Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Sundar Pichai :

Thank you, Jim. And hello, everyone. I'm really pleased with our results this quarter. They showed tremendous ongoing momentum in Search and great progress in Cloud with our AI initiatives driving new growth. Search had another excellent quarter. And in terms of product innovation, we are seeing great progress with AI overviews. In Q2, Cloud reached some major milestones. Quarterly revenues crossed the $10 billion mark for the first time, at the same time pass the $1 billion mark in quarterly operating profit. Year-to-date, our AI infrastructure and generative AI solutions for Cloud customers have already generated billions in revenues and are being used by more than 2 million developers. As I spoke about last quarter, we are uniquely well-positioned for the AI opportunity ahead. Our Research and Infrastructure leadership means, we can pursue an in-house strategy that enables our product teams to move quickly. Combined with our model building expertise, we are in a strong position to control our destiny, as the technology continues to evolve. Importantly, we are innovating at every layer of the AI stack, from chips to agents and beyond, a huge strength. We are committed to this leadership long-term. This was underscored by the announcements we made at I/O, Cloud Next, and Google Marketing Live, and we'll touch on many of them here. Today, I'll start with Search, then move to our AI momentum more generally, followed by Cloud, YouTube, and some closing thoughts. Let's dive in. Over the past 25 years, we have continued to reimagine and expand Google Search across many technological shifts. With AI, we are delivering better responses on more types of search queries and introducing new ways to search. We are pleased to see the positive trends from our testing continue as we roll out AI overviews, including increases in search usage, and increased user satisfaction with the results. People who are looking for help with complex topics are engaging more and keep coming back for AI overviews. And we see even higher engagement from younger users, aged 18 to 24, when they use search with AI overviews. As we have said, we are continuing to prioritize approaches that send traffic to sites across the web. And we are seeing that ads appearing either above or below AI overviews, continue to provide valuable options for people to take action and connect with businesses. Beyond AI overviews, AI expands the types of queries we are able to address and opens up powerful new ways to search. Visual search via Lens is one. Soon you'll be able to ask questions by taking a video with Lens. And already we have seen that AI overviews in Lens, leads to an increase in overall visual search usage. Another example is Circle to Search, which is available today on more than 100 million Android devices. We are seeing tremendous momentum from our AI investments. More than 1.5 million developers are now using Gemini across our developer tools. And we recently unveiled new models that are more capable and efficient than ever. Gemini now comes in 4 sizes, with each model designed for its own set of use cases. It's a versatile model family that runs efficiently on everything from data centers to devices. At 2 million tokens, we offer the longest context window of any large-scale foundation model to-date, which powers developer use cases that no other model can handle. Gemini is making Google's own products better. All six of our products with more than 2 billion monthly users now use Gemini. This means that Google is the company that's truly bringing AI to everyone. Gemini is powering incredibly helpful features in search, workspace, Google messages, and more. At I/O, we showed new features coming soon to Gmail and to Google Photos. Soon you'll be able to ask photos questions like, what did I eat at that restaurant in Paris last year? For a glimpse of the future, I hope you saw Project Astra at I/O. It shows multimodal understanding and natural conversational capabilities. We've always wanted to build a universal agent and it's an early look at how they can be helpful in daily life. Our AI product advances come from our long-standing foundation of research leadership, as well as our global network of infrastructure. In Q2, we announced our first data center and cloud region in Malaysia, and expansion projects in Iowa, Virginia, and Ohio. Our TPUs are a key bet here, too. Trillium is the sixth generation of our custom AI accelerator, and it's our best performing and most energy efficient TPU to-date. It achieves a near 5 times increase in peak compute performance per chip and a 67% more energy efficient compared to TPU v5e. And the latest Nvidia Blackwell platform, will be coming to Google Cloud in early 2025. We continue to invest in designing and building robust and efficient infrastructure to support our efforts in AI, given the many opportunities we see ahead. Of course, as we do this, we'll continue to create capacity by allocating resources towards our highest priorities. We are relentlessly driving efficiencies in our AI