November 8, 2019 0

Alphabet 2017 Q4 Earnings Call

Alphabet 2017 Q4 Earnings Call

woman: Good day,
ladies and gentlemen, and welcome to the Alphabet Inc. fourth 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 touchtone telephone. I would 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
fourth 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
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 10K
for 2016 filed with the SEC. Undue reliance
should not be placed on any forward-looking
statements, and they are made based
on assumptions as of today. 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 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. We had a fantastic 2017 with
total revenues of $110.9 billion, up 23% over 2016, and operating income
of $28.9 billion, up 22% year-on-year
excluding the EC fine. Our momentum reflects
a relentless focus on users, advertisers,
and enterprise customers as well as the benefits
of our commitment to long-term investing. For the fourth quarter, revenues of 32.3 billion were up 24% year on year. The ongoing very strong
performance in Sites revenue in particular reflects the combined benefits
of innovation and secular growth with mobile Search
again leading the way. Healthy growth in Network
revenues was again led by our
programmatic business. Substantial growth
in Other Revenues, namely Hardware,
Cloud, and Play, continues to highlight
the benefits of our investments. 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. In order to facilitate
comparisons of this quarter’s results
to prior periods, we have also provided
the tax-affected line items excluding the impact
of the U.S. tax legislation enacted at the end of 2017. You can see the components
in our earnings press release. Second, I will review results
for Google and then other Bets. I will then conclude
with our outlook. Sundar will then discuss
business and product highlights, after which we will
take your questions. Starting with a summary
of Alphabet’s consolidated financial
performance for the quarter. Total revenues of $32.3 billion
were up 24% year over year and strong across all regions. U.S. revenues were $15.4 billion,
up 21% year over year. EMEA revenues were $10.3 billion,
up 24% year over year. In fixed FX terms,
EMEA grew 22%, reflecting strengthening of both
the Euro and the British pound. APAC revenues were $4.7 billion,
up 30% versus last year and up 32% in fixed FX terms, reflecting weakening
of the Japanese yen. Other Americas revenues
were $1.9 billion, up 31% year over year
and up 30% in fixed FX terms, reflecting strengthening
of the Canadian dollar. On a consolidated basis, total
cost of revenues including TAC, which I’ll discuss in
the Google segment results, was $14.3 billion,
up 34% year on year. Other cost of revenues
on a consolidated basis was $7.8 billion, up 34% year over year, primarily driven by
Google-related expenses, specifically costs associated
with our datacenters and other operations,
including depreciation, hardware-related costs for our expanded Made
by Google family of products, and content acquisition costs,
primarily for YouTube. Operating expenses
were $10.4 billion, up 19% year over year, in particular reflecting
an increase in marketing spend given the holiday season. Stock-based compensation
totaled $1.8 billion. Headcount at the end
of the quarter was 80,110, up 2,009 people
from last quarter. As in prior quarters,
the 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 $7.7 billion, up 15% versus last year, and the operating
margin was 24%. Other income and expense
was $354 million. We provide more detail
on the line items within OI&E in our earnings
press release. Our provision for income taxes on a reported basis
includes $9.9 billion for items associated with
the U.S. tax legislation, resulting in a reported
net loss of $3 billion and loss per diluted
share of $4.35. Excluding the impact
of the U.S. tax legislation, our effective tax rate was 15%. Our net income was $6.8 billion, and earnings per diluted
share were $9.70. Turning now to capex
and operating cash flow, cash capex for the quarter
was $4.3 billion. Operating cash flow
as $10.3 billion with free cash
flow of $6 billion. We ended the quarter with cash
and marketable securities of approximately $102 billion. Let me now turn to our segment
financial results starting with
the Google segment. Revenues were $31.9 billion,
up 24% year over year. In terms of the revenue detail, Google Sites revenues were
$22.2 billion in the quarter, up 24% year over year,
led again by mobile Search, complemented by solid growth
from desktop Search and strong performance
from YouTube. Network revenues were $5 billion,
up 13% year on year, reflecting the ongoing momentum
of programmatic and AdMob. Other revenues for Google
were $4.7 billion, up 38% year on year, fueled
by Hardware, Cloud, and Play. 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 $6.5 billion, or 24% of total
advertising revenues, and up 33% year on 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 primarily an increase
in the Sites TAC rate, which was modestly offset
by a favorable revenue mix shift from Network to Sites. The increase in the Sites
TAC rate year on year was driven by changes
in partner agreements and the ongoing shift to mobile,
which carries higher TAC because more mobile searches are channeled through
paid access points. The underlying trend affecting
the Network TAC rate year on year continues to be
the shift to programmatic, which carries higher TAC. Google’s stock-based
compensation totaled $1.7 billion for the year (sic) [quarter], up 1% year over year. Operating income
was $8.8 billion, up 11% versus last year, and the operating
margin was 27%. Accrued capex for the quarter
was $3.8 billion, reflecting investments
in production equipment, facilities, and
data center construction. Let me now turn and talk
about Other Bets. I’ll cover results
for the full year 2017 because it remains
most instructive to look at financials
for Other Bets over a longer time horizon,
as discussed on prior calls. Results for the quarter
are in our earnings release. For the full year 2017, Other Bets revenues
were $1.2 billion, up 49% versus 2016, primarily generated
by Nest, Fiber, and Verily. Operating loss was $3.4 billion
for the full year 2017 versus an operating loss
