November 10, 2019 0

Alphabet Q1 2016 Earnings Call

Alphabet Q1 2016 Earnings Call


OPERATOR: Good day, ladies and gentlemen,
and welcome to the Alphabet Inc. First Quarter 2016 Earnings Conference 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 0 on your touch-tone telephone. I will now turn the conference
over to Miss Ellen West, head of investor relations. Please go ahead. ELLEN WEST: Thank you. Good afternoon, everyone,
and welcome to Alphabet’s First Quarter 2016 Earnings Conference Call. With us today are
Ruth Porat and Sundar Pichai. 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 2015 filed with the SEC. Any forward-looking statements that we make
are based on assumptions as of today, and we undertake no obligation to update them.
During this call, we will present both GAAP and non-GAAP financial measures. A reconciliation
of GAAP to non-GAAP measures is included in today’s earnings press release. As you know,
we distribute our earnings release through our Investor Relations website, located at
abc.xyz/investor. This call is also being webcast from our IR website, where a replay
of the call will be available later today. And now I’ll turn the call over to Ruth. RUTH PORAT: Thanks. Our very strong revenue
of $20.3 billion in Q1 underscored the great momentum of our businesses globally with consolidated
revenue growth again accelerating meaningfully, up 23% in constant currency versus last year.
The primary driver was the increased use of mobile search by consumers benefiting from
our ongoing efforts to enhance the mobile search experience. We also benefited from
solid growth in desktop and tablet search, as well as continued strength in YouTube and
programmatic advertising. We continue to rationalize our portfolio of
products to ensure we efficiently and effectively focus our resources behind our biggest bets
across Alphabet. I will present to you in the following order. First, review the quarter
on a consolidated basis for Alphabet. Second, review the results for each of Google and
Other Bets. Finally, I will conclude with our outlook. Sundar will then review our business
and product highlights for the quarter, after which we will take your questions. Beginning with the summary of Alphabet’s consolidated
financial performance, total revenue was $20.3 billion, up 17% year over year and down 5%
sequentially. As a result of the ongoing strength of the US dollar, we realized a negative currency
impact on our revenues year over year of $762 million or $593 million after the benefit
of our hedging program. Holding currency constant to prior periods, our total revenue grew 23%
year over year and declined 4% sequentially, reflecting holiday seasonality. Once again, Alphabet revenues by geography
highlight both the strength of our business around the globe, as well as the impact that
currency headwinds continue to have on our non-US business. US revenue was up 21% year
over year to $9.4 billion and down 9% versus Q4. UK revenue was up 15% year over year to
$1.9 billion and flat sequentially. In fixed FX terms, the UK grew 21% year over year and
5% quarter over quarter. Rest of world revenue was up 14% versus last year to $9 billion
and down 2% versus Q4. In fixed FX terms, revenues were up 25% year over year and up
1% sequentially. GAAP other cost of revenues were $3.9 billion.
Non-GAAP other cost of revenues was $3.6 billion, up 27% year over year, primarily driven by
Google-related expenses, most notably due to costs associated with operating our data
centers, including depreciation, content acquisition costs– primarily for YouTube– and hardware
costs related to sales of new Nexus, Chromecast, and Pixel devices launched in the fall. GAAP operating expenses were $7.3 billion
in the quarter. Non-GAAP operating expenses were $6 billion, or 30% of revenue, up 11%
year over year and down 9% versus Q4. The year over year growth was primarily driven
by R&D expense, mainly due to compensation expense related to headcount growth. On a
GAAP basis, operating income was $5.3 billion, up 20% versus last year. The operating margin
was 26%. Non-GAAP operating income was $6.8 billion, up 21% versus last year. The operating
margin was 34%. With respect to stock-based compensation,
it totaled $1.5 billion, up 24% year over year, and up 4% sequentially, primarily reflecting
increased headcount and the impact of our senior executive equity refresh that occurs
every two years. Headcount at the end of the quarter was 64,115, up approximately 2,300
from last quarter. The vast majority of new hires continue to be engineers and product
managers in areas where we’ve prioritized investment, such as Cloud and Apps. On a numbers
basis, we’re adding more headcount in Google, while on a percentage basis, we’re growing
faster in Other Bets. Other income and expense was negative $213
million. As discussed on prior calls, OI&E consists of a number of line items with different
drivers, which makes it inherently unpredictable. The key drivers this quarter were the ongoing
drag from foreign exchange given the volatility in currency markets, as well as losses recorded
for marketable and non-marketable securities. These items offset interest income from our
investment portfolio, which remains fairly consistent. Our effective tax rate was 18%, reflecting
the geographic mix of our income and adoption of a new accounting standard that reflects
certain SBC tax benefits in GAAP earnings that were previously recognized in equity.
We have excluded these benefits in our non-GAAP earnings. Net income was $4.2 billion on a
GAAP basis and $5.2 billion on a non-GAAP basis. Earnings per diluted share were $6.02
on a GAAP basis and $7.50 on a non-GAAP basis. Turning now to CapEx and operating cash flow.
CapEx for the quarter was $2.4 billion, the substantial majority of which supported the
Google segment. Operating cash flow was $7.7 billion with free cash flow of $5.2 billion.
