September 14, 2019 0

Alphabet 2018 Q1 Earnings Call

woman: Good day,
ladies and gentlemen, and welcome
to the Alphabet Inc. first quarter
2018 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 be
given 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
first quarter 2018 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 10-K
for 2017 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 delivered ongoing
strong revenue growth up 26% year-on-year and up 23%
in constant currency. The sustained outstanding
performance in Sites revenues in particular reflects the combined
benefits of innovation and secular growth, with mobile search again
leading the way. Robust growth in Network
revenues was again led by our
programmatic business. Ongoing substantial growth
in Other revenues, namely Cloud,
Hardware, and Play, continues to highlight
the growing contribution of our non-ads opportunities. 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. Second I will review results
for Google and then Other Bets. As we highlighted in
our earnings press release, our results this quarter
were affected by a new accounting standard that changes the way
companies account for equity
security investments. I’ll highlight the impact
on particular line items as I review the quarter. 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, our total revenues
of $31.1 billion were up 26% year-over-year. We realized a positive
currency impact on our revenues
year-over-year of $1.3 billion, or $1.1 billion after the impact
of our hedging program. Turning to Alphabet’s
revenue by geography, you can see that our
performance was strong again in all regions. U.S. revenues
were $14.1 billion, up 20% year-over-year. EMEA revenues
were $10.5 billion, up 29% year-over-year. In constant currency
terms EMEA grew 21%, reflecting strengthening
of both the Euro and the British pound. APAC revenues were $4.8 billion,
up 33% versus last year and up 30%
in constant currency, reflecting strengthening
of the Japanese Yen and Australian dollar. Other America revenues
were $1.7 billion, up 36% year-over-year and up
35% in constant currency. On a consolidated basis, total
cost of revenues including TAC, which I’ll discuss in
the Google segment results, was $13.5 billion,
up 37% year-on-year. Other Cost of Revenues
on a consolidated basis was $7.2 billion,
up 39% year-over-year, primarily driven by
Google-related expenses. The key drivers were first cost associated
with our data centers and other operations,
including depreciation, which was affected
by a reallocation of certain operating expenses
primarily from G&A. Second, content acquisition
costs, primarily for YouTube, and finally
hardware-related costs. Operating expenses
were $10.7 billion, up 27% year-over-year, with the biggest increase
in R&D expenses, reflecting our continued
investment in technical talent. The growth in Sales
and Marketing expenses reflects advertising
investments in Cloud and Hardware as well
as the Assistant. G&A expense trends were
affected this quarter by a number of factors, in particular performance
fees accrued in connection with the recognition
of equity security gains, which were partially offset
by the reallocation of certain expenses from G&A, primarily to Other
Cost of Revenues and the benefit of the Uber
litigation settlement. Stock-based compensation
totaled $2.5 billion. The quarter-on-quarter step-up reflects the full-year
equity refresh grant to employees at the beginning
of the quarter and the bi-annual
grant to SVPs. Headcount at the end
of the quarter was 85,050, up 4,940 people
from last quarter, including just over
2,000 people who joined
at the end of January when we closed our previously
-announced deal with HTC. As in prior quarters,
the majority of new hires were engineers
and product managers. In terms of product areas, the most sizeable headcount increases were the additions from HTC, followed by hiring in Cloud for both technical
and sales roles. Operating income was $7 billion,
up 7% versus last year, and the operating
margin was 22%. Other income and expense
was $3.5 billion, which includes $3 billion
of primarily unrealized gains in equity
security investments recognized under the new
accounting standard. We provide more detail
on the line items within OI&E in our earnings press release. Our effective tax rate was 11%
for the first quarter. As outlined in our earnings
press release, this includes a five
percentage point reduction from the release of a deferred
tax asset valuation allowance which offset the income tax expense on the equity
security gains. Net income was $9.4 billion, and earnings per diluted
share were $13.33. As indicated in the table
in our earnings press release, these results
reflect an increase in net income of $2.4 billion and $3.40 in earnings
per diluted share due to the impacts
from the gains on equity security investments
we’ve already discussed. Turning now to capex
and operating cash flow. Cash capex for the quarter
was $7.3 billion, which I’ll discuss in
the Google segment results. Operating cash flow was
$11.6 billion with free cash flow of $4.3 billion. We ended the quarter with cash
and marketable securities of approximately $103 billion. Let me now turn to our segment
financial results. Starting with
the Google segment, revenues were $31 billion, up 26% year-over-year. In terms of the revenue detail, Google Sites revenues were
$22 billion in the quarter, up 26% year-over-year,
led again by mobile search, complemented by solid growth
from desktop search and strong performance
from YouTube. Network revenues
were $4.6 billion, up 16% year-on-year, reflecting the ongoing momentum
of programmatic and AdMob. Other revenues for Google
were $4.4 billion, up 36% year-over-year, fueled
by Cloud, Hardware, and Play. As a reminder, the Hardware
revenues in this line now include our Nest business and prior periods
were restated. We continue to provide
monetization metrics in our earnings press release to give you a sense of the
price and volume dynamics of our advertising businesses. As we previously announced,
we made a change this quarter to impression-
based monetization metrics for our network business given the ongoing growth
of programmatic. Total traffic acquisition
costs were $6.3 billion, or 24% of total
advertising revenues, and up 36% year-over-year. This year-on-year 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 in
