Alphabet 2018 Q1 Earnings Call (Alphabet 2018 Q1 Earnings Call)

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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 abc.xyz/investor.
This call is also being webcast from our IR website
where a replay of the call will be available later today.
And now I'll turn the call over to Ruth.
Porat: Thank you, Ellen.
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.