We ended the quarter with cash and marketable securities of $75.3 billion, of which approximately
$45 billion, or 60%, is held overseas. This reflects our strong operating cash flow, offset
by the impact of our share repurchases during the quarter of approximately $2.1 billion. Let me now turn to our segment financial results,
starting with the Google segment. Revenue was $20.1 billion, up 17% year over year,
which includes the impact of FX. In terms of the revenue detail, Google Sites revenue
was $14.3 billion in the quarter, up 20% year over year and down 4% sequentially. Year on
year growth reflects substantial strength in mobile search due to the ongoing benefit
from the improvement in ad formats and delivery that we launched in the third quarter of last
year. We continue to have solid growth from desktop
and tablet search. YouTube revenue continues to grow at a very significant rate, driven
primarily by video advertising across TrueView and Google Preferred with a growing contribution
from app promotion. Network revenue was $3.7 billion, up 3% year on year and down 11% sequentially,
continuing to reflect the strong growth of programmatic offset by the traditional network
businesses. Other revenue for Google was $2.1 billion, up 24% year over year and down 1%
sequentially. Year over year performance was driven by Play, as well as continued strong
growth in Cloud and Apps and a nice contribution from hardware. Finally, we continue to provide monetization
metrics to give you a sense of the price and volume dynamics of our advertising businesses.
You can find the details in our earnings press release. As a reminder, these metrics similarly
are affected by currency movements. Total traffic acquisition costs were $3.8 billion,
or 21% of total advertising revenue, up 13% year over year and down 7% sequentially. The increase in both Sites TAC and Network
TAC as a percentage of revenue reflects the fact that our strongest growth areas, namely
mobile and programmatic, carry higher TAC. Operating income excluding SBC was $7.6 billion,
up 22% versus last year, for an operating margin of 38%. Google stock-based compensation
totaled $1.3 billion for the quarter, up 25% year over year. Operating income reflecting the impact of
SBC was $6.3 billion, up 21% versus last year, and the operating margin was 31%. CapEx for
the quarter was $2 billion, reflecting investments in production equipment, facilities, and data
center construction. Turning to Other Bets financials– as a reminder,
the majority of these efforts are pre-revenue. We continue to invest across these opportunities,
doing so in a disciplined way. Because Other Bets’ results aggregate the revenues and expenses
from a number of businesses operating in different industries, there is likely to be lumpiness
in the reported results from quarter to quarter, which is why we think it remains most instructive
to look at them over a longer time horizon. For Q1, Other Bets revenue was $166 million,
up 108% versus last year. Reported revenue for Other Bets was primarily generated by
Nest, Verily, and Fiber. Operating loss excluding SBC was $657 million in the first quarter.
Including the impact of SBC, operating loss was $802 million. Other Bets CapEx was $280
million in Q1, primarily reflecting ongoing investment in our Fiber business. Looking forward, a few observations. First,
regarding revenue, our culture of innovation drives our strong revenue growth. We’ve talked
previously about the benefits from changes made to ad formats and delivery in the third
quarter of 2015, and that continues to be a tailwind. Mobile, as an example, continues
to offer sizable opportunity for revenue enhancement, given the increasing ubiquity of mobile use
by consumers and the strong location and contextual signals from mobile devices. Although we remain intensely focused on innovation
across Alphabet, the timing and magnitude of ongoing changes obviously are inherently
uncertain and are not designed with an eye toward quarterly schedules. Second, as to
expenses– within Google, we continue to be focused on managing the expenses that we can
actually control, as you can see from our results again this quarter. However, the secular
trends driving revenue are accompanied by greater required investment in our ecosystem
to support that revenue growth. Most specifically, the continued trend of higher TAC due to an
ongoing change in mix within our Sites and Network businesses. Third, regarding CapEx– as we have consistently
said, technical infrastructure is a key strategic asset for us. We have tremendous scale and
continue to add to it. The team continues to deliver innovative solutions that are creating
meaningful efficiencies in machine use, allowing us to benefit from earlier investments and
meet our growing Google requirements cost-effectively. With regard to CapEx investments for Other
Bets, the bulk of that is directed to our Fiber business, where CapEx should obviously
increase as we execute in a growing number of cities. Fourth, about our balance sheet–
as I discussed on our Q4 call, last quarter, we initiated steps to align our capital structure
consistent with the move to Alphabet, providing greater flexibility as we continue to grow.
Our exchange offer will be completed on April 25, and we have completed the move of our
commercial paper and revolving credit facility from Google to Alphabet. Finally, our strategic prioritization– as
I indicated last quarter, there are a number of different execution paths we are pursuing
to optimize our investments and opportunities. In some areas, we will be increasing investment
if teams meet milestones we set as part of our 2016 budgeting process. In other areas,
we’ve chosen to work with industry leading partners, who can increase our momentum. Finally,
in certain areas, where we have had multiple teams developing different approaches to a
similar technology, we’ve been evaluating how to rationalize these approaches, enabling
us to increase investments around a smaller, more focused set of opportunities. So my closing comment is that in Q1, we continue
to see tremendous revenue growth across our businesses, and we remain focused on disciplined
investing for the long term. I will now turn the call over to Sundar. SUNDAR PICHAI: Thanks, Ruth. It’s great to
join you all today. Our teams are off to a great start this year. And there is even more
excitement in the month ahead, as we gear up for big events like our Annual Developer
Conference, Google I/O, our YouTube Event Brandcast, and the Google Performance Summit
for Advertisers. Google’s mission is to organize the world’s
information and make it universally accessible and useful. And after 17 years, we have just
scratched the surface of what’s possible. We are reinvigorated around this mission,
and as you will hear, we are making solid progress across many of our products. Today,
I’ll quickly share a few highlights from the quarter, as well as some of the areas where
we are investing to make our products more useful and intelligent. Then I’ll give an
update on our advertising business and our growing Cloud business. A few highlights from the quarter– we continue
to invest in making search more useful and assistive. In the early days, when you did
a search on your desktop, we gave you 10 blue links and then sent you on your way. Users
still had to do too much work to find the information they were looking for. We’ve made
a lot of improvements over the years to add more comprehensive and assistive information
right within the search results. For instance, 10 years ago, if you tried to
find the score during your favorite soccer team’s match, we’d likely point you to some
news articles or the team’s website. Today, we show the live scores for nearly 200 soccer
leagues across 70 countries, so fans around the world can quickly find information like
upcoming schedules, team news, and conference standings right in the search results. We are incredibly well-positioned to better
assist our users thanks to our strengths in areas like search, geographical information,
machine learning, image recognition, and natural language processing. One of the key ingredients
behind this push towards greater assistance is AI. We have long invested in building the
best machine learning team and tools, and we are seeing these efforts bear fruit in
many ways. As many of you saw last month, DeepMind’s AlphaGo has been making great strides.