of $3.6 billion in 2016. Other Bets accrued capex
was $507 million, down from $1.4 billion in 2016, primarily reflecting
a reduced investment in Fiber. We’re pleased with our
progress across Other Bets. A couple of updates,
Nest turned in a strong holiday performance
in the fourth quarter across an expanded
family of products in Energy, Safety, and Security. In 2017 Nest products also became available in 12 new countries, more than double
the number in 2016. Verily wrapped up
its first field study seeking to reduce
the transmission of diseases through mosquitoes
with positive results, and just last week Onduo, a joint venture
between Verily and Sanofi, began a limited
commercial launch of its diabetes
management platform. At Waymo, progress
is accelerating. For example, Waymo surpassed
4 million miles of driving in the real world, taking only six months to
achieve the last million miles, compared to about 18 months
for our first million miles, and in November Waymo announced
that it is the only company to have a fleet of
driverless cars on public roads that are completely autonomous without anyone
in the driver’s seat. Let me close with
some observations on our priorities
and longer-term outlook. Our 23% revenue growth in 2017
was powered in particular by the ongoing
extraordinary performance of our Sites business. Both mobile and desktop Search continue
to grow and benefit from our approach to innovation
with strong momentum as we identify
additional opportunities to enhance the user
and advertiser experience. As we’ve consistently
emphasized, alongside the continued momentum
in our advertising business, we are focused on building
a second wave of growth within Google over
the medium and long-term, which includes
the rapidly-growing revenue businesses in Google, Cloud, Hardware,
and YouTube. With respect to Cloud,
we are seeing the benefits of a fully-featured
enterprise offering and an expanded
go-to-market team bringing our advantages
and infrastructure, data analytics,
security, and machine learning to more customers, and we’re pleased
with the momentum in our Hardware
business in 2017, driven by an expansion
in both our product line and geographic availability. Finally, as we look
further into the future for our third wave of growth, we remain excited about
the longer-term potential for our Other Bets businesses. Overall, operating income
was up 22% year on year in 2017, excluding the impact
of the EC fine, although there was
obviously fluctuation in the rate of operating income
growth quarter to quarter. Within cost of revenues, the biggest component
is traffic acquisition cost, reflecting our strong revenue
growth in mobile Search and the fact that mobile
search carries higher TAC than our desktop business. While we expect Sites TAC
to continue to increase as a percentage
of Sites revenue, reflecting ongoing
strength in mobile Search, we anticipate that the pace
of year-over-year growth in Sites TAC as a percentage
of Sites revenue will slow after
the first quarter of 2018. Within OpEx we are keenly
focused on prioritization in order to optimize
the resources we are investing for longer-term growth. As I discussed on
last quarter’s call, marketing spend
in the fourth quarter is significantly elevated, in particular
supporting Hardware but also across
Cloud and YouTube. For 2018 we remain excited
about the investments we are making to drive
the next phase of growth in our big Bets in Google
in Cloud, Hardware, and YouTube, and our machine
learning efforts, which are powering innovation
across our businesses. You’ll see us continue
to support our priority areas with increased headcount, which
will remain concentrated in R&D. With the closing of our deal
with HTC earlier this week, for example, we’ve added
2,000 employees to support our
Hardware business. With respect to SBC,
we’ve completed the transition to a single annual
compensation cycle for employees with a full-year
equity refresh grant to employees
in the first quarter of 2018. Our biannual grant to SVPs will
also occur in the first quarter, and you will see
the combined step-up in our first quarter results. For our Other Bets, in 2018 we will continue to calibrate the magnitude
and pace of investment appropriate to their
individual execution paths. Finally, our framework
for capital allocation is unchanged from
our prior discussions. The primary use of cash
continues to be to support organic growth
in the business. We’re excited about
the significant opportunities we’ve identified
in our businesses and continue to invest
appropriately. We then layer in
a sensitivity analysis regarding potential M&A
as well as capex, in particular computing
infrastructure, to support the needs
of these growing businesses. The most sizable
catalyst for added investment in compute power include the expanding
application of machine learning efforts
across Alphabet as well as additional
requirements for Google’s Cloud, Search, and YouTube businesses. This framework further
considers complementary uses such as a share repurchase. After taking these potential
investments into account, our Board has decided to extend
our share repurchase program up to an additional $8.6 billion
of class C capital stock. In conclusion, 2017 was
another great year, and we are very excited
about the opportunities ahead. I will now turn
it over to Sundar. Pichai: Thanks, Ruth. Our teams are off
to a great start in 2018. This year is special, as it’ll mark 20 years since Google was founded. A lot has changed,
but our mission, organizing the world’s
information and making it universally
accessible and useful, remains the best guide
for the next ten years. Technology’s an incredibly
dynamic industry. We’ve been laying a foundation
for the next decade as we pivot to
an AI-first company powering the next generation
of Google products like the Google Assistant, and we have been making
substantial investments in our three biggest bets,
Cloud, YouTube, and Hardware. These bets have
enormous potential, and already they are
showing real momentum and gaining traction. Today I’ll start by sharing
some of the exciting progress in these three big bets. First, Google Cloud. Google Cloud, which includes
Google Cloud Platform and G Suite, has reached
meaningful scale, and I’m excited
to share today that it’s already a billion-