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-over-year was driven by changes
in partner agreements and the ongoing shift
to mobile, which carries higher TAC. The underlying trend
affecting the Network TAC rate year-over-year continues to be
the shift to programmatic, which carries higher TAC. Google’s stock-based
compensation totaled $2.3 billion for the quarter, up 22% year-over-year. Operating income
was $8.4 billion, up 12% versus last year, and the operating
margin was 27%. Accrued capex for the quarter
was $7.7 billion, reflecting investments
in facilities, production equipment,
and data center construction. Facilities was
the largest component of capex this quarter, due primarily to the $2.4
billion purchase of Chelsea Market that we announced in March. Let me now turn and talk
about Other Bets. For the first quarter, Other
Bets revenues were $150 million, primarily generated
by Fiber and Verily. As a reminder, Nest results
are now reported as part of the Google segment with revenues reflected
in the Google – Other Revenues line. Operating loss was $571 million
for the first quarter. Other Bets accrued capex
was $55 million. We’re pleased with our progress
across Other Bets. A couple of updates. At Waymo, we have achieved
five million miles of driving on city streets, adding the latest million
in just three months. We also announced
a long-term partnership with Jaguar Land Rover for their fully
electric I-PACE vehicles. Verily is seeing good
progress with Onduo, its joint venture with Sanofi. The company has made its
diabetes management platform commercially available
in three states with Blue Cross Blue
Shield of Arkansas and South Carolina and Anthem’s
health plan in Georgia. Let me close with
some observations on the quarter
and our longer-term outlook. First, with respect
to revenues, the opportunity set ahead of us
is quite extraordinary, and we remain focused
on investment to support long-term revenue
and profit growth. We have both
the business confidence to invest appropriately
in the next phase of innovation as well as clarity about some very compelling
opportunities that, in our judgment, will enable us
to create shareholder value. We’re pleased with
the continued momentum of our revenue
growth, again, this quarter reflecting strong underlying trends
across our business, which are amplified by our
relentless focus on innovation not only in our
newer businesses like Cloud and Hardware but in our sites business. Specifically, we’re excited by
the still-sizeable opportunity in search advertising
led by mobile. At 26% year-on-year revenue
growth in our Sites business, we continue to benefit
from our investments to enhance the user
and advertiser experience. Second, with respect
to profitability. Within Cost of Revenues,
the biggest component is TAC. While we expect sites TAC
to continue to increase as a percentage
of Sites revenues reflecting ongoing strength
in mobile search, we continue to anticipate that the pace of year-over-year
growth in Sites TAC as a percentage of Sites revenues will slow beginning
in this second quarter. Within opex,
as I said last quarter, we are continuing to support
our priority investment areas. Within R&D this is reflected
in increased headcount, particularly for
technical roles. Sales and marketing
is similarly elevated to support these areas, both in the quarter
and for the full year, and we expect expenses
to remain more heavily weighted toward the back
half of the year to support the holiday season. As you’ve seen
in prior quarters, G&A can be a more
difficult line to forecast. In particular this quarter
we had the impact of the accrual
for performance fees related to the equity gains previously discussed
partially offset by the reallocation
of some expenses to other cost-of-revenues
in the Uber legal settlement. We appreciate the importance
of prioritization and are keenly
focused on the steps we can take to make
the right investments with the proper intensity while being diligent about
long-term plans and returns. For our Other Bets,
we remain focused on moving toward
commercial applications in a number of areas, with a continued focus
on calibrating investment to metrics for success. Third, with respect to capex, our commitment to growth
is evident in the trend in capex investment almost equally
split this quarter between compute capacity
and facilities. Our facility spend in Google, dominated by the Chelsea
Market acquisition, reflects that we favor owning
rather than leasing real estate when we see good opportunities. With respect to
compute capacity, the largest component
of capex is for machines that incorporate
the latest technologies. We are also investing
in data center growth and increased network capacity
through undersea cables. These combined investments will
expand our compute capacity to support our growth
outlook across Google, including Machine Learning,
the Assistant, and Cloud. In many respects,
these investments underscore my opening comment about both our confidence
and clarity about future opportunities, with our focus on
proprietary solutions that enable us
to deliver the secure, reliable, high-performing
compute infrastructure to support new and emerging
products and services for our users, advertisers, and enterprise customers. I will now turn
the call over to Sundar. Pichai: Thanks, Ruth. The end of Q1 is always
an exciting time as we prepare for our annual
developer conference, Google I/O. Computing is evolving
at a rapid rate, and we can’t wait
to share what’s next and how we are tackling
important issues. I want to call out
an important highlight from Q1. The Google News Initiative
that we unveiled in March. Over the years, we have worked
closely with the news industry to address key challenges
through projects like Accelerated Mobile Pages. We are building
on that partnership with a $300 million investment to elevate and strengthen
quality journalism. As part of this effort
we announced more than a dozen new projects, including Subscribe
with Google, developed in close
collaboration with publishers, which lets you use
your Google account to buy a subscription
on participating news sites. We’ve had
overwhelming interest. Since the launch,
we have heard from more than
300 news publishers who are interested
in Subscribe with Google. We also introduced
new tools for journalists and improvements
to our platforms to ensure that we are
surfacing accurate, quality content