It was a privilege to play legendary Go player Lee Sedol in such an important milestone for
artificial intelligence. This is another step towards creating AI that
could help us with everything from our daily tasks to potentially even bigger challenges
like climate change and cancer diagnosis. At Google, machine learning is already helping
us improve our products every day in Search and many other areas like Photos, Maps, and
more. Last quarter, I talked about how machine learning
helps Smart Reply suggest responses in Inbox. This quarter, we launched Goals in Google Calendar,
an intelligent feature that helps users make the most of their time. You just add a personal
goal like run three times a week, and Calendar will help you find the time, then help you
stick to it. There’s still a lot more that we can do to make Search and other Google
services more assistive and helpful to you. You’ll see a lot more from us this year. On the content side, we are seeing great traction
on Google Play and YouTube. YouTube still has incredible momentum, and we continue to
invest heavily here. What seemed like a moonshot a decade ago has grown into a booming community
of engaged users, creators, and brands, unlike any other video platform. YouTube on mobile
alone now reaches more 18- to 34- and 18- to 49-year-olds in the US than any TV network,
broadcast or cable. This past quarter, we launched YouTube Originals, original content
available on our premium service, YouTube Red, and we are very pleased with how it’s
been going. And earlier this week, we announced that we
are making 360-degree live streaming available globally on YouTube. We are kicking things
off by live streaming select performances at Coachella for fans around the world in
360 degrees. Google Play remains a thriving hub for digital content across apps, games,
music, movies, TV, and books. Game developers of all sizes are building successful businesses
in the Play Store, thanks to its global reach of over a billion users. In fact, in 2015, we saw 50% more games reach
over 1 million installs compared to the previous year, and we keep adding great content to
Google Play. For instance, performances by artists like Coldplay and Justin Bieber from
the 2016 Brit Awards were available exclusively on Google Play Music. When we talk about great
content, the mobile web is equally important. This quarter, our simple, fast, and secure
browser, Chrome, reached another important milestone, surpassing 1 billion monthly active
users on mobile alone. And of course, one of the keys to a great mobile web experience
is fast content. As you know, we have teamed up with hundreds of publishers and tech companies
to improve the mobile web for everyone with accelerated mobile pages. Early data shows that these pages load 4 times
faster and use 10 times less data than traditional pages. We recently made it easy to find AMP
in relevant mobile search and Google News results, giving users a lightning fast reading experience
for top stories. And there are great advertising opportunities for publishers in these new
fast pages. Another example is Progressive Web Apps, which
combine the best of the web and apps, allowing companies to build mobile sites that load
quickly, send push notifications, have home screen icons, and much more. Of course, computing
is the foundational layer through which all our products are delivered. In March, we previewed
the Android N release to give developers an early look at what’s coming in the next version
of our software. This release has key features like multi-window support, direct reply notifications,
and battery efficiencies. We are also building for future platforms.
We expanded Android Auto to Brazil. And Android Wear partners like Michael Kors and Fossil
also announced that they are working on new devices coming later this year. In our newest
platform, VR, we also recently introduced VR View, a quick and easy way for developers
to include 360-degree VR images and videos in their apps and websites. Now moving on to some of the key drivers and
trends in our advertising business– as people turn to their mobile phones in moments of
high intent, which we call micromoments, Google has a compelling value proposition. We offer
marketers four things– the best ways to target commercial intent at the right moment, the
best mobile ad formats, the best reach and range of quality inventory, and the leading
measurement solutions. First, thanks to our unique intent signals,
we are able to connect marketers with the right customer at precisely the right time.
A new example of this is Customer Match, which helps brands reach their most valued customers
on Google Search, YouTube, and Gmail with highly relevant and targeted ads. After using
Customer Match to reactivate their loyal customers, specialty retailer Williams-Sonoma reported
a 50% lift in revenue compared to previous campaigns that didn’t use Customer Match. Second, we continue to invest in the best
new mobile ad formats tailored to help users find exactly what they need at the right moment.