dollar-per-quarter business. In fact, we believe that
Google Cloud Platform, based on publicly-reported data for the 12 months
ending December 2017, is the fastest-growing major public cloud provider in the world. We’re also increasingly
doing larger, more strategic deals
with customers. In fact, the number of deals
worth over a million dollars across all Cloud products more
than tripled from 2016 to 2017. The strength of our products and the value of
working with Google is increasingly clear
to partners and customers. In the fourth quarter
we forged new and deepened
existing partnerships with industry leaders, including Cisco for open
hybrid environments, Salesforce for customer
insights and productivity, and SAP for AI and data
insights across our products. These collaborations span
our entire companies from engineering integration to marketing programs
to joint sales, and they cover
Google Cloud Platform, G Suite, and Google Analytics. We also saw accelerating
customer traction, and our wins included
global brands like Bed Bath & Beyond,
Dentsu Aegis Network, Keller Williams, Mattel,
and Tyco Retail Solutions, and underscoring the increasing
importance of Google Cloud to the enterprise, we surpassed another
new milestone, 4 million paying
customers on G Suite. Next, YouTube. Every month more than 1.5
billion people come to YouTube to watch their favorite
content on channels ranging from “The Ellen Show,” which has more than 22 million
subscribers, to the NBA, with over 8 million
subscribers, to SciShow, a really popular
educational channel with more than 4.5
million subscribers. In fact, there are
over 1 billion learning-related video views
every day on YouTube. I learned that this week. With all this great content,
people are thinking of YouTube more as a key part of their
TV-viewing experience. For Tuesday night’s
State of the Union, more partners used YouTube to livestream
the address than ever before, generating 5 million live views, and just yesterday we announced
a partnership with Major League Soccer’s L.A.
Football Club. YouTube TV will be
the exclusive home to watch all locally-televised English-language
matches in addition to their original
programming and content. YouTube TV is now
also available on Roku. There is great momentum
around the world with localized
versions of YouTube now in 90 countries
in 80 different languages. Just this morning we announced that we are expanding
the popular YouTube Go app to over 130 countries
around the globe. The app has great data
usage, transparency, and controls built in, which is especially
useful for people living in regions
with limited connectivity. In the fourth quarter we also
strengthened our relationship with the music industry, signing new licensing
deals with Sony Music Entertainment
and Universal Music Group. We also partnered
with Ticketmaster to help fans buy tickets to see their favorite
artists perform live. Third, our growing
Hardware business. Our Made by Google
hardware products were very popular
this holiday season. Device shipments
in the fourth quarter have more than
doubled year over year. Our retail partners also
saw strong performance. Our devices are available
in stores like Best Buy, Target,
and Walmart. I’m especially excited
about the popularity for Google devices
for the home like the Google Home, Mini, Max,
and Chromecast. In the last year
we have sold tens of millions of these
devices and counting. I want to call out
the great work of our Marketing
and Design teams. Our hardware is beautiful
individually and as a family, and people love discovering
the unique features like the built-in
Google Assistant. Earlier this week we officially
closed our deal with HTC, which will bring
great talent to drive even more innovation
in the years to come. Turning to our efforts
in machine learning, our AI research and
innovation leads the world. Our mission to better organize the world’s information
has been transformed by these technologies
with our Search products and the Google Assistant
at the heart. There’s great momentum
around the Google Assistant as we bring it to more
people on more devices. It’s now available on more
than 400 million devices, including speakers
like Google Home as well as Android
phones and tablets, iPhones, headphones,
televisions, watches, and more. People love to use the Assistant
on all these devices. There was a lot of excitement around the Google
Assistant at CES from partners
and consumers, where we brought the Assistant to new surfaces
like smart displays from brands like JBL and Lenovo as well as Android Auto, which is now available
in more than 400 car models from brands like GM,
Hyundai, and Volvo. One area that’s
really benefitting from our advancements
in AI is photography. The Pixel 2 phone is the leader
in video rankings by industry standards
with smoother and clearer videos thanks to machine learning and our video
stabilization technique, and Google Photos continues to
go from strength to strength. On New Year’s Eve alone
over 3 billion photos and videos were uploaded
to Google Photos. More broadly, we want everyone
to be able to use machine learning for their own needs. We recently gave Google Cloud
customers access to AutoML, which makes it far easier
to build complex neural nets. Since it launched
a few weeks ago, over 10,000 customers have
already signed up to try it. Lastly I’ll give a quick update on our computing
and advertising platforms. First, Android. To provide a better,
more tailored experience for our next billion users, we made Android Oreo Go Edition available for
our device partners. This year we expect to see Go devices from dozens
of manufacturers, and with great support
from mobile operators and app developers
around the world, I’m confident that this will
bring the power of smartphones to many more people
for the first time. Google Play is
also growing well. Just last week
we introduced Audiobooks, so you can now catch up
on your favorite books anytime on multiple devices, and in Latin America
number of unique monthly buyers
on Google Play grew by over 50% year
over year in 2017. Chromebooks also continued
to gain momentum and traction. Third-party research tells us that fourth quarter sales
of consumer Chromebooks in the U.S. grew by over
70% year over year. Moving to our
advertising platforms which help large