models. For example, over the past quarter, we have made quality improvements that include doubling the core model size for AI overviews, while at the same time improving latency and keeping cost per AI overviews served flat. And we are focused on matching the right model size to the complexity of the query in order to minimize impact on cost and latency. Separately on our real estate investments, we are taking a measured approach to match the current and future needs of our hybrid workforce, as well as our local communities. Next, Google Cloud. We continue to see strong customer interest, winning leading brands like Hitachi, Motorola Mobility, and KPMG. Our deep partnership with Oracle significantly expanded our joint offerings to the large customer base. Our momentum begins with our AI infrastructure, which provides AI startups like Essential AI, with leading cost performance for models and high-performance computing applications. We continue to drive fundamental differentiation with new advances since Cloud Next. This includes Trillium, which I mentioned earlier, and A3 Mega powered by Nvidia H100 GPUs, which doubles the networking bandwidth of A3. Our enterprise AI platform, Vertex, helps customers such as Deutsche Bank, Kingfisher, and the US Air Force build powerful AI agents. Last month, we announced a number of new advances. Uber and WPP are using Gemini Pro 1.5 and Gemini Flash 1.5 in areas like customer experience and marketing. We broaden support for third-party models, including Anthropic's Claude 3.5 Sonnet and open source models like Gemma 2, Llama and Mistral. We are the only cloud provider to offer grounding with Google Search, and we are expanding grounding capabilities with Moody's, MSCI, ZoomInfo, and more. Our AI-powered applications portfolio is helping us win new customers and drive upsell. For example, our conversational AI platform is helping customers like Best Buy and Gordon Food Service. Gemini for Workspace helps click therapeutics analyze patient feedback as they build targeted digital treatments. Our AI-powered agents are also helping customers develop better quality software, find insights from their data, and protect their organization against cybersecurity threats using Gemini. Software engineers at Wipro are using Gemini code assist to develop, test, and document software faster. And data analysts at Mercado Libre are using BigQuery and Looker to optimize capacity planning and fulfill shipments faster. Cyber security risks continue to accelerate and the number of breaches continue to grow, something we all see in the news every day and that our [Mandiant teams] (ph) help manage. Our strong track record of uptime, quality control and reliability made Google Cloud the trusted security choice for organizations like Fiserv and Marriott International. In Q2, we infused AI throughout our security portfolio, helping TELUS strengthen its proactive security posture. Turning next to YouTube, YouTube is focused on a clear strategy, connecting creators with a massive audience and enabling them to build successful businesses through ads and subscriptions, while helping advertisers reach their desired audience. We had a great brand cast this quarter, and Philip will say more. I'm pleased at the progress here. YouTube has remained number one in US Streaming watch time, according to Nielsen. Views of YouTube shots on connected TVs more than double last year. And we are making it easier for creators to add captions and turn regular videos into shots. Next, on Android and Pixel. We joined Samsung for their Galaxy Unpacked event a few weeks ago, and we shared that Samsung's new devices will include the latest AI-powered Google updates on Android. It was a great event. I'm looking forward to our Made by Google event happening in August. We'll have lots to share around Android and the Pixel portfolio of devices. Our Pixel line is doing well. We recently introduced the new Pixel 8a, powered by our latest Google Tensor G3 chip. It provides beautiful AI experiences like Circle to Search, Best Take, and a Gemini-powered AI assistant. In other bets, I'm really pleased with the progress Waymo's making, a real leader in the space and getting rave reviews from users. Waymo's served more than 2 million trips to-date and driven more than 20 million fully autonomous miles on public roads. Waymo's now delivering well over 50, 000 weekly paid public rides, primarily in San Francisco and Phoenix. And in June, we removed the waitlist in San Francisco, so anyone can take a ride. Fully autonomous testing is underway in other Bay Area locations without a human in the driver's seat. Before I close, I want to acknowledge that today is Ruth's final earnings call. Let me take a moment to thank her for all she has done for Google and Alphabet as our longest-serving CFO. I'm excited to continue to work with her in her new role. And I look forward to welcoming our newly appointed CFO, Anat Ashkenazi. She starts next week, and you'll hear from her on our call next quarter. Thanks as always to our employees and partners everywhere for a great Q2. With that, over to you, Philip.