For example, we rolled out Model automotive ads, which helps automakers recreate the showroom
experience by featuring images of cars alongside helpful information right in the mobile search
results. On average, participating brands see a more than 30% increase in engagement
rate with these new automotive ads compared to standard text ads. Third, we provide advertisers with the best
reach in inventory across many of the web’s most coveted platforms. Marketers like HBO
Now are seeing great results from our popular app promotion offerings like universal app
campaigns, which helps advertisers easily run campaigns in Google Play, YouTube, Search,
and across our Display Network. In fact, in January, we saw a 200% year over year increase
in ad-driven installs on Android alone. And in our burgeoning programmatic business, we
recently rolled out Programmatic Guaranteed, a new way to conduct direct deals between
advertisers and publishers on high-quality inventory. And fourth, we give marketers powerful measurement
tools, so they know exactly how effective their ads are. Just this week, we announced
the availability of sales lift studies to help consumer packaged brands better understand
how their online videos are driving offline sales. This adds to our significant efforts
in this area. I want to specifically highlight the success
we are seeing with YouTube advertising. As YouTube continues to grow with great content
and engage users, marketers can’t get enough. For example, Microsoft Xbox hosted a six-hour
live stream event on YouTube for their Halo 5 opening week, promoted with TrueView ads,
where 8 million people tuned in, helping it break sales records. Excitement is especially high as we head into
our annual Brandcast event coming up next month. Thanks to the success of Google Preferred,
this is the third year in a row we are making it the cornerstone of our offering to marketers.
In fact, the number of brands in the US using Google Preferred has doubled year over year. Now I want to spend time on our exciting enterprise
businesses, which have been gaining momentum. Last December, we have unified our cloud businesses
under one leader, so we can innovate faster and better serve our customers. This decision
is already paying off. Enterprises are starting to see the power of combining Google Cloud
Platform with our suite of business applications, all of which are infused with our machine
learning services. As companies accelerate their move to the cloud, we can help them
automate their IT operations, better understand their data, and become more cost effective
and secure, while also offering them transformative office productivity. In addition, we are helping customers adopt
our powerful Chromebooks and Android phones. Our recent Next 2016 Conference in San Francisco
showed just how serious we are about the enterprise. It was wonderful to hear executives from Spotify
and Coca-Cola share their stories about how they are benefiting from Google’s Cloud technology,
including our best-in- class security, reliability, and analytics. We also introduced Cloud Machine
Learning, which provides modern machine learning services with pre-trained models, such as
Cloud Vision API and Cloud Speech API. Our growth was accelerating going into that
event, and since then, the quantity and quality of our enterprise conversations has risen
to a whole new level. Now we are investing in building our go-to-market activities to
ensure we have the right expertise available for each of our business customers. We are
enabling service partners to assist customers with everything from migrating to the cloud
to using machine learning to understanding their data. We are providing engineering to
help them architect solutions, and we are building out our support teams. We are also helping businesses migrate to
our suite of productivity applications like Gmail Docs and Drive, and customers love them.
And we continue to accelerate our innovation in this area with new enhancements, such as
Smart Reply and Voice Typing. It’s gratifying to see the immensely positive response from
our customers and partners, who recognize that we offer a powerful combination that
is unique to Google– unmatched product innovation combined with world-class security and reliability,
technical transparency, and customer orientation. To close, as I said before, Google’s mission
is and has always been to organize the world’s information and make it universally accessible
and useful. As I think about all our businesses and each of the countries we reach, I have
never been more excited about how our teams continue to bring this mission to life and
make technology available for everyone. I have been so proud to see us expanding our
core products to more and more countries around the world– Street View in Sri Lanka, YouTube
in Nepal and Pakistan, new Indic keyboards in India, and the new engineering center in
Singapore that will help us get closer to the next billion users coming online by developing
products that will work well for them. We are laser focused on our mission at Google,
and I want to say thank you to all of the Googlers around the world who are helping
us make it a reality each and every day. Before we take your questions, Ruth and I wanted
to take a moment to pay our respects to Bill Campbell, our very close friend and a mentor
to many of us at Google and Alphabet, who sadly passed on Monday. Bill spent endless hours with our founders
and our leadership over the years helping to build our board of directors and sustain
our culture. He had a very big impact on our company, made us all smile, and inspired many
great leaders of the Valley. We offer our condolences to Bill’s family, and we will
miss him. And with that, I’ll hand it back over to Ruth. RUTH PORAT: We’ll now turn it back to the
operator for questions. Thank you. OPERATOR: Thank you. Ladies and gentlemen
on the phone lines, if you would like to ask a question at this time, please press Star
followed by the number 1 key on your touch-tone telephone. If your question has been answered,
or you wish to remove yourself from the queue, you may press the Pound key. Again, to ask
a question at this time, please press Star followed by the number 1 key. And our first
question comes from Eric Sheridan of UBS. Your line is now open. ERIC SHERIDAN: Thanks for taking the questions.
Maybe just two. One on YouTube, if you’ve now played around with the idea of original
content, also injected a subscription offering into the marketplace, what did you learn from
the early days of original content and a subscription offering, and how that might allow YouTube to
evolve and change over time as a product offering? And second, with respect to the advertising
business, I was curious if there were any verticals or geographies that you might call
out as either strengths or weaknesses in the advertising business during Q1. Thank you. SUNDAR PICHAI: Thanks, Eric. On YouTube, we
are definitely excited by the successful rollout of YouTube Red. It’s been very well-received.