and small businesses. As shoppers turned
to their mobile phones this holiday shopping season, Google was central
to helping them discover new brands,
compare products, and find the best deals. We redesigned the mobile
shopping experience on Google, bringing more product
information to the forefront, like reviews and ratings. We are also making the payments
experience simpler, safer, and more consistent. We brought our payments efforts
together as a new Google Pay which shoppers can use
to pay online, in stores, and across Google products
like Chrome and the Play Store. Companies like Airbnb
and Instacart are using Google Pay
to speed up mobile checkout, and HotelTonight found
that customers using Google Pay are 65% more likely to
complete their bookings. We also have really strong
momentum in app promotion ads. The majority of our
app promotion campaigns are now using Universal
App Campaigns, which is part of our focus on simplifying
the advertiser experience. Additionally, we introduced
a new playable ad format in Google Play that allows users to sample
games before they install. Ads in Google Play
are performing really well for developers, and our App Promotion business
on YouTube is flourishing. We launched major initiatives
such as Store Visits Measurement and location-based ad formats to drive online
to offline commerce. We are focused on
making sure YouTube is a great place
for users and advertisers while helping creators earn
money from popular content. In addition to
the significant work we are doing to protect users and stop abuse on the platform,
just a few weeks ago we announced changes
to advertising on YouTube, including stricter
monetization criteria, new manual reviews for all
videos in Google Preferred, and simpler controls
for marketers. The feedback we have received
from advertisers and creators so far has been
really positive. So as you can see, we are making great strides
in our biggest bets, and I’m proud of the work
we are doing across the company. I’m also incredibly proud
that as Google grows, we are making significant
contributions to our partners, the economy,
and our local communities. Our business continues
to benefit our partners around the world. This includes news publishers,
app developers, and YouTube creators
who we share revenue with. Over the last four years our partners have earned
over $100 billion. That’s incredible, and we are
working on new ways to drive even more value
to our partners. In the U.S. specifically, we have offices and
data centers across 21 states, and we plan to hire
thousands of people across the U.S. this year. Last year in the U.S. we grew faster
outside the Bay Area than in the Bay Area. To support this growth we’ll be
making significant investments in offices across nine states, including Colorado and Michigan. We’ll also be building
or opening five big new data centers
in the U.S, and with digital skills
in high demand by employers, our Grow With Google initiative
will help job seekers and small businesses
gain education and skills to help them succeed. Just a couple weeks ago we
announced that we are creating an IT support
certification program that will give thousands
of people scholarships and job opportunities. More than 10,000 people
have already signed up, which is amazing. I want to thank
all our employees, Google users, partners, and
advertisers around the world. I couldn’t be more excited
about what’s in store for all of us this year. With that I’ll 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 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, please press the pound key, and to alleviate
any background noise, we ask that you
please mute your line once you’ve asked your question, and our first question comes
from Eric Sheridan of UBS. Your line is now open. Sheridan: Thanks for
taking the questions, maybe two, one for Sundar,
one for Ruth. Sundar, coming out of CES and the success you had
with Google Home and the Google Assistant
during the holiday period based on the blog post
you guys put out, can you identify some of
the key investments in either partnerships
or hardware or capabilities that you’re targeting over
the next one to two years to make sure the momentum
around Assistant is sustained? And then Ruth, looking at
cost of goods sold, that came in quite a bit
higher than we thought, and you were lapping
a one-time charge of we have it right versus
the year ago period. Maybe you could talk a little
bit about some of the pressures in cost of goods sold
that were either seasonal or maybe a new normal in terms
of a higher level going forward. Any color there would
be really appreciated. Thanks, everyone. Pichai: Thanks, Eric. On the Google Assistant
and Google Home, we are, you know, very excited about the momentum
we saw in CES. It actually reflects work
we’ve been doing for a while. You know, Google Assistant,
in some ways, brings together
all the technology we’ve been building for years, you know, and it’s an extension, and it’s supported
by Google Search as well. We’re also thinking
about our capabilities, you know, broadly beyond
just one device alone, and, you know, that’s what
we are doing here across phones, across all surfaces, so that’s something
big we are focused on, and the second is we’ve
always built ecosystems, be it Android or Chrome
or Chromebooks. We work with many, many partners
and scale up things, right? And so we are leveraging
those best practices and trying to build this in a way in which the entire
ecosystem can ship products with the Google Assistant
and generate value, so I think
the framework is great, and long-term, you know,
our investments in AI, you know, will directly manifest
as capabilities for users through the Google Assistant,
so I’m very bullish on it. Porat: And then in terms
of the gross margins, it obviously reflects
our product mix, and as you know well, you know,
the TAC rate for each of Sites and Network as a percentage
of those revenue lines does continue to increase ’cause there are our
strongest growth areas, namely mobile Search
and programmatic, and so carry higher TAC, but as I indicated
in my opening comments, we do estimate that
the year-on-year increase in the Sites TAC rate will slow
after the first quarter of 2018, and then the other
thing to note, other cost of revenue does reflect the