Ruth Porat :

Thank you, Philipp, and thanks, Sundar, for those kind words. We had another strong quarter, driven in particular by performance in Search and Cloud, as well as the ongoing efforts to durably reengineer our cost base. My comments will be on year-over-year comparisons for the second quarter unless I state otherwise. I will start with results at the Alphabet level followed by segment results and conclude with our outlook. For the second quarter, our consolidated revenues were $84.7 billion, up 14% or up 15% in constant currency. Search remained the largest contributor to revenue growth. In terms of expenses, total cost of revenues was $35.5 billion, up 11%. Other cost of revenues was $22.1 billion, up 14%, with the increase driven primarily by content acquisition costs, followed by depreciation as well as the impact of the Canadian digital services tax, which was applied retroactively. Operating expenses were $21.8 billion up 5%, primarily reflecting an increase in R&D partially offset by a decline in G&A with sales and marketing essentially flat to the second quarter last year. The increase in R&D was driven primarily by compensation which was affected by lapping a reduction in valuation-based compensation liabilities in certain other bets in the second quarter last year followed by depreciation. The largest single factor in the year-on-year decline in G&A expenses was lower charges related to legal matters. Operating income was $27.4 billion, up 26% and our operating margin was 32%. Net income was $23.6 billion and EPS was $1.89. We delivered free cash flow of $13.5 billion in the second quarter and $60.8 billion for the trailing 12 months. As a reminder, last year, we had a timing benefit in the second and third quarters from a $10.5 billion deferred cash tax payment made in the fourth quarter, which depressed reported free cash flow growth this quarter, and we'll do so again next quarter. We ended the quarter with $101 billion in cash and marketable securities. Turning to segment results. Within Google Services, revenues were $73.9 billion, up 12%. Google Search and other advertising revenues of $48.5 billion in the quarter were up 14%, led again by growth in retail, followed by the financial services vertical. YouTube advertising revenues of $8.7 billion were up 13% driven by brand followed by direct response advertising. Network advertising revenues of $7.4 billion were down 5%. Subscription platforms and devices revenues were $9.3 billion up 14%, primarily reflecting growth in YouTube subscription revenues. TAC was $13.4 billion, up 7%. Google Services operating income was $29.7 billion up 27% and the operating margin was 40%. Turning to the Google Cloud segment. Revenues were $10.3 billion for the quarter, up 29%, reflecting first significant growth in GCP, which was above growth for cloud overall and includes an increasing contribution from AI. And second, strong Google Workspace growth, primarily driven by increases in average revenue per seat. Google Cloud delivered operating income of $1.2 billion and an operating margin of 11%. As to our Other Bets for the second quarter, revenues were $365 million and the operating loss was $1.1 billion. Turning to our outlook for the business. With respect to Google Services, First, within advertising. The strong performance of search was broad-based across verticals. In YouTube, we are pleased with the growth in the quarter. We had healthy watch time growth continued to close the monetization gap in Shorts and had continued momentum in Connected TV, with brand benefiting in part from an ongoing shift in budgets from linear television to digital. As we look forward to the third quarter, we will be lapping the increasing strength in advertising revenues in the second half of 2023, in part from APAC based retailers. Turning to subscriptions, platforms and devices. First, we continue to have significant growth in our subscriptions business which drives the majority of revenue growth in this line. However, there was a sequential decline in the year-on-year growth rate, as we anniversaried the impact of a price increase for YouTubeTV in the second quarter last year. The impact will persist through the balance of the year. Second, with regard to platforms. We are pleased with the performance in play driven by an increase in buyers. Finally, with respect to devices. The most important point as we look forward is that our Made by Google launches have been pulled forward into the third quarter from the fourth quarter last year benefiting revenues in Q3 this year. Turning to cloud, which continued to deliver very strong results. For the first time, Cloud crossed $10 billion in quarterly revenues and $1 billion in quarterly operating profit. As Sundar noted year-to-date, our AI infrastructure and generative AI solutions for cloud customers have already generated billions in revenues and are being used by more than 2 million developers. We're particularly encouraged that the majority of our top 100 customers are already using our generative AI solutions. We continue to invest aggressively in the business. Turning to margins. The margin expansion in Q2 versus last year reflects our ongoing efforts to durably reengineer our cost base, as well as revenue strength. Our leadership team remains focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure. Once again headcount declined quarter-on-quarter, which reflects both actions we have taken in the first half of the year and a much slower pace of hiring. Looking ahead, we expect a slight increase in headcount in the third quarter, as we bring on new graduates. As we have discussed previously, we’re continuing to invest in top engineering and technical talent, particularly in cloud and technical infrastructure. Looking forward, we continue to expect to deliver full-year 2024 Alphabet operating margin expansion relative to 2023. However, in the third quarter operating margins will reflect the impact of both the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure, as well as the increase in cost of revenues due to the pull-forward of hardware launches into Q3. With respect to CapEx, our reported CapEx in the second quarter was $13 billion, once again driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. Looking ahead, we continue to expect quarterly CapEx throughout the year to be roughly at or above the Q1 CapEx of $12 billion keeping in mind that the timing of cash payments can cause variability in quarterly reported CapEx. With regard to other bets, we continue to focus on improving overall efficiencies, as we invest for long-term returns. Waymo is an important example of this, with its technical leadership coupled with progress on operational performance. As you will see in the 10-Q, we have chosen to commit to a new multi-year investment of $5 billion. This new round of funding, which is consistent with recent annual investment levels will enable Waymo to continue to build the world's leading autonomous driving technology company. To close, this is my 56th and last earnings call, 37 of them at Alphabet. So I have a few closing thoughts of gratitude. I've been so proud to be at Google and Alphabet as CFO and to work with some of the smartest people in the world every day. I think, we have accomplished a lot in the last nine plus years, and I am confident that progress will continue. Of course, I'm not going far and I'm honored to have my new role, which I've been slowly working my way into during the past 11 months and I look forward to continuing to work with Sundar, and our great team. Being CFO of one of the most important companies in the world has been the opportunity and responsibility of a lifetime. Google's Mission of advancing technology and bringing information to people throughout the world is as relevant today as it was when I worked on its IPO. Technology has been a catalyst for economic growth throughout human history. The people on this call know that if a technological advancement is not the focus of every business and government, they will be left behind. Underpinning this is the need for sound and responsible investment. That has never been more important than today and certainly, that is Google and Alphabet's focus. I want to end by thanking Googlers around the world for the innovation and commitment that has enabled us to deliver such extraordinary products and services globally. I also want to thank our investors and analysts for your long-term support and your feedback. Thank you. Sundar, Philipp and I will now take your questions.

Brian Nowak:

Thanks for taking my questions. First, thank you Ruth for all the help and significant impact over the past decade. The first one, it is a little bit of a jump ball, I guess for Sundar, Philipp or Ruth. I guess we're sort of 18 months this fever pitch around the GenAI focus in the world. Maybe from any of your perspective, can you just sort of talk to us about areas where you've seen faster than expected traction or testing adoption of some of the AI, generative AI capabilities versus slower than expected traction and testing from a Google perspective. And then, Ruth I appreciate all the comments about structurally reengineering the OpEx base. Are there any more tangible examples of areas you can talk to us about where you still see further ways to drive more efficiency across the company. Thanks.