We really focused on our creators and partners, so hopefully, you caught some of our YouTube
originals. We have released six so far, which are available to YouTube Red members. So early
indications are that this is something that’s going to resonate well with users. And we
are working on a lot more original content throughout the year, and we’ll see how it
goes. RUTH PORAT: And then in terms of your question
on the regions, as I tried to make clear in my opening comments, what we saw was real
strength across the board. I think you could see that from the growth rates with US up
21% year over year, and that was really strength across products. UK, we’re really pleased
with the team. We continue to see great execution there on a fixed FX basis, as I noted, up
21%. The biggest contributor to growth in the UK
was mobile search, and then rest of world growing at 25% on a fixed basis. That’s about
in line with last quarter. We continue to be really pleased with the growth we’re seeing
there in addition to the ongoing contribution from mobile. The rest of world also benefited
from Play, and then really nothing to note with respect to verticals. ERIC SHERIDAN: Thank you. RUTH PORAT: Thank you. OPERATOR: Thank you. And your next question
comes from Carlos Kirjner of Bernstein. Your line is now open. CARLOS KIRJNER: Hi. I have two quick questions.
First, on margins– despite the increase in TAC, the percentage of revenues, I just did
a [INAUDIBLE] income margin expanded almost 140 bps for Google year on year. Can
you help us understand, even if roughly how much of this margin expansion is specific
to the quarter like due to FX, versus systemic or secular, so to speak. And the second question, I think maybe for
Sundar, can you talk a bit about the decision you took last year to have an additional ad
on mobile search response pages relegating organic results below the fold? How is it
good for the user experience to have ads instead of organic? And if it is good, what does it
say about the potential for innovation in organic search? Thank you. RUTH PORAT: Thanks, Carlos. So starting on
the margin question, you’ve hit a couple of the components, so I’m going to try and just
break it down into the drivers on cost of sales versus OPEX more broadly as you asked
it. So on cost of sales or the gross margin trend, as I tried to make clear, certain costs
associated with revenue are going up given secular trends in the market. So in sites,
mobile carries higher TAC than does desktop, and mobile remains a strong growth driver.
So we do expect this to continue. And then on the network side, we have strong
growth in programmatic, and that carries higher TAC than traditional ad buying. The obvious
result is more revenue and gross margin dollars, but at a lower margin. And then on OPEX more
broadly, we remain very committed to long-term revenue growth and profit, as we’ve talked
about on prior calls. We did set priorities in the 2016 budget.
And we made some tough choices, because our aim is to be as efficient and effective as
possible with investment dollars, while properly funding the big opportunities that we have
that are reflected in OPEX. So as I’ve repeatedly said, some of the biggest bets are in Google. Sundar commented quite a bit on Cloud. That’s
an exciting opportunity. We want to continue to add headcount to drive growth, and all
of this is consistent with our goals of driving long-term growth in revenue and profit. So
it goes to my opening comments that we’re focused on controlling the expenses we have.
And then there are certain trends, as I noted, in particular on the TAC side that have been
increasing with the strong growth we’re seeing in mobile and programmatic. SUNDAR PICHAI: And Carlos, on the ad side,
we are incredibly sensitive to the user experience on Search, and so we are constantly evolving
how we display ads, but we take a very long-term view. Our ads’ quality efforts– these are
people who have been working on this for many, many years, and they’re squarely focused on
optimizing for positive metrics across users and advertisers. So our utmost focus is making sure for
users these changes have a positive impact. And mobile is an entirely different paradigm,
and so a lot of things are counter-intuitive. So for example, users are very comfortable
swiping on mobile. So we deeply think about these things, and I’m very comfortable about
how we are planning this for the very long term. CARLOS KIRJNER: Thank you. OPERATOR: Thank you. And our next question
comes from Ross Sandler of Deutsche Bank. Your line is now open. ROSS SANDLER: Thank you. Ruth, I just had
one question to follow up from a previous one on the regions. So the US had greater
than expected seasonal downtick. It was down 9% quarter on quarter, and I know that you
picked up Yahoo and lost AOL from 4Q to 1Q. So was that the primary driver of that? Or
as YouTube becomes a bigger percent of your revenue, should we expect greater seasonal
uptick in 4Q and seasonal downtick in 1Q? Can you just give us a little bit more color
on what’s driving that? Thanks. RUTH PORAT: Well, we, as you know, don’t comment
on any particular partners, so all I can add here is that the deceleration quarter on quarter
does reflect holiday-related seasonality, which we did call out last quarter. And you
see that in a number of the products. OPERATOR: Thank you. And our next question
comes from Mark Mahaney of RBC Capital Markets. Your line is now open. MARK MAHANEY: Thanks. You talked about TAC
rising because of the increasing mix shift towards mobile and programmatic. It seems
like there was a little bit of an extra bump-up this quarter. Would there have been any one
major renewal of the deal that would have caused that? It did seem to spike more than
what you would get, I assume, if you just rolled out mobile and programmatic. And then any commentary at all on Nest? There
seemed to be an unusual amount of press intra-quarter on troubles with that asset. Could you just
comment on qualitatively how the asset is doing? Thank you. RUTH PORAT: So on TAC, it’s really the ongoing
growth in mobile, as I kind of answered a couple of times here. And that reflects the
strong secular trends behind mobile. So really nothing to add on the site’s TAC side. And
then on the network side, again, it’s really the higher TAC that we’re seeing on programmatic.
So nothing really to call out. And then with respect to your question on
Nest, what I’ll add there is Nest products are our bestsellers in the category. It’s
a leading brand in the connected home. It’s obviously early, but a very exciting category.