where it matters most. Today, I’ll quickly talk
about how machine learning is helping us
advance that mission, then I’ll highlight progress
in our three big areas, Cloud, YouTube, and Hardware, and share updates
on our computing and advertising platforms. First, machine learning and making information
accessible to everyone. Our own ML-powered products like Google Photos
and Google Lens gets better every day. The Google Assistant is
a great example of this. In the home, we have added
over 200 new device partners that work with the Assistant just in the last
four months alone. We now partner with
all major manufacturers of connected devices
for the home in the U.S. All told, the Google
Assistant can now help you with over one million actions, including new things like
reminding you to buy bread when you get to the store
or sending money to friends or if you want to get
a rideshare home. For a concept we unveiled
at I/O less than two years ago, this is great progress. AI is also unlocking new
opportunities for everyone. Just in the last few months we have seen some
amazing applications from dairy farmers
in Georgia using TensorFlow to improve the health
of their herds to our own Google researchers who figured out
how to use ML techniques to assess a person’s
risk of a heart attack. The possibilities of AI in
healthcare are truly exciting. At a recent TensorFlow summit
we introduced TensorFlow Hub, making it easier for developers
to share and reuse models so that we can work together
to tackle even more problems and get to better ideas faster. Our investments
in this area are helped because of our specialized
Tensor Processing Units, which are specifically designed
to be highly efficient for machine
learning applications. Of course, we continue
to advance Google’s core mission
in other ways too. We recently launched our Google
Go app in 26 African countries. This app reduces
the amount of data needed to display
search results by 40%, and we continue
to invest in ways to give people granular
and easy control over their information
across all our products. Every single day
nearly 20 million people visit My Account, which gives them options to
review their Google security, privacy, and ad settings. Additionally, tools
like Security Checkup and Privacy Checkup prompt people to keep
their accounts secure and control
their data settings. Now turning to our three
big areas, Cloud, YouTube, and Hardware. Last quarter, we shared
some exciting metrics about the progress
of Google Cloud, including that we passed
a billion dollars per quarter in 2017. In Q1, we saw
increasing momentum. We are growing
across the board, and we’re also signing
significantly larger, more strategic
deals for Cloud. Our security capabilities, the easy-to-use
advanced data analytics and machine learning solutions, and the secure and
industry-leading collaboration platform G Suite are winning
customers over. Google Cloud is growing well. Some examples of new
technologies announced in the quarter
include Cloud AutoML, which makes it easier
for companies without machine learning expertise to build
complex neural nets, and more than 20 new
security products. Our global infrastructure continues to expand to support demand. We commissioned three
new subsea cables and announced new regions
in Canada, Japan, Netherlands, and Saudi Arabia, bringing our total
of recently launched in upcoming regions to 20. G Suite has reached a point
where it can serve all the needs
of a large enterprise, and as a result growth
has hit an inflection point. The suite is growing
from strength to strength. We believe our secure
environment is an important factor in driving enterprise
customer wins. G Suite customers like
Colgate-Palmolive Company tell us that no one offers
a better combination of hardware, network,
and data security. In Q1, we also
signed agreements with customers like Airbus and Thailand’s
Krung Thai Bank. As a result, G Suite revenue
growth accelerated in Q1. Next, YouTube. The platform continues to grow as millions of creators
build communities and find opportunity
on YouTube. Over the last year, channels earning six figures annually grew more than 40%. This quarter, Dua Lipa’s
video for “New Rules” become the 100th
video on YouTube to reach one billion views. We’re also investing in new
experiences like live content where we see
tremendous momentum. One recent example was our exclusive
Coachella live-stream, which had more than
41 million live views from all over the world. Coachella was YouTube’s
most-viewed live music festival ever, and no surprise, Beyoncé was the most-viewed
Coachella performance ever on YouTube. Even as we invest
in new experiences, we stay very focused
on making sure that YouTube remains a safe
platform with great content. We are aggressively
combating content that violates
our strict policies through a combination
of user and machine flags. Over six million videos
removed in Q4 were first flagged
by our machine systems, and over 75% of those
videos were removed before receiving
a single view. We also changed
our monetization requirements to better identify creators who contribute positively
to the community and drive more ad
revenue to them. Moving to Hardware. This quarter, we welcomed Nest
to the Google Hardware team to supercharge our efforts. Nest is building industry-
leading products for the home, including new additions
like the Nest Hello doorbell and Nest temperature sensor. In 2017, they sold more devices than the previous
two years combined. They are an incredibly talented
team with fantastic momentum. Google Home continues
to be super popular, and we are making it available
in many more countries. Just recently we launched Google Home in India
and Singapore, and the response
has been terrific. Our early 2018
Net Promoter scores rank among the highest
in the industry across all product categories. This shows how much love
people have for Made by Google consumer
hardware devices and makes us even more
excited for what’s ahead, discrete momentum across
our computing platforms like Android and Chrome. At Mobile World Congress, a new generation of
Android-partnered devices was introduced, including Android One phones
like the Nokia 7 plus. Android One pairs high-quality
hardware with the secure and streamlined software
experience from Google. This quarter, we launched
the Acer Chromebook Tab 10, the first Chrome OS tablet designed specifically