seasonality of hardware, you know, having increased both the number of products
in the Made by Google family as well
as continuing to expand geographically in Western
Europe and APAC, you can see that
reflected here. Sheridan: Thanks. woman: Thank you,
and our next question comes from Heather Bellini
of Goldman Sachs. Your line is now open. Bellini: Great,
thank you so much. Two quick questions,
one for Ruth and Sundar. I guess, Ruth, just to follow up
on your comments there, the partner agreements
which you just cited, is there any color
you could give us on how these typically work? And what I mean by that is are they typically multi-year
deals on average, and how do we think about these impacting the rate of change in TAC, since you were talking about
the pace of growth and TAC, as we look out–call
it a year or two if these are multi-year deals? And then for Sundar,
I guess I wanted to follow up a little bit
with what we saw at CES, but how do you
think about voice? And given the significant
number of devices in the market, how do you think in the future about traffic acquisition
strategies on these devices as you look five years
down the road? Is there any reason to think that the strategies
might be different that you’re gonna follow
as you look ahead than what we’ve seen
over the past call it–you know,
since the advent of the iPhone? Thank you. Porat: So on your
first question, there’s not much, really, that I’m gonna be
able to add there. I mean, given
the ongoing momentum in our mobile Search business, this does continue to be
relevant as you look forward, given mobile carries higher TAC, but the rate as
per your question is also reflected changes
in partnership agreements, so, you know,
all factors considered, we expect
the year-on-year increases will slow after
the first quarter of ’18, and as I’ve said
on many of these calls, we’re very pleased to have
a very strong position in a rapidly growing market,
and that momentum does continue. I guess the only
other thing to add is that Q4 TAC
as a percentage of revenues does benefit from the fact
that the fourth quarter is a seasonally strong
quarter for YouTube, so quarter-on-quarter changes
are less insightful because CAC as distinct from TAC
is not in this number, but not much more
to add there. Pass it to Sundar. Pichai: And Heather,
on the–on voice, you know, we’re very
excited by voice. You know, we obviously see it being adopted strongly
in countries like India. It’s actually
a significant part of just mobile Search
queries in general, and, you know, things like
Google Assistant and doing Google Home kind of
really accelerates the trend, but, you know, we definitely see
more multi-modality, so, you know, as you saw, we also announced many
smart displays at CES, and I think that’ll be
an exciting trend as well, so we’ll bet on all of that. In general I think
about, you know, we want to be there
for users when they need us, you know, and we want
to serve everyone. This is why we work
across the ecosystem. We do first-party devices. We do it globally, and so we are
committed to doing that well, so, you know, you–I think
it will be an extension of how we have approached Search from day one and trying
to serve everyone, and so I don’t overall
see a big shift. Bellini: Thank you.
woman: Thank you, and our next question
comes from Douglas Anmuth of J.P. Morgan. Your line is now open. Anmuth: Great, thanks
for taking the question. Some big news earlier this week
just in terms of Waymo with FCA talking about delivering
thousands of minivans to Waymo later in the year, so was hoping, Ruth,
you could just talk to us more about the timing
for that business and how we should think
about the economic model there as you move to operations
and deployment phase, and then secondly, the cash now
obviously much more accessible in terms of what
is held overseas. Can you just talk more
about your plans there? Obviously the, you know,
bigger–you know, the buyback there,
but still, you know, not meaningful in terms of the overall size
of the company. Thanks. Porat: Sure. So first, on Waymo, we do remain very excited about the opportunity with Waymo and our continued progress
on multiple fronts. In particular the rider program
in Phoenix we’re excited about, and we’re expanding
our testing to more states. You know, in November
we announced that Waymo’s self-driving tech reached a major milestone,
becoming the only company to have a fleet of
driverless cars on public roads that are completely autonomous, and that builds on our more than 4 million test miles
driven in the real world. In seven states, 25 U.S. cities we’re currently
driving–self-driving, I should say,
10,000 miles every day with billions of miles
in simulation and robust testing
at our private facility, so, you know,
more to your question, we do continue to explore
a range of options beyond the program
we’re piloting in Phoenix, including, you know, ride sharing and personal
use vehicles, logistics, deliveries,
and working with cities to help them address public
transportation objectives. That being said, our first
commercial application is a ride service
that we will launch in 2018 that would be open to members
of the public in Phoenix, and riders will be able
to use a Waymo app to hail one of our fully
driving–self-driving cars without a driver
at the wheel, so very excited about that,
and then in terms of cash, you know, I think the main point
as we think about it is there’s no change
in our approach to our capital
allocation framework. We’ve consistently been focused
on long-term investing, and we talked a lot about
that already on this call, and our framework has been
therefore very consistent. The priority,
the first use is organic. It’s investing in the many
opportunities that we have, and the second is strategic,
and we do remain active with smaller M&A deals, in particular to support
our Cloud business and hardware. You know, the HTC deal
which we just closed is a good example of that. Third is capex, and we continue
to invest in machines to support growth
we see across Google, but in particular supporting
Cloud, Search, YouTube, and all that we’re doing
in machine learning, and then finally,
that leaves return of capital, and, you know, when we
considered all of that, that’s what led us to extend–to have the board extend
the share repurchase program which we announced