And as we’ve talked about, our Other Bets are all very early stage, but continues to
be the bestseller in the category. MARK MAHANEY: OK. Thank you. RUTH PORAT: Thank you. OPERATOR: Thank you. And our next question
comes from Heather Bellini of Goldman Sachs. Your line is now open. HEATHER BELLINI: Great. Thank you. This question
is for Sundar. It’s multi-part, but I was wondering if you could talk a little bit more
about your Cloud ambitions and wondering, what do you see as the biggest changes in
strategy post-Diane Greene’s appointment? And then how are you getting enterprise customers
to think of you as having enterprise DNA, if you will, which is something that took
Amazon a long time to get? And I guess lastly, just if you could just help us think about
which type of workloads do you see Google as being the most competitive for at this
time? Thank you. SUNDAR PICHAI: Thanks, Heather. Obviously,
I talked about it a lot in my prepared remarks, and we already had a lot of momentum in this
area. And in many ways, given the scale at which we have done this internally for us,
we view it as an area we are very competent at. What Diane has brought to us is a deep
understanding of how to think about what enterprises need and adapt to it in a very detailed and
nuanced way. And you saw the momentum at the Next conference, which she hosted. We’re getting a lot more inbound. We are in
much deeper conversations than we have ever been before. We do think we are competent
across a range of workflows and areas where we view we will be uniquely capable over time
is because of our machine learning capabilities, helping enterprises really understand their
data, understand how best they can do what their core competency is, and really the revolutionize
around that. It’s early days, and it’s a long-term investment, but bringing on machine learning
APIs over time through Cloud to our enterprise customers is going to be a huge source of
differentiation for us. HEATHER BELLINI: Thank you. OPERATOR: Thank you. And our next question
comes from Doug Anmuth of JP Morgan. Your line is now open. DOUG ANMUTH: Thanks for taking the question.
Two things– for Sundar, I was hoping you could comment more on mobile search pricing.
In particular, it gets a little bit lost just with overall pricing per click, especially
with YouTube in there. So I was hoping you could comment on pricing on more of a like
for like basis. And as inventory perhaps stabilizes some, would you expect pricing here to increase
over time as conversion improves? And then secondly, Ruth, if you could just comment
a little bit more on other income and just help us understand some of the details there
on the negative number in that line. Thanks. RUTH PORAT: So I’ll take those. In terms of
the first question, there’s obviously some data as a reference attached with the press
release, and as you know well, all of the monetization data reflects a host of factors
from geographic mix and device mix and property mix. As well as it’s all on a floating FX
basis, and clearly, FX is a contributor. I think you’re trying to get more color on mobile,
and what’s hopefully clear from the opening comments is that mobile continues to outperform.
Desktop growth did pick up modestly in Q1, but from opening comments, it should be clear
that mobile search revenue was up significantly. And then in terms of your question on other
income, so you know that’s also– let me point you to the OI&E table at the end of our press
release. This line consists of a number of different items. They can be affected by different
trends, but you can see the breakout in that table, which hopefully is helpful there. Interest income has been fairly consistent.
We do continue to manage our portfolio conservatively. FX is consistently an expense here. It was
slightly elevated again this quarter, given the ongoing volatility in foreign exchange
markets. We haven’t changed our approach to hedging, but up with volatility in the markets. And then the OI&E line also includes changes
in value or equity pickups related to marketable and non-marketable securities and investments.
We appreciate with all those different line items. It’s tough to forecast, but you can
see the detail attached to the press release. DOUG ANMUTH: Thank you. OPERATOR: Thank you. And our next question
comes from Stephen Ju of Credit Suisse. Your line is now open. STEPHEN JU: Thank you. So Sundar, I think
it was an I/O last year when you started to call out the products which have over a
billion users. At this point, are you able to elaborate on what percent of these users
have either a Google ID or are known users for you? And Ruth, kind of a housekeeping,
I guess, item on the CapEx here. When you talk about CapEx with the Other Bets being
primarily for Fiber, is this a fairly sort of straightforward passing of homes? Or is
there a cash use going toward developing new technologies or products like SkyBender?
Thanks. SUNDAR PICHAI: Stephen, on the first question,
maybe I can add more color this way. As the user base is scaling, we’ve also seen tremendous
shift towards mobile. So in many of these products, we are already over 50% of these
users are coming from mobile. And in mobile, typically, all users are signed in. And so
I think over time, as the shift continues, I think we have a user base which is signed
in. And so that’s the way we think about it. RUTH PORAT: And then on the CapEx question,
if I just broaden that a bit, the CapEx trends in part is efficiency, and part is timing
when you look at year over year spend. Compared to last year, we had some outsized machine
spend that filled some recently constructed data centers. And as we’ve consistently said,
our technical infrastructure is a really key strategic asset for us. We have tremendous
scale. We continue to add to it, and the team has done an extraordinary job innovating to
deliver some meaningful efficiencies in machine use. And that enables us to benefit from earlier
investments. And although you asked about the Fiber side,
just to build off of what Sundar was saying on Cloud, given what a strategic priority
that is for us, and the requirements for a leading cloud business are clearly at the
core of all that we do and at a scale that’s unmatched, given our sustained investments
in infrastructure. One of the things that was also mentioned at Next is that we plan
to add 12 new regions, and to be clear, we’re going to be using multiple execution paths
for those data center requirements. In other words, every cloud region isn’t necessarily
going to be housed in a Google data. Center. So we don’t need to build data centers in
all of these places. They will all incorporate the same Google hardware and software and
meet the same performance, reliability, and security requirements. And investing in Cloud
isn’t only about CapEx. We also put a lot of headcount behind that, again, this quarter. And then more specifically, on the Fiber side,
as you were pointing to, we do expect that to increase throughout the year as we execute
on the cities that we’ve already announced. It’s primarily about continuing to execute
on those cities. We now are up to 22 announced cities. Two most recent announcements being
some buildings– we’re bringing Fiber to select buildings in San Francisco, and we’re working
with the city of Huntsville. That being said, I liked your question, because we’re also
very focused on innovation and technology. And so it’s really both, but predominantly
continued execution against the cities that we’ve announced. STEPHEN JU: Thank you. OPERATOR: Thank you. And our next question
comes from Dan Salmon of BMO Capital Markets. Your line is now open. DAN SALMON: Hey, good afternoon, everyone.