for education. It is a secure and easily
shareable tablet equipped with all
the Chromebook features that educators
and students love. And finally,
our advertising platforms. We continue to make
Google Search and Shopping the best places
for people to find and buy products from
a range of merchants. We recently announced
Shopping Actions, allowing customers to easily
buy from their choice of participating retailers
on the Google Assistant and Search with a universal
cart across mobile, desktop, and even Google Home. This is also really
helping retailers. Early testing showed
that participating retailers see an average increase
in basket size of about 30%. YouTube is delivering great
results for advertisers. To help brands reach
broad audiences on YouTube with even more flexibility we
introduced TrueView for Reach, which optimizes in-stream ads
to reach a wide audience. In beta testing,
nine out of ten campaigns drove a significant
left-in ad recall with an average lift
of nearly 20%. We’re also helping
small businesses take advantage of video with the expansion
of YouTube Director Onsite to over 170 U.S. cities. This gives SMBs access
to a professional filmmaker to create and edit
their video ads. Finally, we remain
focused on investing in our publisher partners. Last year, we paid
$12.6 billion to publishing partners
in our ad network. We recently announced
AdSense Auto Ads. This uses machine
learning to analyze ad placements on
a publisher’s page and show ads when they’re likely
to perform well while providing a good
user experience. Google’s success depends not just on the success
of our partners but also on the communities
where we work. We recently announced
a Rolling Study Halls program for rural areas
across 12 states. It equips school buses
with Wi-Fi devices and on-board educators so that students
with long commutes can get their homework
done during the trip. We’re also making
long-term investments in our offices and data
centers around the country. Last month, we announced
the purchase of Manhattan’s Chelsea
Market building, and in Tennessee and Alabama we broke ground
on two new data centers, which will have a big economic
impact on the local economies. These investments
are made hand-in-hand with our commitment
to sustainability. In 2017, we officially
met our goal to purchase enough
renewable energy to match all the electricity consumed by our operations
around the world. I want to close by saying
thank you to our employees. It’s been a particularly
tough few weeks for the Google family,
especially at YouTube. I’m so proud of the resilience
that our employees have shown, and I’m so grateful
for the support we have gotten
across the industry and from the community. Thank you. 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. Once again, if you’d like
to ask a question at this time, please press Star-1. And our first question
comes from Douglas Anmuth of JPMorgan. Your line is now open. Anmuth: Thanks for
taking the question. Ruth, just first
on the accounting change, I was just hoping
you could clarify. If we’re trying
to normalize that, is it right that
we would be adding back about $632 million
to operating income and then reducing EPS by $3.40, and then just on the EPS side perhaps adjusting
for the tax rate. And then just in terms
of the business, I just wanted to
ask about Waymo. If you could talk a little bit
about just the latest timing for the commercial
launch in Phoenix and how quickly you look
to expand to other markets, and then just how you’re
thinking about the technology and whether you’ll license it
to others going forward or keep it more proprietary
for Waymo services. Thanks. Porat: Sure.
So on the accounting standard we tried to lay out
all the component parts clearly on the cover
of the earnings release so that you would have it
all in one place. I think you
summarized it right, but I’d just direct everybody
to the earnings release, you know, the net
of which was the gain from the equity investments was $2.4 billion
to net income. That is net of
performance fees as well as the release of a deferred
tax asset that we have. So it does reflect
$3 billion in gains, and I think you know this,
but this quarter, the accounting
standard requires marks for everything where
there is an observable raise, so these are unrealized–the
majority of them are unrealized, not actually monetized
by Alphabet, and then the performance
fees are calculated based on investment returns. They’re accrued but not paid
until an exit event occurs, and they do appear in opex. And as you noted,
there is also therefore the benefit that flows
through on the tax line, and that is five percentage
points of benefit offset to the effective tax
rate for the quarter. As it relates to your Waymo question–I think
there was a lot in there. We do remain very excited about
the opportunity with Waymo and our continued progress
on multiple fronts. It is still very early. In terms of our progress, this year is about offering
a service that is safe, that works, that delights users
in the Phoenix area. The rider program in Phoenix is
open to members of the public, and riders will use a Waymo app to hail one of our
fully self-driving cars without a driver at the wheel
and we’ll pay for the service. We’ve also had progress
on the vehicle partnerships as I mentioned
in my opening comments. Last month,
Waymo announced it signed a long-term strategic
partnership with Jaguar, beginning with a collaboration to design and manufacture self-driving I-PACE vehicles for Waymo’s
transportation service. These are all-electric cars. This new partnership
in the vehicles adds to our strong
position with FCA, and the production
of the cars begins in 2020, and then we are expanding
our testing to more states. We’re also working
on additional areas, like applying the technology
to logistics and deliveries and working with cities to help strengthen
public transportation and, for personal
use vehicles. And, you know, as we’ve talked
about on a bunch of calls, the opportunity is here for us
because we started with safety and we remain
a leader in safety, and we do believe that’s
the foundation for success, and it builds on all the
test miles that we’ve done. So, you know,
we keep coming back to when you create vehicles
that drive themselves safely, we think there’s
a lot of potential uses and business
opportunities, and that’s what
we’re focused on. Anmuth: Thank you, Ruth. woman: Thank you.