a couple of years ago, and, you know,
we’ll let you determine what that number represents
in true Google fashion, but it’s just a modest increase to what we’ve been
doing previously. Anmuth: Okay, thank you, Ruth. 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, Ruth, you–you
called out desktop Search, I think for the second
straight quarter, as being relatively strong. Could you just talk about
some of the drivers of the strength of desktop, and how do you think
about the sustainability of continued strong desktop
growth into 2018 and beyond? The second one, kind of a
question on Search query volume. There’s often speculation
and question marks around how consumer behavior
is changing in ecommerce and whether Google
is still capturing as many ecommerce searches. Could you just talk to
what you’re seeing in retail Search query volumes
and Search user growth within ecommerce
in the United States? Pichai: You know, overall,
look, you know, we–obviously Search
is very broad, and, you know, even when you
talk about commercial thing, we serve across many, many categories including things like, you know, you know,
from travel to hotels and to services
to products and so on, so we’re very,
very comprehensive, and, you know, obviously
ecommerce is evolving a lot, and, you know, we continue
to invest there. You know, Google Shopping
is doing well, and we work hard to make sure we bring the best
experience possible, which is why as it evolves
with Search and Assistant, we partner with companies
like Walmart, for example, to make it much easier
to buy products and so on, so we–you know, we invested
a lot there. You’re right. Consumer behavior is changing, but we are comfortable
given the breadth of how we do things
and how that–you know, how we are focused
on user experience there. Porat: And then on your question
on desktop, you know, there’s–there really isn’t one particular item
to call out here, and that’s why
last quarter I tried to walk through the process
that our team goes through and the way they look
at innovations, really stepping back
and recognizing that the way we all use
smartphones and desktop is continuing to evolve, and so therefore there’s utility
in challenging assumptions about evolving user behavior
and advertiser preferences, and that opens
new lines of inquiry, which benefits not just
mobile but also desktop, and desktop did deliver
solid revenue growth. It does remain
an important form factor for certain more complex tasks
such as planning vacations or assessing insurance options, and we’re pleased with
the ongoing strength. I’ll leave it to you to do
any of the forecasting, but, you know,
we just view it as yet another valuable form factor and are really pleased
with the performance there. Nowak: Great, thank you both. woman: Thank you,
and our next question comes from Anthony
DiClemente of Evercore. Your line is now open. DiClemente: Thanks
for taking my questions. I have one for Sundar
and one for Ruth. Sundar, on YouTube
you mentioned the 1.5 billion people come to YouTube. Any other information
you can give us there on user growth or engagement
trends would be great, anything on time spent,
I mean, particularly as YouTube becomes more mature
and mobile video, particular in North America,
gets more competitive, and then, you know,
also on YouTube, you know, anything
around new products or features driving
the monetization or ad business, and then Ruth, just
a question on the growth in marketing spend
in the fourth quarter. I think you said that the 4Q
is significantly elevated. Shall we interpret that
to mean that the growth rate in selling and marketing
year over year should decelerate off the 4Q? And then just related
to that, you know, are you getting a good
return on investment from this marketing
spend, you know, particularly when you think
about media mix and all the spend
that we’ve seen on TV as compared to
digital marketing? Thanks a lot. Pichai: You know, look,
on YouTube, you know, we are continuing
to see great momentum. Maybe one area of which,
for example, highlights, you know,
how well it’s doing is if you think
about YouTube on TV. People actually watching YouTube
on the big screen, our growth has been,
you know, significant there, and see increasingly people,
you know, use YouTube for–we see it being used across
every possible use case, and I said it earlier
in the call, you know, every day we get
over a billion views on educational content alone. You know, people use it
to go catch up on sports, music, entertainment, and so, you know,
you can think about the breadth of–you know,
historically YouTube has been very strong on mobile and continues to be
strong on mobile. It’s doing particularly well in
the next billion user markets. Our growth last year
was very strong there, which is why we supported it with investments
like YouTube Go, and we are seeing it now
grow well beyond mobile, especially in the living room,
so a lot of momentum there. Porat: And then in terms
of sales and marketing, you know, as I said, it particularly
supported hardware but was also supporting
Cloud and YouTube, and as both Sundar
and I have said, these are important
Google growth areas for us, and we are investing to support
growth in the business. The elevated levels this quarter
did reflect both seasonality and, you know,
a strategic decision to invest in these brands, and so, you know, we view it as a very important part of the overall investment and what we view as
very sizeable opportunities, and it’s both supporting
the brand and the momentum therefore going into 2018, but, you know, this is a very
specific product focus as well. DiClemente: Okay, thank you. woman: Thank you, and our next
question comes from Dan Salmon of BMO Capital Markets. Your line is now open. Salmon: Good afternoon,
everyone. Thanks–thanks for
taking the question. Sundar, I’ll go with
a European theme. First, curious to
hear your thoughts on the potential
impact of GDPR, maybe both on your own
sites and properties and how any business practices
may need to be adjusted for that but also for tools
like Customer Match that your advertisers may use, and then second,
I’ll take a shot at it, any updates on your dialogue
with EU officials and regulators
on the proceedings there? Thank you. Pichai: You know, first,
good question. I was just in Europe last week.
