. We feel–you know, we’re really pleased
with the sites revenue growth, the performance in mobile,
desktop, and YouTube. I think, you know, if you just
go down to the big categories, network revenue also was quite strong. I think one thing to add
there is programmatic continues to be a strong contributor. It generates significant growth–we’ve
talked about that on prior calls–you know, given all the ongoing advertiser
adoption of programmatic buying, and AdMob continues to see strength. What you’re also seeing here
is the traditional AdSense businesses–you know, overall, the pace of advertiser
migration to programmatic affects this business
kind of quarter on quarter as well as the policy changes that
we’ve talked about in prior quarters, and those factors were less of a drag
in the last couple of quarters. So you actually saw a nicer
revenue growth year on year here as well.
It was up 16%. And then Sundar’s talked a lot about the
components of other revenues up nicely. We’re really pleased
with what’s going on there, and then on top of that Other Bets. So we’ve got a couple
of components to it, and I tried to give you
a color on each one. Thill: Thank you. woman: Thank you.
And our final question comes from the line
of Stephen Ju of Credit Suisse. Your line is now open. Ju: Okay, thank you.
So, Sundar, can you talk about how Google’s positioning in the emerging markets over the longer-term
can be different versus what we are used
to seeing here in the States? I mean, you talked
about Tez in India, and that’s the type of stuff that we’re
not even seeing here in the States. So is there a broader
opportunity for you to do a larger land grab
with more products? And Ruth, should we assume
that the relative size of the dollar contribution
to the other revenue growth happened in the order you gave out
in the prepared remarks? I guess Cloud,
Play, hardware, and if so, this would make it
the second quarter in a row which Cloud has shown up as
the largest contributor I guess, as opposed to the third. So any perspective you can share
in terms of the relative growth you may be seeing recently? Thank you. Pichai: You know, on the emerging
markets, you know, I mean, we do see a differentiated
opportunity there, partly because the characteristics of how truly many of these markets
came mobile first. I think it gives rise to different ways users
are adopting our products, and also, more importantly,
the ecosystem which it’s built around. So for example, if you take e-commerce, the kind of models that are
emerging in these countries are also a bit different. So I think we see a way
to look at these markets with a lot more thought and address them
for the opportunity that they have, not just apply our
global products there. So I think, you know, that’s what
led us to do Google Tez in India, and, you know, we’ll thoughtfully
look at opportunities in that region and invest a lot
in the years ahead. Porat: And then we do–we
did list them in the order in which they’re making
a contribution. It’s obviously a mix of businesses,
and as we’ve talked about, we have, you know, very strong growth
in each of Cloud and hardware. That was tempered by slightly
slower growth in Q3 for Play, reflecting what’s the hit-driven nature
of that business of gaming, but, you know, again, I feel really
pleased with the progress, momentum that we’re seeing
in the various businesses, and I guess the only
other thing to note is of the seasonality on hardware
as we move into the fourth quarter here. Ju: 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 any closing remarks. West: Thanks, everyone,
for joining us today. We look forward to speaking with you
again on our fourth quarter call. 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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