And our next question comes from Heather Bellini
of Goldman Sachs. Your line is now open. Bellini: Great, thank you. I wanted to ask two
quick questions. One just–one on GDPR
and then one on Cloud. On GDPR, I was just wondering
if you could share with us kind of any impact
you’re thinking about as the implementation
occurs later in May, so any thoughts you could
share there would be great. And then on Cloud, Sundar, you had mentioned you’re
seeing a lot of momentum. You said G Suite I believe
accelerated in Q1. I was wondering if there was
any color on the GCP side that you could share
from a growth perspective, if that business
accelerated or not and, you know,
kind of how are the deal sizes trending for that business
in particular? Thank you. Pichai: Great.
Maybe I’ll do the GDPR first. You know, GDPR, you know, I realize is a fairly
new public topic, but for us it’s not new. You know, we started
working on GDPR compliance over 18 months ago and have been very,
very engaged on it. It’s really important, and we
care about getting it right, and overall we’ve long
had a very robust and strong privacy
program at Google too. So we are committed
to meeting requirements on May 25th and also long-term. We are working very closely
with advertisers, publishers,
and our partners, and, you know, we’ll also
update all the privacy policies and controls we provide
to users worldwide. So it’s a big effort.
We are very committed to it. You know, we are very focused
on getting it right by our users and partners, and that’s where
our focus is now. On–Heather, on Cloud I guess your question
was about overall growth, and, you know, we are
continuing–the momentum has been very strong
on Cloud as well. You know, we hadn’t talked
about G Suite much and so we highlighted
the momentum there, but Cloud is continuing
its great growth. We are seeing it
across the board. Things work that we’d call out as we are seeing
larger deals as well. We are seeing good synergies
between G Suite and Cloud. The areas where we have
done acquisitions like Apigee, they are beginning to work in terms of driving
synergies to Cloud, and, you know, the efforts
we are beginning to put together
with our partners, you know, that is beginning
to bear fruit as well. So we have, you know,
go-to-market programs now with SAP, Cisco
and Salesforce, and I think we are beginning
to see early results from that and, you know, hopefully
that translates into more momentum
going forward. Bellini: Thank you. woman: Thank you.
And our next question comes from
Eric Sheridan of UBS. Your line is now open. Sheridan: Thank you very much
for taking the question. Maybe two for Sundar if I can. One, on mobile search,
continue to call that out as a point
of strength in the results. What are you most excited
about in terms of either product innovation, whether you’re building
to get consumers to adopt mobile search
more broadly on devices globally which could lead
to more ad budgets moving into mobile search? And then on hardware, you’ve now been
through two years of sort of Pixel devices. You’ve made the
acqui-hire of HTC engineers. Can you give us a sense
of what you’ve learned so far from
your hardware efforts and how that might involve
product innovation or go-to-market
strategies long-term? Thanks so much. Pichai: Good. You know,
on mobile search, you know, for me, you know, mobile obviously
raises the bar, and if you look at
the evolution of Search, you know, we came
from–we evolved to stay ahead of
user expectations, and we evolved from just
providing links to answers. I just feel at a high level the next big evolution
we are doing, as part of mobile
search and Assistant, is to actually help
users complete actions, to help get things done, and, you know, that’s really
hard to do at scale, and that’s the work
we are doing, and as we do that, you know, it’ll impact not
just the Assistant but mobile search more broadly, and obviously there is
a commercial impact as well. So we continue
to be very excited about the opportunities there. On hardware, you know,
the exciting part for us is, you know, now, you know, I think, you know,
we have all the end-to-end capabilities
of a world-class, you know, hardware
organization, along with the quality
of the software organizations we’ve always had, and in this area it truly
takes long-term planning. And so, for example,
if you think about Silicon, et cetera, the longer you can do it
the more advantages you have, and so, you know,
I definitely feel we are taking the steps to us being able to do this well
for the long term. Part of that obviously
involves scaling up our go-to-market strategies, both in the U.S.
and internationally, so that we can
drive that option. You know, I said earlier
our Net Promoter scores show that we are right up there
with the best-in-class devices, and across all
the products we have. Not just our Pixel. Across our Nest family
and everything we do. So the opportunity
is clearly there. We’re gonna lean into it, and, you know, it takes two
to three years to really get to the scale
where we want to see it, but we are committed
to getting there. Sheridan: Thanks so much. woman: Thank you.
And our next question comes from Mark Mahaney of RBC Capital Markets. Your line is now open. Mahaney: Great, thanks.