It was exciting to be there. There’s clearly
momentum, we feel, in terms of how
Europe is doing, and we are very committed
to the region. We–you know, we are
opening new offices there. We announced a AI center. We are committed
to hiring more engineers and supporting staff there, so it’s an important
market for us. On things like GDPR, you know, we want to be–we’ve been
thoughtfully engaged there. I think it’s important
to put privacy first for European citizens, and we are very supportive of
the work that’s underway there, and we are committed
to complying with GDPR across all the services
that we provide in Europe. There’s still time. As a reminder, it doesn’t go
into effect until May or so, and we are working to make sure
all our products are ready, and, you know, we’ll work hard
to make the transition well. In terms of–you know, again,
with the EU –with the European Commission, we have long had, you know,
constructive conversations. We are understanding
their concerns and responding
with thoughtful changes, and we’ll continue engaging
in a thoughtful way. Salmon: Okay, great, thank you. woman: Thank you,
and our next question comes from Colin Sebastian
of Robert Baird. Your line is now open. Sebastian: Thank you. First, Sundar, your comments
on Google Cloud were upbeat, and I wonder how much
of the momentum there is related to machine
learning capabilities offered as a service, if you could frame
just how important that is for the Cloud
business overall, and then as a follow-up
on Google Home or the voice-based Assistant,
if there’s any update in how you’re thinking
about monetization from a transactional
perspective, transactional model with
perhaps retail partners, or do you see it an ad-based
model emerging there as well? Thank you. Pichai: On the first thing,
Colin, on Cloud, you know, you know, particularly this
–last quarter, we obviously brought AutoML
to our Google Cloud customers. To me, that shows
the rate of which we are bringing
our internal advances. Just a year ago I remember
reviewing with the team, and they first showed me
the AutoML work. We spoke about it at Google I/O, and, you know, it’s pretty
cutting-edge work, and to turn it back around and to provide it
for everyone in the world, I think that shows the power of
what we can do with Google Cloud and get our state of the art of
and get it to everyone. I think the momentum
there obviously, you know, is due to our strength
in machine learning, the kind of open, agile
development environment we provide, security, and then
combination with G Suite, but above all I think
–you know, we’ve always–you know,
we’ve been doing Cloud now for 19 years because, you know, Google itself
was built on a cloud platform, but where the momentum
is really coming from is over the past two years
we put a lot of effort to make sure we are
enterprise-scaled ready, so now we can handle
any type of enterprise, any kind of regulatory
complexity, security complexity, and so on, and that’s evident in the
business whence we are seeing, so we are signing customers who are very large
across the board globally, and I think that’s driving
a lot of momentum there. On your question on Google Home
and voice-based Assistant and how we are thinking
about monetization, you know, there are a lot
of interesting ideas internally, you know, so we have
–you know, teams are excited
about trying new things. We see a lot of potential, but the guidance
I’ve given the teams is to be squarely focused
on user experience. We are really getting started. I think these are gonna be
powerful technologies, but, you know, there are areas
where we clearly feel, you know, all of us
fall short for, you know, doing right by users and getting the expectations–
matching their expectations, so you’ll see us focused
on user experience there for a while to come. Sebastian: Thank you. woman: Thank you,
and our next question comes from Michael Nathanson
of MoffettNathanson. Your line is now open. Nathanson: Thanks. I have one
for Sundar and one for Ruth, both on YouTube. So first
question was as Google Preferred takes up a little heat
on types–the types of qualities that makes the cut
for your videos, do you feel that you have to
take a more active stance in looking at what is in Google
Preferred–in, sorry, YouTube Preferred, and how are
you going to go about that? And then for Ruth,
the past year was one where we heard a lot
about brand safety, and I wonder when you look back
at the YouTube results in ’17, is there any noticeable
signs of maybe a shift in ad spending from some of the brands who were making
those complaints? So those are my questions. Pichai: Thanks, Michael. I probably can talk about
both as they’re related. You know, in–you know, we obviously want
to make sure YouTube, you know, has a great experience
for users, content creators, and advertisers because
it supports content creators, and, you know, we took
a lot of steps last year, but particularly in December we
adopted a new rigorous approach, and, you know, that’s the much
more stringent standards. For creators,
you know, for example, they need a thousand subscribers
to be eligible for monetization. We are manually reviewing
Google Preferred videos. We obviously used machine
learning to support that a lot, and they both go hand in hand. We have provided improved
controls for marketers, and we are also working
with trusted third-party vendors to assess brand suitability, so it’s a comprehensive approach to make sure all
of this works well, and so while there have been,
you know, concerns, and we are –but
we are working really hard to address them
and respond strongly, and so I think
it sets–we are focused on the long-term
opportunity here, and I think we are
setting ourselves up well for the years ahead. Nathanson: Thanks. woman: Thank you,
and our next question comes from Ken Sena
of Wells Fargo Securities. Your line is now open. Sena: Great, thank you. So just a question
on–as searches, you know, seem to be coming more
qualified through travel as far as filtering,
you know, the price that people
that people want to pay, locations, amenities,
et cetera, you know, is there any trend that goes
along with that in terms of maybe depressing search volume
growth to some extent because of the more
filtered aspect? And then secondly, does the higher
qualification trend tie in at all to the shifts
towards programmatic in terms of other parties
that might be involved or the discussion that,
you know, we’ve had around TAC? And then maybe too,
just as a follow-up, if you can provide, you know, just a little bit
more color on Google Pay in terms of what might
be different in the–this round
versus previous attempts? Thanks. Pichai: You know,
maybe I’m not fully sure I understood
all the specifics there, but, you know,
at a high level, you know, as people
are on the go, they are traveling,
et cetera, if anything, I think Search is more
invaluable than ever before. You know, all the work we do
in local searches applies, you know, incredibly
when you travel. The properties we have
like Google Maps, et cetera, go along with it, so overall I think they all add
up to a better user experience and hence a better
opportunity for us. Google Pay turns out to be an
important part of all of this. You know, as we move
from just–you know, answers to helping users
complete actions over time, including transactions, their ability to complete
the transaction is an important part of it and–which is why
making sure Google Pay, in a unified way,
works as seamlessly as possible is a big part of our
long-term strategy. Sena: Okay, thank you. woman: Thank you,
and our next question comes from Stephen Ju
of Credit Suisse. Your line is now open. Ju: Okay, thanks. So Sundar, I think Ruth cited
hardware in the prepared remarks as the largest contributor
in the fourth quarter for the Other Revenue line. As you look at the roadmap
going forward, you acquired the HTC engineers
to bring that team in-house so it looks like
for the first time you have an integrated hardware and software team
under one roof, so how do you think your product
development pace and strategy will change for smartphones
and other devices going forward, and also does it make sense
to bring the Nest team to be more integrated
into core Google, you know, as well
given the drive to increase the touchpoints
for all the Google products to other form factors?