Ruth Porat:

And on your second question first, thank you for your comments. Look, the reason we've consistently used the term, the phrase that we're focused on durably reengineering our cost base is because these are deep work streams. They are not tactical fixes, and we continue to build on them. And so the main areas that we've talked about are around product and process prioritization around organizational efficiency and structure. Both of those are reflected in the headcount and the fact that headcount is down year-on-year. And across all of those -- as I said, across our entire leadership team, we remain focused on continuing to execute against them. So in terms of the most recent examples, as we talked about last quarter with the combination of the devices and services product area with the platforms and ecosystems product area, we announced that back in April. And what we discussed last quarter and what we're seeing is that unifying teams across these organizations, helps with product execution and what we're really focused on is really adding to velocity and efficiency. So kind of the gift that keeps giving. And then more broadly, all of the work streams that we've talked to you about before, we continue to remain focused on. A big one, very important one, is all of the efficiency efforts, the work streams around technical infrastructure and improving efficiency there. We are also working on the use of AI across Alphabet. We are working on continuing to build on what we've done with our centralized procurement organization. We are continuing to optimize our real estate portfolio. And so again this is across our leadership team. These are efforts that all build to this phrase durably reengineering our cost base.

Operator:

Our next question comes from Doug Anmuth with JPMorgan. Your line is now open.

Ruth Porat:

So in terms of the Google services operating margin, it did reflect all the work that we are doing on durably reengineering the cost base. It also reflected the benefit of strong revenue performance in search. And so what I tried to lay out in the comments, as we look forward to the third quarter is operating margins will reflect the increases in depreciation and expenses associated with higher levels of our investment in technical infrastructure. It will also reflect higher expenses associated with the Pixel launch, due to the pull forward. So those are important factors. I would say, overall company-wide, it is important to note that we do expect to continue to deliver full year '24 Alphabet operating margin expansion relative to 2023, but I did want to highlight those important points as we look forward to Q3.

Philipp Schindler:

Yes, look, innovation and improvements to the user experience on search have historically opened up new opportunities for advertisers. We talked about this before we saw this when we navigated from desktop to mobile for example. And we can see GenAI obviously expand the types of questions we can help people with, as Sundar mentioned. And as we said before, people are finding ads either above or below AI overviews helpful. We have a solid baseline here from which we can innovate and as you have probably noticed at GML, we announced that soon we'll actually start testing Search and Shopping ads in AI overviews for users in the US, and they will have the opportunity to actually appear within the overview in a section clearly labeled as sponsored, when they're relevant to both the query and the information in the AI overview, really giving us the ability to innovate here and take this to the next level.

Ruth Porat:

Thank you.

Michael Nathanson:

Thanks. I have two, one for Sundar and one for Philipp. Sundar, on decision this week to not deprecate cookies. I know it's been a long journey. Can you talk a bit about what we should expect in terms of new experience in Chrome and why the company makes a decision not to go down the path on deprecating cookies. And then Philipp, I know it's only one quarter, but it's interesting that Search is growing faster than YouTube, which surprised some of us. But can you talk about what factors you think are kind of differences in growth rates between these markets? And is there anything on the AI front that you could see maybe reaccelerating YouTube growth, as you've seen happen with Search. Thanks so much.

Philipp Schindler:

And on the second part of your question, maybe Ruth, you want to jump in first and then I take the rest if needed.

Philipp Schindler:

Yes, that was very comprehensive. Nothing really to add from my side here.

Michael Nathanson:

Okay. Thanks a lot. And best to you. Thanks.

Eric Sheridan:

Thanks so much. And I'll echo the thanks for Ruth, for all the insights and partnership over the years on these earnings calls. Sundar maybe first for you, in terms of Cloud and bringing AI to the enterprise, I wanted to know if you go a little bit deeper in terms of how you are seeing AI actually get adopted implemented, what it potentially could mean for the strategic positioning of the cloud business and the potential for AI workloads to be a stimulant to revenue growth for Cloud first. And then following up the last set of questions on YouTube are really about the macro or the ad environment. What do you guys, as a team, continue to learn about the subscription side of YouTube and the appetite for consumers to engage with a broader array of media products at the subscription layer. Thanks.

Ruth Porat:

And then on your second question with respect to subscriptions, I am implicit in your question, how strong is it, as I noted in opening comments, that overall line subscriptions platforms and devices delivered healthy growth and that was led by subscriptions. And as we've said on many calls here in a row, the subscription revenue growth continued to be quite strong. It was driven by subscriber growth in both YouTube TV and YouTube Music premium. And then the other component within that line is Google One that also delivered strong subscriber and revenue growth. I think the heart of your question is really around YouTube and that is the heart of the revenues in that line. So it continues to be very strong. We see a lot of take up in it, strong subscriber growth, really pleased with it. We did note that growth on that line decelerated due to anniversarying the YouTube TV price increase. But at the heart of it, our people interested in the subscription offerings and it’s the take of significant. We're really pleased with it.

Operator:

Our next question comes from Ross Sandler with Barclays. Your line is now open.