I want to follow up on Heather’s question on GDPR, and the question I want to ask
is I understand that you’ve, you know,
been working for a long time to make sure that
you’re compliant, but do you think that
GDPR or other regulation that you see on the horizon is
likely to impact materially, the targeting capabilities that
advertisers have on Google? Is there something
in the regulation that’s gonna make Google and its properties less
attractive to advertisers? That’s the action question
I want to ask. Thank you. Pichai: Yeah. Thanks, Mark. You know, above
everything else, you know, we are working through GDPR. We are making sure
we are focused on getting the user experience right for our users
and our partners, but to clarify your question
further, you know, first of all it’s
important to understand that most of our ad
business is Search. We rely on very
limited information, essentially what is
in the keywords, to show a relevant
ad or product. And so, you know, we’ve been
preparing this for 18 months, and I think–I think,
you know, we’re focused on getting
the compliance right. It’ll be a year-long effort and, you know,
we are helping not just us but our publishers
and partners, but overall we think
we’ll be able to do all that, you know, with
a positive impact for users and publishers
and advertisers and so our business. Mahaney: Okay.
Thank you, Sundar. woman: Thank you.
And our next question comes from Brian Nowak
of Morgan Stanley. Your line is now open. Nowak: Thanks for
taking my questions. I have two. The first one
on desktop search. It’s always nice to hear
that your oldest business is still growing. Just curious,
could you give one or two tangible
examples or products that are still driving
the desktop search growth? And Sundar, I understand
you’re always focused on user experience. At a high level, what do you
see as the biggest area with potential further
improvement in desktop search? And let me ask you the same
question about YouTube. What are sort of
the biggest areas of tension that you’re focused
on improving from a user perspective
on YouTube right now? Pichai: So, you know,
on desktop search–sorry, is your question on the user
experience on desktop search? How do we see improvements? You know, look, I mean,
the same–first of all, users are having
cross-device experiences, cross-screen
experiences, right? So I think your desktop search
experience, mobile search, everything goes hand-in-hand
and, you know, every–you know, all the work we are doing
to make mobile search better translates
to desktop search as well. Areas where desktop
search historically has been a bit behind is in terms of things
like identity and payments and having all that work well
to enhance the user experience, and with Chrome
now we are investing a lot in those areas as well, and I think that
will contribute to overall improvements there. On YouTube, you know,
there are many, many areas we are
focused on YouTube. We’re always very focused
on making sure there are supporting
emerging formats, be it mobile live-streaming
or emerging formats like VR, and so that’s an area
focus for us. We’re also really looking at
what are all monetization options for creators
beyond advertising. So be it subscriptions,
features like Super Chat which we’ve launched
are very popular. We have beta testing
sponsorships, merchandise, merchandising and concert ticketing,
et cetera, right? So these are all areas
by which we are improving, and obviously there
are additional areas, like Music and YouTube TV, which are seeing
great momentum as well. Nowak: Great, thanks.
woman: Thank you. And our next question comes
from Ross Sandler of Barclays. Your line is now open. Sandler: Great.
Just two questions please. Americas revenue
accelerated nicely on a currency-neutral basis. This is a geography that rarely
comes up on these calls, so any color about what’s
driving that acceleration and the sustainability
of what’s going on in the Americas region? And then Ruth,
a question on Sites TAC. So I know you said
the pace of deleverage is gonna start to
improve next quarter. Is this something
that we should expect to happen for a year and then kind of normalize back to a pretty steady
pace of deleverage or is this–are we over
some critical threshold and we should, you know,
see this trend of moderating deleverage continue for several
years into the future? Thanks. Porat: So on your
first question, Other Americas–you know, I would say,
like the other regions, really pleased
with the strength we have across the regions. It is obviously one
of the smaller ones, so growing at
a slightly faster clip, and really pleased with
the broad strength there. It starts with the sites
revenue strength, but on top of that they
benefited from hardware devices launching in some additional
markets over the past year. And then in terms of TAC,
you know, I would say there’s not much to
add to what we’ve already said after some kind of
sustained period of stronger increases. We were pleased last quarter
to be able to signal that this quarter that pace
of change is slowing and, you know, I’ll just
leave it at that for now. woman: Thank you.