Thanks. Pichai: Oh, thanks, Stephen,
great question. You know, you’re right
that part of the reason we are so excited
about being able bring this world-class
team in-house is while we’ve been
working together already, you know, we’ve had to straddle, you know, a company
boundary to do that, but now having them
as Googlers, you know, will really make
that integrated development which is
so critical–critical, you know, for us to,
you know, do it better. You know, we bring a unique
approach to hardware, the combination of AI
plus software plus hardware, so being able to get those
teams working together, I think, will really
drive the pace forward, and the best example of that is you see the advances
we have made with both, you know, still
and video photography, you know, on our phones, and, you know, the Nest team
is very, very closely aligned with the Google Hardware team. We work hard to realize
a lot of synergies there. We already share a lot
of our go-to-market efforts, and we increasingly
are collaborating on product development as well, so we collaborate closely, and I’m excited at the
possibilities there as well. Ju: Thank you. woman: Thank you,
and our next question comes from Justin
Post of Merrill Lynch. Your line is now open. Post: Great, thanks.
First, for Sundar, it didn’t feel like
there was many visible Search changes this year as far
as coverage or ad formats, so would love
to hear your thoughts on Search innovation pipeline
as you look out to ’18 and key growth drivers
going forward, and then Ruth,
in the prepared remarks there was a lot of
comments on investment in your medium-term
business growth drivers, offices, data centers,
and other areas, and just wondering
if you view 2018 upcoming as an investment year or kind of more of the same of what we’ve seen over
the last couple years? Thank you. Pichai: So Justin,
when you think about Search, you know, one of the ways
that I encourage you to think, we think about user journeys, so a lot of the innovation
that we are doing has gone onto not
just an individual query and how we respond but how we think
about what a user is trying to accomplish over
a series of sessions. Are you trying to plan a trip,
and how do we do it better? Do you have
a health-related area where you’re trying
to learn more about it, and how do we help you
through that? And so it’s not always just
changing a specific format, but understanding context better and bringing you that
information through a journey, and I think–so there’s
a lot of innovation that’s happening
in that direction, and also underlying
is what I said earlier. It’s not just providing
the answers. How do you help them get to
that information and act on it? And so maybe
you found something, and you want to call that place, or maybe you are trying
to order a birthday gift, and we actually want you
to–want to go a step further and help that–help
you buy that gift, so that’s along the lines, and the innovation is happening across Search and Assistant
in an integrated way. Porat: And then in terms of your
investment question, you know, we’ve consistently been
investing across Alphabet, and we’ve tried to be very clear
about our investment priorities, you know, all with the view to supporting healthy
long-term growth that goes back to
the inception of the company. The year-on-year op inc growth that you’ve seen does include
these sustained investments for all the areas that both
Sundar and I have talked about, you know, for the year up
22% versus last year, obviously a lot of variability
in growth quarter to quarter, and we just continue
to be focused on doing the right things to
support growth of the business. The fourth quarter does reflect
the obvious seasonality, and again, you know, we continue to look across
the various products at their needs
and try and prioritize, but we remain committed
to long-term growth. woman: Thank you,
and our next question comes from Ben Schachter of Macquarie. Your line is now open. Schachter: Just
a couple questions. Can you discuss the evolution
of the business model for Waymo? You’re launching the ride
hailing service in Phoenix. You’ve worked
with manufacturers. You talked about other models, but when you think
about the sort of five to ten-year view of that, what will the primary
business model look like? And separately, can you talk
about what it -what is interesting
from a strategic point of view about the video game business? You’re making some
key hires there, and just wondering
what you think Google can bring
to that industry that would be innovative?
Thanks. Porat: So on Waymo, you know,
really not much more to add. We’re really pleased after
years of work on technology where it was really about
safety, safety, safety and developing the technology
and the platform, and now we’re in a position
where we have this opportunity to let people use and benefit
from what we’ve developed. I think that safety
has been a key driver, and the opportunity for cities
has been really exciting, what means about optimizing
resource space that they have, so it’s still very early days,
and we’re just–we’re pleased with all the progress
that the team’s made, but it would be getting
ahead of ourselves to go further out than
what we’ve laid out here. Pichai: You know,
on the video gaming side, I think, look, you know,
we are–I mean, we today have a lot
of momentum in these areas, both with YouTube as a platform,
Google Play, so, you know–you know,
so these are, you know, assets which really work well, and we’ll continue
investing there. Nothing new or interesting
to share with you at this time. 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 first 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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