Sundar Pichai:

Thanks Ross. I think great questions. Look, I -- obviously, we are at an early stage of what I view as a very transformative area and in technology when you are going through these transitions, aggressively investing upfront in a defining category, particularly in an area in which in a leveraged way cuts across all our core areas our products, including Search, YouTube and other services, as well as fuels growth in Cloud and supports the innovative long-term Bets and Other Bets is definitely something for us makes sense to lean in. I think the one way I think about it is when we go through a curve like this, the risk of under-investing is dramatically greater than the risk of over-investing for us here, even in scenarios where if it turns out that we are over investing. We clearly -- these are infrastructure, which are widely useful for us. They have long useful lives and we can apply it across, and we can work through that. But I think not investing to be at the frontier, I think definitely has much more significant downside. Having said that, we obsess around every dollar we put in. Our teams are -- work super hard, I'm proud of the efficiency work, be it optimization of hardware, software, model deployment across our fleet. All of that is something we spend a lot of time on, and that's how we think about it. To your second question on whether -- how do the scaling loss hold. Are we hitting on some kind of wall or something? Look, I think we are all pushing very hard, and there is going to be a few efforts, which will scale up on the compute side and push the boundaries of these models. What I would tell is regardless of how that plays out, you still think there is enough optimizations we are all doing, which is driving constant progress in terms of the capabilities of the models. And more importantly, taking them and translating into real use cases across the consumer and enterprise side, I think on that frontier. I think there is still a lot of progress to be had. And so we are pretty focused on that as well.

Operator:

Our next question comes from Stephen Ju with UBS. Your line is now open.

Sundar Pichai:

On the first part of the question look I think the technology's horizontal enough, it can apply on both sides. If you take a use case like improving the customer service experience, it is part of it which is driving efficiencies, and you can look at it from a cost standpoint, but you could also be overall improving the experience, improving conversion, driving the funnel better. And so increasing basket size if you are a retail e-commerce player, et cetera. So we are seeing people experiment across both sides. And so I think, you will see it played across both sides. Philipp, on the second one?

Stephen Ju:

Okay. Thank you.

Justin Post:

Great. I'll ask a couple of areas. First on the cloud acceleration, would you characterize that as new AI demand helping drive that year-to-date? Or is that more of a rebound in just general compute and other demand or is AI really moving this forward and helping drive acceleration. And then I wanted to ask about your internal cost savings which has been really strong. How are you using AI internally to help cut costs? Are you seeing better efficiencies with your engineers? And just would love to hear about how you are applying AI to cut your own costs? Thank you.

Sundar Pichai:

Look, I think specifically, if the question is about engineers and coding, et cetera, we definitely want to be on the cutting edge there. I think, we are making these tools available to some of the most [line of] (ph) productive engineers and demanding engineers out there, and they are definitely kicking the tires hard. And -- but I would say, it's still all in very early stages. I think particularly when it comes to writing high-quality secure code, but I think all the learnings what we are gaining here will translate into our models and products, and that's the virtuous cycle, which I'm excited by. So there's a lot more to come.

Operator:

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks.

Operator:

Thank you everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2024 Earnings Conference Call. [Operator Instructions]

James Friedland:

Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2024 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler, and Ruth Porat.

Sundar Pichai:

Thank you, Jim, and hello, everyone. It was a great quarter led by strong performance from Search, YouTube, and Cloud.

Philipp Schindler:

Thanks, Sundar, and hi, everyone.

Ruth Porat:

Thank you, Philipp. We are very pleased with our financial results for the first quarter driven, in particular, by strength in Search and Cloud as well as the ongoing efforts to durably reengineer our cost base. My comments will be on year-over-year comparisons for the first quarter unless I state otherwise. I will start with results at the Alphabet level, followed by segment results and conclude with our outlook.

Brian Nowak:

I have two. The first one, I wanted to ask about overall search behavior. Philipp, I know you talked in the past about how overall query trends continue to grow. Can I ask you to drill a little bit more into monetizable and commercial query trends? Has there been any changes in sort of your commercial query trends growth. There's just been all these new entrants moving around in e-commerce. That is my first one.

Sundar Pichai:

Thanks, Brian. To your first question, look, I think broadly, we've always found that over many years, when things work well on the organic side, monetization follows. So typically, the trends we see carry over well. Overall, I think with generative AI in Search, with our AI overviews, I think we will expand the type of queries we can serve our users. We can answer more complex questions as well as, in general, that all seems to carry over across query categories. Obviously, it's still early, and we are going to be measured and put user experience at the front, but we are positive about what this transition means.

Operator:

Our next question comes from Doug Anmuth with JPMorgan.

Ruth Porat:

And then in terms of CapEx, as I said in opening comments, we do expect the quarterly CapEx throughout the year to be roughly at or above the $12 billion cash CapEx we had here in Q1. As I said, you can always have variability in the reported quarterly CapEx just due to the timing of cash payments, but roughly at or above this level. And it really goes to Sundar's opening comment that we're very committed to making the investments required to keep us at the leading edge in technical infrastructure to support the growth in Cloud, all the innovation in Search that he and Philipp has spoken about and our lead with Gemini.

Operator:

Our next question comes from Eric Sheridan with Goldman Sachs.

Sundar Pichai:

Thanks, Eric. Great question. Obviously, I think the AI transition, I think it's a once-in-a-generation kind of an opportunity. We've definitely been gearing up for this for a long time. You can imagine we started building TPUs in 2016, so we've definitely been gearing up for a long time. The real opportunities we see is the scale of research and innovation, which we have built up and are going to continue to deliver. I think for the first time, we can work on AI in a horizontal way and it impacts the entire breadth of the company, be it Search, be it YouTube, be it Cloud, be it Waymo and so on. And we see a rapid pace of innovation in that underlying. So it's a very leveraged way to do it, and I see that as a real opportunity ahead.