And our next question comes from Anthony
DiClemente of Evercore. Your line is now open. DiClemente: Okay. Thank you
for taking my questions. I have two, one for Ruth
and one for Sundar. Ruth, on capex, even if we
excluded the Chelsea Market one-timer, the growth in capex
is really substantial, even on a kind of
recurring basis. Should we expect that
sort of dramatic growth or step up in the growth rate
in ongoing capex to continue
throughout the year? Or, you know, other than
the Chelsea Market one-timer, were there any reasons
to think that it was timing in terms of the
timing front-end weighted into the first
quarter for capex? And then secondly, on Sundar,
just a question on YouTube and your media strategy
at a higher level. In view of the success of other competitive subscription
TV products out there,
Internet video products, can you just talk
about YouTube Red and any thoughts on ways
you can accelerate growth for your YouTube
subscription video products, whether that may be
organic investment in content,
original production, or even via acquisition. Thank you. Porat: So in terms of capex,
you know, it’s about equally split
between facilities and our technical
infrastructure, and, you know, we had the $2.4
billion purchase in New York as well as this continued
ground-up development projects. Facilities does tend
to be lumpier over time. We are continuing with the
ground-up development projects, and, you know, as a reminder,
we do favor owning rather than leasing real estate when we see good opportunities, and that has served us
well over the years. But I think more
to your question, with respect to
technical infrastructure, that reflects investments
in compute power to support growth
that we see across Google, and the largest component
is on machines. It’s also on data centers
and undersea cables, and on machines
the biggest contributor is the demand
that we’re seeing. So in particular it’s
the expanding application of machine learning efforts
across Alphabet, plus the requirements for
Cloud and Search and YouTube, and secondarily the increased
cost of newer technologies. You know, CPUs,
memory, network. So I think, you know, really to answer
your question most directly, it reflects the demand
that we’re seeing, so I wouldn’t want
to suggest, you know, a one-off in terms
of the investments we’re making in
technical infrastructure. And then in terms
of the data centers, we are investing globally. We currently have over
20 sites on four continents, and that’s under differing
stages of construction as Sundar noted, and, you know,
it’s across the U.S. Tennessee, Alabama,
South Carolina, Iowa. So we’re really building out
to support the growth that we’re seeing. woman: Thank you– Pichai: Sorry, on the second
question on YouTube. You know, for sure, you know, that option and feedback
across both YouTube Red and YouTube Music
has been great to see. We are doing a lot
more work there. You will see us continue
to invest further and develop those
offerings better, and as part of that, you know,
further drive that option. So for example, YouTube Originals end up
playing a big part of YouTube Red subscriptions, and so far we’ve launched
in a handful of markets, and we’ll continue to roll it
out to more markets there. And on YouTube Music, you know, we are working on
enhancing the product, and I think there’s definitely
great opportunities there as well. DiClemente: Okay.
Thank you very much. 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 have two for you. First, during the quarter there were some reports
of changes in leadership at your Search
and AI divisions functionally, sounds like
separating leadership over those two very large, important businesses
for the company. Could you talk a little
bit more about that and how that may impact broader
strategy for the company? And then second, a little
bit more tactical one on your advertising
business you launched, Shopping Actions,
during the quarter with a pay-per-sale model,
pricing model, and I was just curious to hear what type of feedback you were
getting from advertisers that led to a product with that
pricing model in particular or any other features
of Shopping Actions that you think are
important to highlight. Pichai: Thanks, Dan.
On the–you know, we obviously–you know, Search has been leading
the company in terms of how they have been adopting
machine learning and AI, and it’s really working well
through Search and Assistant. We sense that, you know, obviously as an
AI-first company, AI cuts across everything
we do in Google, so as an organization it’s
a horizontal organization which needs to serve
all our areas, and in some ways
the change reflects that, and, you know, we have
very capable leaders. Jeff, who runs–you know,
was the founder of Google Brain and, you know, really
well-positioned to lead our AI efforts, and Ben has been at Google
since the early days of Search. Started at Google in 2000 and has been driving Search
for over 18 years. And so we are very excited, and we think the changes
will serve the company well. On your second thing, the question was on
Shopping Actions? Salmon: And in particular the
price-per-sale pricing model. Pichai: Oh. You know,
so I think we, you know, announced this
new service in March, and the feedback
has been very positive, I mentioned earlier,
which is, you know, for retailers when
they are testing this, they see it drives
an increase in basket size, so that means users
are interacting with the product well and, you know, that’s all
I have to share for now. It’s still early days. 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: Great, thanks.
A couple from me please. First on the Cloud business. I was wondering if you
could provide any color, at least on
the relative momentum you’re seeing in that segment
from infrastructure services compared to platform
or software services? And then related
to the adoption of AMP. A key question we get asked is whether that
ultimately changes usage, and maybe you have
some perspective on this from Android, but in the ecosystem
between mobile web pages and in-app usage, are you seeing any shift among
users between those formats? Thank you. Pichai: Yeah. On the first
question of Cloud, you know, look,
I mean, I–you know, I think the main thing I would
say is the fundamental drivers of our option of Google Cloud, you know, based on what we hear
back from customers is, you know, our advantage in data
analytics and machine learning. The fact that we really
support an open, agile developer
environment. Kubernetes has literally become the standard for workloads, and the fact that
we are open in terms of how we approach this space. Security is becoming
a big differentiator for us and something we’ve been
leading for a while, and I think that’s driving it. G Suite, as I called
out earlier, you know, is a good
synergistic driver. You know, G Suite
is doing well, and clearly a very
unique offering, and it’s gotten
very comprehensive. And so I think overall
it comes together well. On your second question around
AMP, you know, AMP has been, you know, definitely
very successful. It’s really made
publisher content much more friendly for users in terms of latency
and the user experience, and hence, you know, that
option has been great for sure. AMP has definitely
helped the mobile web, and that’s part of
the big reasons we did it. You know, mobile web
is still a big part of how users
consume content, especially around news,
and so, you know, us investing there
clearly makes a difference. I guess if, you know,
for example, you know, when we look
at–I don’t know. J.Crew adopted AMP. Their mobile page loading times
are now over 90% faster, and now they are integrating
the Google Payment Request API that reduces checkout times
from two minutes to 30 seconds or so. So things like that, you know, we’re gonna constantly stay
on improving the mobile web, and that plays a big part
in how our ecosystem works. Sebastian: Thank you. woman: Thank you.