Just a few questions on YouTube. And first, on the preferred programming, you mentioned
it sounds like the growth continues to be really strong there going into Brandcast.
And I was just curious, is the program now formally rolled out globally? And then I’ve
got one followup on Red. RUTH PORAT: So in terms of preferred, you’re
right. I did note that the strong revenue growth there is driven virtually exclusively
by video. That’s TrueView and increasingly Google Preferred. And as we said, nice app
promotion there as well. SUNDAR PICHAI: And that’s largely rolled out
in major markets, and we’ll continue to do that. DAN SALMON: OK. Great. And then just a quick
one on Red. It seems as if the direction for the content remains to focus on your own originals
right now. What may or may not make you consider looking at other licensed, maybe more traditional
TV or film content? SUNDAR PICHAI: I mean, look. We are going
to approach it comprehensively, and we have obviously had great early traction with the
six original series we have released so far. This year, we are on track to release 15 to
20 original series of films coming out. And so I think that’s an exciting direction we
will pursue. But at the same time, we’ll keep an open mind about all other avenues as well. DAN SALMON: OK. Great. Thank you. OPERATOR: Thank you. And our next question
comes from Justin Post of Merrill Lynch. Your line is now open. JUSTIN POST: Great. Thank you. I have a few.
First, for Sundar, you talk about the cloud. Why really get more aggressive now? We’ve
been riding on it for many years, and I’m just wondering why now really ramping up the
investment. And how would you characterize the margins or the returns on capital in that
business? Why is that interesting for you? And then maybe for Ruth, you give us a lot
of detail on click growth, but I’m just wondering if you can help us all on query growth– just
how that’s trended since mobile really took off. Is it growing? How’s it trending? And
do you have more room to monetize, given where your ad coverage is now? Thank you. SUNDAR PICHAI: Just on the first one, I would
say there are three points of inflection for us, and that’s why we are really ramping it
up. But the first is we’ve always been doing Cloud. It’s just that we were consuming it
all internally at Google. But as we have grown really mature in terms of how we handle our
data center investments and how we can do this at scale, we have definitely crossed
over to the other side, where we can thoughtfully serve external customers. So that’s the first
point of inflection. The second point of inflection for us is as
we’ve been investing in machine learning and AI for years, but I think we are at an exceptionally
interesting tipping point, where these technologies are really taking off. And that is very, very
applicable to businesses as well. And so thoughtfully doing that externally we view as a big differentiator
we have over others. And third is definitely Diane Greene coming in. And I think I wanted
to scale our efforts here thoughtfully when it is set up with a great leader who understands
this space deeply. And so those are the three main reasons why we are significantly ramping
up what we’re doing there. RUTH PORAT: And then on query growth, we don’t
really talk about query growth. As Sundar said, focused on answers. There are a lot
of new ways to search on mobile, of course– voice, et cetera. So let me try and actually add a little more
on your question on Cloud. We’ve consistently said it’s early days. You asked about ROIC.
We’re really excited about the magnitude of the opportunity, as Sundar has talked about.
And one thing that’s really powerful here is we’re benefiting from our heritage, from
our differentiated strength, the scale of our infrastructure. Those are investments
we’ve made over many years that give us extraordinary efficiency. We have robust security. Again, we’ve invested
over many years. We have unparalleled machine learning, and so really when we think through
to the ROIC opportunity compelling building on investments that we’ve made and continue
to make in a very exciting opportunity. JUSTIN POST: Thank you. OPERATOR: Thank you. And your next question
comes from Anthony DiClemente of Nomura. Your line is now open. ANTHONY DICLEMENTE: Thanks for taking my questions.
I have two. First for Sundar on Google Fiber, just on a higher level, would you please broadly
update us on your learnings from Google Fiber up to this point? And what are the goals that
Google is trying to achieve with Google Fiber in terms of longer term ambitions, in terms
of TV, or video distribution? And then Ruth, you mentioned in your prepared
remarks mobile search being driven by improvements in ad formats and delivery starting in the
third quarter of last year. Is there any way to frame or think about what sites revenue
growth might be on a recurring basis if we were to try to exclude the impacts or benefits
from the changes in formats that you mentioned and as we start to think about the year over
year growth comparisons there for the back half of 2016? Thank you. RUTH PORAT: So let me go ahead and start on
the Fiber question. Fiber is one of the businesses that is in Other Bets. And like all of our
access efforts, we’re really focused, and our vision here is to create abundant ubiquitous
networks. We think there’s a lot of opportunity to improve the experience that users have. And that’s where the Fiber team is focused.