Operator:

Our next question comes from Stephen Ju with UBS.

Operator:

Our next question comes from Justin Post with Bank of America.

Ruth Porat:

So the increase in CapEx, as Sundar said and I said, really reflects the opportunity we continue to see across the company. It starts with all that we're doing in support of the Gemini foundational model but then also, clearly, the work across Cloud, on behalf of Cloud customers, and the growth that we're seeing with GCP and the infrastructure work there, and then, of course, as both Sundar and Philipp talked about the application across Search, YouTube and, more broadly, the services that we're able to offer. So it's the growing application and our focus on ensuring that we have the compute capacity to deliver in support of the services and opportunities we see across Alphabet.

Operator:

Our next question comes from Mark Mahaney with Evercore.

Sundar Pichai:

YouTube and Cloud.

Ruth Porat:

I would just say from Sundar's opening comments, it's just the ongoing momentum that we've seen in the business that we've been talking about, the ongoing growth and strong performance. And so what we were really getting at in that comment, what Sundar was getting at, is that we've continued to build strong businesses over time, and that just helps dimension it. We had similar comments last quarter when you talk about our subscription business. We're really proud of all the work that the teams are doing across the company, building new, strong opportunities, delivering for our users, for customers, for advertisers in profound ways. And so it was just helping to dimension what we have built over the years.

Kenneth Gawrelski:

Two, if I may. First on GCP, you had nice acceleration in the quarter. Could you talk a little bit about the opportunities and constraints upon GCP's ability to continue to address that large addressable market and accelerate growth? Is it more sales-oriented? Is it more product sales solutions or both? And do you plan to address most of these organically? Or could a partner approach work for you?

Sundar Pichai:

Look, on the Cloud side, obviously, it's definitely a point of inflection overall. I think the AI transformation is making everyone think about their whole stack, and we are engaged in a number of conversations. I think paid AI infrastructure, people are really looking to Vertex AI, given our depth and breadth of model choice, or using Workspace to transform productivity in your workplace, et cetera. So I think the opportunities there are all related to that, both all the work we've built up and AI being a point of inflection in terms of driving conversations. I think you'll see us do it both organically and with a strong partner program as well. So we'll do it with a combination.

Philipp Schindler:

And with regard to your sports rights question, look, I mean, we've had long-standing and significant partnerships with the most popular sports league here in the U.S., around the globe, federations teams, athletes, broadcasters. And obviously, these partnerships, in combination with our very vast audience of sports fans, drives investment in subscription experiences across many offerings

Ross Sandler:

Sundar, I had a question about smartphone-based AI searches. So you guys are powering all these new AI interactions and searches on Pixel and on Samsung devices. And I think there's speculation that Gemini might be used on iOS in a future state. So the question is, as users start searching on smartphones and those searches are basically rendered on the model, on the phone, without accessing the web, how do you guys anticipate monetizing some of these smartphone-based behaviors that are kind of run on the edge? Any thoughts on that?

Colin Sebastian:

I guess first, a follow-up on some of the questions on SGE in the core Search. I guess I'm wondering, along with some of those changes in behavior, is there a way to quantify that overall engagement shift, whether that's an increase in time spent or the level of increase in queries for both sort of traditional search as well as more generative answers.

Sundar Pichai:

On the first question on Search, not much more to add to what I said, but what we have seen. And we've been in live experiments just for a few weeks in U.S. and U.K. on a slice of our queries, and all indications are positive that it improves user satisfaction. We see an increase in engagement, but I see this as something which will play out over time.

Operator:

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks.

Operator:

Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions]

James Friedland:

Thank you. Good afternoon, everyone, and welcome to Alphabet's Fourth Quarter 2023 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat.

Sundar Pichai:

Hello, everyone. Our results reflect strong momentum and product innovation continuing into 2024. Today, I'm going to talk about four main topics. One, our investments in AI, including how it's helping Search; two, subscriptions, which reached $15 billion in annual revenue, up 5x since 2019. Subscriptions is growing strongly powered by YouTube Premium and Music, YouTube TV and Google One. Three, Cloud, which crossed $9 billion in revenues this quarter and saw accelerated growth driven by our GenAI and product leadership; and four, our investments and focus to meet the growth opportunities ahead.

Philipp Schindler:

Thanks, Sundar, and hi, everyone. Google Services revenues of $76 billion were up 12% year-on-year. In Google advertising, Search and other revenues grew 13% year-on-year, led again by solid growth in the retail vertical. We had particular strength in retail in APAC, a trend that began in the second quarter of 2023 and continued through the end of the year.

To keep this momentum going, we're focused on delivering value across 4 pillars:

creation, viewers, monetization and responsibility. First, creation, which increasingly takes place on mobile devices. We've invested in a full suite of tools, including our new YouTube Create app for Shorts, to help people make everything from 15-second Shorts to 15-minute videos to 15-hour live streams with a production studio in the palm of their hands.

Number two, viewers. We continue to grow watch time across YouTube with strong growth in Shorts and connected TV. Shorts remains a top priority. We have 2 billion-plus logged-in users every month, and we are averaging 70 billion in daily views. Connected TVs, or what we refer to as the living room, is where viewership is growing the fastest. We're investing to make this experience even better with interactive features tailored to TVs, plus the content people love:

our creators, NFL Sunday Ticket and the range of live sports and studio content via YouTube TV and Primetime Channels. Put this all together and YouTube is the must-have app on every connected TV.