And our next question comes from Michael Nathanson
of MoffettNathanson. Your line is now open. Nathanson: Thank you. I have two, one for Sundar
and one for Ruth. First for Sundar,
could you give us any sense of how Google
Home consumers are using Search
on these devices differently than maybe
the traditional ways of Search? And your findings
in those homes, is it additive
to rural search activity? And then for Ruth,
when you look at the last page
of the press release where you’ve shown the new
monetization metrics you see a real increase in the cost-per-impression
on network sites. So can you talk about
maybe what’s happening there? Is there a mix-shift? Types of publishers,
types of products, or is that just
market inflation? Thanks. Pichai: For sure–in
a Google Home gives rise to a lot of new
and unique use cases. You know, Actions had
a big part of it. You know, “Call Mom”
is a good example of something you say
to Google Home a lot, you know,
which is different than what you would
say to Search. We see this as a good
complementary thing. You know, you will see
Search embrace some of the capabilities
you find in Google Assistant
and Home and vice versa, and so overall I view this as additive
in the long term, and we are definitely
just getting started there. Porat: And then on the
network monetization trends, first, just to give
people a bit more color, when we launched the AdSense
businesses our network revenues
were largely click-based, and over time there’s
been a meaningful mix change
in our business given the strong growth
in programmatic, which is impression-based. So as a result this shift now
covers more of the business, and then in terms of the
question on impression growth versus CPM growth, you know, as we’ve
discussed on prior calls, the network business
is actually a number of different
businesses, and then within that we had
flat year-on-year growth in the number of impressions
that was driven by efforts
to improve user experience through a reduction
of less relevant ads and AFC, and so these changes
had a positive impact on the year-on-year
growth in CPMs, and then the trend
in impressions and CPMs can clearly
be volatile from quarter to quarter as we’re optimizing
for the user, publisher, and advertiser, but it really goes to
the efforts that we make. Nathanson: All right.
Thanks, Ruth. Thanks, Sundar. woman: Thank you. And our next question comes
from Brent Thill of Jefferies. Your line is now open. Thill: Good afternoon. Just as a question regarding
any changes on your framework for growth versus
operating margins. The last few quarters
you’ve seen steady top line acceleration,
yet the margins were down. Can you just talk about how you
think about it at a high level? Any changes from the past? Porat: Yeah, that’s
an important question. As we’ve talked about
on many, many calls, we have been and remain focused on supporting long-term revenue
and profit growth, and we think the opportunity
set ahead of us is quite extraordinary, and as I said
in opening comments, just given our confidence
and as we’re looking forward, we want to make sure we’re
investing appropriately in the next phase
of innovation, and we have clarity about some
very compelling opportunities, and in our judgment
that enables us to maximize shareholder value. So we’re taking the steps
really to put in place the support for
longer term growth. Part of what I’m saying
you can see in our sites revenue growth. Tried to make that clear
in opening comments. We see this consistent,
strong momentum globally, and we’re really excited about
the still sizeable opportunity led by mobile search, and we’re continuing to invest to enhance the user
and advertiser experience and thereby extend the growth
in our ads business. You can see this also
in the trend on capex spend, as I noted, you know,
in our opening comments. The investments we’re making
there really provide the compute capacity
to support our growth outlook, and that’s supporting,
you know, the opportunities that
come out of machine learning and the Assistant, and then we also see
extraordinary upside in the newer markets
as Sundar’s talked about, most notably Cloud
computing and hardware, and so we’re
investing to support the long-term growth
opportunity there. And then finally when we look
at the market opportunity in both self-driving cars
and life sciences, our judgment is it makes sense to place the kinds
of investments that we are, and with all of this,
what also hasn’t changed is we appreciate the
importance of prioritization and picking our spots, and we’re keenly
focused on steps we can take to both make
the right investments with the proper intensity
while being diligent about long-term plans
and returns. So at a high level,
the approach hasn’t changed. You’re seeing
the investments here. 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, you know, Sundar, I think one of the themes that you as a management team
has talked about has been to I guess democratize
advertising with AI to help SMBs who may have found
advertising across Google’s ad products
to be perhaps overwhelming. So, you know, can you talk
about the rate of uptake among the smaller advertisers
and whether or not this is helping to catalyze
growth in new budgets and where these guys
might otherwise have not been able
to advertise before. There’s SMBs and then
there’s local also, so what will be the plan
to get this technology into the hands of folks
who will want to use them? Thank you. Pichai: Look, I mean,
this is a big focus for us and, you know, today, SMBs are–you know, play a big,
big role in our ecosystem and, you know,
we are doing a lot of stuff to support them
across the board, right? And from, you know–from
things like, you know, our offerings to help SMBs get an online presence,
create a website, be discovered in local
search and Google Maps. So we–you know, we do a lot
of detailed work to make sure SMBs are working well. We’re also doing a lot of stuff
on local as well, including efforts
even around local services. So we have very specific
initiatives. This is gonna be–I mean,
it’s actually–to us it’s the bread and butter
of what we do here, and so there’s a lot
of effort underway, not to mention the fact
that we provide G Suite for businesses
as they scale up as well. So it’s an end-to-end offering, and you’ll continue to see us
invest more 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 second quarter call. woman: Ladies and gentlemen,
thank you for participating
in today’s conference. This does conclude the program,
and you may all disconnect.

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