And we have some other efforts within Other Bets that are really exciting as well that
address Access, Loon within our X businesses targeting the 4 billion people still offline,
and we view that similarly as a big opportunity and an important problem to address. And in terms of the early learnings, there
have been a lot. As I talked about on the last quarter call, we’ve really continued
to refine and enhance our go-to-market strategy with the way we’re working with cities, the
way we’re building out those cities, and really the level of technology and innovation that
we can use to differentiate the offering and are pleased with the ongoing efforts there. And then in terms of the change in ad format,
as we’ve talked about on a lot of calls, innovation is core to all we do. It obviously happens
on its own timeline. We have a culture of it. We’re continuously focused on it. I’m
not going to break out impact for any change. We’re constantly looking to innovate and improve
the user experience, and so there was a step up, which we’ve talked about. And we continue
to look at other ways, as Sundar talked about, to continue to enhance the user experience.
But I think the most important point and somewhat implicit in your question– that shouldn’t
take away from the very strong underlying revenue and revenue growth that we have in
that business. ANTHONY DICLEMENTE: Thank you, Ruth. OPERATOR: Thank you. And our next question
comes from Brian Nowak of Morgan Stanley. Your line is now open. BRIAN NOWAK: Thanks for taking my question
today. I have two. Just on mobile search and the mobile ad format changes in 3Q of last
year, could you just help us? Were those changes made globally last year in the third quarter?
And if not, how should we think about when they will go globally or how you’re kind of
phasing those changes? And then the second one, on the desktop, Ruth.
You mentioned that desktop growth picked up in the first quarter. What drove that pickup
in growth? And any learnings from the change in the right-hand rail in the first quarter?
Thanks. SUNDAR PICHAI: You know, the launch which
you’re talking about was global, so we’ve been doing these changes for a long time.
And so we tried to roll it out globally, and that’s what we did. RUTH PORAT: And then in terms of the desktop
format change, so we had a modest benefit from that change, where, just to be clear,
for all, we reduced the ad load by removing ads on the right side of the screen, while
adding a fourth ad slot for highly commercial queries and in the aggregate that resulted
in a cleaner, more useful presentation and improved user experience. It was a modest
impact, but additive. BRIAN NOWAK: Thanks. OPERATOR: Thank you. And our next question
comes from Ben Schachter of Macquarie. Your line is now open. BEN SCHACHTER: Two questions. Sundar, your
commentary on Play focused on games, but what needs to happen to have more verticals beyond
Games become meaningful? And then, Ruth, a couple more on the Sites TAC. At a high level,
how do average TAC rates differ on mobile versus desktop? And aside from the TAC rate,
are there any other notable contractual issues that differ meaningfully between mobile and
desktop search partnerships? Thanks. SUNDAR PICHAI: Ben, on the first question,
I think that’s a good question. We are seeing traction across categories. Just that Games
are at a much larger scale. But for example, when we get into education, we see if you
view that as a vertical, we do see traction there and so on. So I am taking a very long-term
view. It’ll probably reflect where there are commercial opportunities across every vertical.
But game developers are the savviest developers in terms of getting ahead of this curve. RUTH PORAT: And on your TAC question, as I’ve
indicated a number of times already on the call, the TAC rate is higher on mobile. Mobile
is growing at a faster rate, and what you’re seeing here is a mixed shift. So there is
a delta between the two. But I think importantly, we’re benefiting from an important secular
trend behind mobile. And like the revenue dollars and the gross profit dollars that
come as a result of that, and we’ll continue to innovate on mobile and are excited about
the opportunity, in particular, with all the changes that we continue to see in the way
users use the phone and the opportunities. OPERATOR: Thank you. And our final question
comes from Colin Sebastian of Robert Baird. Your line is now open. COLIN SEBASTIAN: OK, great. Thanks very much.
Sundar, first off, you mentioned a lot of the ongoing projects at Google, but I wonder
if you could share with us maybe the two or three areas that you’re spending the most
of your time on or are focused on. And related to that, one of the strengths of the company
is obviously the strong engineering orientation and ability to hire some of the best talent
and acquire the best technology. And the company’s been able to adapt very quickly to change,
but I wonder which areas of your business demonstrate where Google or Alphabet are really
on the forefront of development, pushing innovation, rather than adapting to changes you see in
the market. Thank you. SUNDAR PICHAI: Thanks, Colin. On the first
thing, obviously we are doing many things. But I tend to spend my time at the core of–
in our core product, I think we have a unique opportunity to evolve search to be very assistive
in how we serve our users and be an intelligent assistant that helps users throughout their
needs in context, especially in the context of mobile. That’s an area definitely I spend
a lot of time on. And related to that, we do think we can do a lot of that based on
our core advancements in machine learning and AI. So that’s an area we invest a lot,
and I’m thoughtfully involved with that as well. And third, definitely from a computing standpoint,
computing is foundational to everything we do. And so thinking through about how computing
evolves, be it emerging technologies like VR or how mobile advances over the next few
years. So these are all areas where I do spend time on. And overall, I do think in the long run, I
think we will evolve in computing from a mobile first to an AI first world. And I do think
we are at the forefront of the development, so we don’t view it as adapting to it as much
as pushing hard and getting there. And so that’s the core of what we do, and we’ll continue
to do that. COLIN SEBASTIAN: Thank you. OPERATOR: Thank you. And that concludes our
question and answer session for today. I’d like to turn the conference back over to Miss
Ellen West for closing remarks. ELLEN WEST: Thanks to everyone for joining
us today. We look forward to speaking with you again on our second quarter 2016 call. OPERATOR: Ladies and gentlemen, thank you
for participating in today’s conference. This does conclude the program, and you may all
disconnect. Have a great day, everyone. [MUSIC PLAYING]

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