Ruth Porat:

Thank you, Philipp. We are very pleased with our full year results with 2023 Alphabet revenues of $307 billion, up 9% versus 2022, which added $25 billion to revenues for the year. We ended with a strong fourth quarter with consolidated revenues of $86.3 billion, up 13% versus last year in both reported and constant currency.

Brian Nowak:

I have two for Philipp. Philipp, the first one is about sort of a lot of the new generative AI advertising tools. You obviously have a lot of irons in the fire here. You've been talking about some of the early momentum with tens of thousands of advertisers.

Philipp Schindler:

Yes. Thank you so much. So I've covered this a little bit on previous quarters. AI has been at the core of our advertising products for a very, very long time. And the recent advances are really allowing us to drive more value for advertisers across a large range of different areas

Operator:

Our next question comes from Doug Anmuth with JPMorgan.

Operator:

Our next question comes from Eric Sheridan with Goldman Sachs.

Ruth Porat:

And then in terms of your other question, so on the real estate charge of $1.2 billion in exit charges related to real estate, that is in Alphabet-level activities. But the other comment I was making in opening comments is when you go through the various line items, R&D, et cetera, you see it spread there. And we have a table and IR can walk anybody through the technicals on that just to understand how it then gets arrayed across the various lines in the P&L.

Michael Nathanson:

I have two for Philipp, I think. Given the importance of connected TV engagement in YouTube, can you talk about the opportunity outside the U.S. for connected TV? And what the company is doing at large to drive more adoption of YouTube or connected TVs given the Google operating system? And can you talk about outside the U.S.?

Philipp Schindler:

Yes. Thank you so much for your question. On the connected TV side, I mentioned it actually continues to perform really well. I said before, YouTube is the leader in U.S. streaming watch time and it's not just one audience group diving deep it's really all audiences. On the international side, it's something we are closely looking at. There's nothing specific I have to add at this moment in time on this one.

Operator:

Our next question comes from Stephen Ju with UBS.

Justin Post:

Maybe one for Sundar and one for Ruth. Just on Search growth, I think there are some concerns on use of competitive AI tools as an alternative to Search. Just wondering if you're seeing any changes in query volumes, positive or negative, since you've seen the year evolve and more Search Generative Experiences. And what can really make Google stand out versus other AI tools?

Sundar Pichai:

Thanks, Justin. First of all, look, we think about effects on Search, obviously, more broadly. People have a lot of information choices. So -- and user expectations are constantly evolving. And so we've been doing this for a long time. And I think what ends up mattering is a strong continuous track record of innovation.

Ross Sandler:

So I guess a question for, I don't know if it's Sundar or Philipp. But if we go back to the DOJ trial that happened in the fall, there was a document that was disclosed from Google that said something along the lines of why being on ad quality team to deliver 20% RPM growth in Search is a fragile strategy. So dating back to 2019, your business has, I think, more than doubled since then.

Sundar Pichai:

Look, I think I have tremendous confidence in the quality driven both our work, be it search quality, ads quality, our improvements on search, our improvements on ads RPM, all -- 2 foundational pillars are extraordinary focus on ads quality so that we deliver the actual ROI to advertisers and improve the experience for users and all underpinned by rigor and technical excellence and go-to-market excellence, right?

Operator:

And our last question will be from Mark Mahaney with Evercore.

Philipp Schindler:

So on your YouTube question, maybe let me start with a general view. YouTube's mission, you know, has enabled millions of creators around the world to share their voice and connect with audiences and obviously build thriving businesses here. And AI has been a very critical piece of this already.

James Friedland:

Thanks, everyone, for joining us today. We look forward to speaking with you again on our first quarter 2024 call. Thank you and have a good evening.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Third Quarter 2023 Earnings Conference Call. [Operator Instructions]

James Friedland:

Thank you. Good afternoon, everyone, and welcome to Alphabet's Third Quarter 2023 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat.

Sundar Pichai:

Thank you, Jim, and hello, everyone. I'm pleased with our business results this quarter, which demonstrates strong growth in Search and YouTube and momentum in Cloud. Google turned 25 in September, which offered an opportunity to reflect on our progress over the last quarter century and to look ahead to the opportunities enabled by AI we are so excited and confident about.

Ruth Porat:

Thank you, Philipp. We are very pleased with our financial results for the third quarter, driven by meaningful growth in Search in YouTube and Momentum in Cloud. My comments will be on year-over-year comparisons for the third quarter, unless I state otherwise. I will start with results at the Alphabet level followed by segment results and conclude with our outlook.

Brian Nowak:

I have two. The first one, maybe just a little bit of a jump ball. There's somewhat of an investor debate about sort of the incremental return on capital to Search when it comes to AI. I know it's early, but are there any examples that you're seeing with SGE or Bard on higher utility, higher conversion rates, more engagement, just something to sort of show signal around the return that could come from these investments?

Sundar Pichai:

Ruth, do you want to take the second part? I'll take the first.

Sundar Pichai:

And to your first part, obviously, we see AI as a foundational platform shift and are excited about the opportunities across our business. It starts with Search. And I've been pretty pleased with how the user feedback has been on SGE. We are rolling it out to more users. Through it all, we are making sure the product works well, and we are generating value for our ecosystem, and that adds transitions well. And I think I view this as, with AI, the opportunity to evolve Search and Assistant over the next decade ahead. And I think as we've always seen, when you continue to invest and build great experiences, you can get value on the other side. And I do think over time, there will be newer paths, just like we have done on YouTube. I think with the AI work, there are subscription models as a possible path as well. And obviously, all of the AI investments we are doing applies across Cloud, too, and I'm pretty optimistic about what's ahead there as well.

Douglas Anmuth:

One for Sundar and one for Ruth. Sundar, you talked a lot about AI. I was hoping you could talk more about Gemini and how it will differentiate from other models some of the multimodal capabilities and what new experiences or agents do you think it could unlock and how we should think about timing? And then also just on Cloud, hoping you can talk about some of the factors there on the decel in cloud and just what you're seeing in terms of optimizations? And is there any sign of new workload deployments taking place?

Operator:

Your next question comes from Eric Sheridan with Goldman Sachs.

Ruth Porat:

And then on to your second question regarding YouTube, as we said, overall year-on-year growth in revenues was driven by both brand advertising and direct response. But very much to your question, yes, there was a stabilization in spending by advertisers. We're really pleased about that. We're particularly pleased about the ongoing performance in the Living Room and on Shorts. And as I said, that's both watch time growth and monetization. I'd say the other thing benefiting YouTube is the retail strength we talked about with Search, retail strength in APAC in both Search and YouTube. And that really began in the second quarter, continued in the third quarter, but that was another contributor. So quite a number of things going on. I feel good about the results the team was able to deliver here.

Lloyd Walmsley:

Two, if I can. First, as we just think about the rollout of SGE across the user base, like how far along is that? And how do you balance the product rollout and consumer uptake versus monetization in that transition?

Sundar Pichai:

On the first part about SGE, we are still in very, very early days in terms of how much we have rolled it out, but we have definitely gotten it out to enough people both geographically across user segments and enough to know that the product is working well, it improves the experience and -- but there are areas to improve, which we are fine-tuning. Our true north here is getting at the right user experience we want to, and I'm pretty comfortable seeing the trajectory. And we've always worked through these transitions, be it from desktop to mobile or from now mobile to AI and then to experience. And so it's nothing new. And I feel very comfortable that as we go through it, the strength of our teams, both on the organic side as well as at site, to drive the right experience for users, including ads, will pay dividends. And I think we'll continue to make improvements and make progress there.

Operator:

Your next question comes from Michael Nathanson with MoffettNathanson.

Philipp Schindler:

So as Sundar said earlier, we're several weeks into our first season, and we're very pleased with how it's going. I think, in the broader context, you have to look at it as an overall YouTube subscription strategy. The great feedback we've gotten so far in the YouTube experience is very, very significant. People love the navigation. They love multi-view, they love the chats and the polls. And frankly, people are very happy with the lack of latency here. The #1 piece of concrete feedback the team has gotten is actually that people want the ability to pick their own games from multi-view, which is multi-view is the awesome feature we started rolling out on YouTube TV, that gives sense to the ability to basically watch multiple streams at once. And yes, overall, the teams are working hard to build a fantastic experience, and we are really trying to stay focused on getting our first season right and providing the best possible experience really for fans here.

Justin Post:

A couple of questions on Q4. Can you provide any color if there's been any pause in advertising around the Middle East conflict in October, anything we should be aware of for Q4?

Ruth Porat:

So look, on the first question, obviously, this is tragic. There are no words to talk about what's going on. And all of our focus has been on supporting our people there and how our products can be as helpful as possible in this very painful time broadly, and so nothing really to add.

Kenneth Gawrelski:

Two questions, if I may. First, how do you think about the future structure of AI-driven Search capabilities? Will activity remain centralized in a search bar or will it be decentralized and present in many different applications, including on third-party applications? You alluded to Bard being integrated into multiple Google experiences earlier in the call.

Sundar Pichai:

On your first question, look, I broadly think of it as people are looking for information. They always look for it in many, many different ways. We've given the product search example. People can directly go to Amazon, as an example, or come to Google. So if you zoom back and take an information view of the world, there's always been many different ways to get it. And part of our work we do in making Search be world-class and give users what they're looking for is so that we can get as much of that intent as possible. So I don't see that changing. With mobile, there were more ways people could get information, but we worked out to make Search work better in the mobile world. And similarly, a view with AI, there'll be many ways people get information, but it also offers us an opportunity in Search and in Assistant to take it to the next level and answer use cases, which we couldn't have done before, and expand the diverse set of needs where we are sourced. So that's how I see the opportunity ahead.

Mark Stephen Mahaney:

Two questions, please. Ruth, you talked about these elevated levels of investments in Q4 and in '24. I'm sorry, were you referring to just CapEx or CapEx and total expenses? And then on the comments around stabilization in Cloud, is this something that you just started to see in the September quarter? Or had you seen that starting earlier in the year? And if you just started seeing it in the September quarter, would you have any thoughts on why you would have seen it, like Google Cloud would have seen it maybe later than some of the other hyperscalers?

James Friedland:

Thanks, everyone, for joining us today. We look forward to speaking with you again in our fourth quarter 2023 call. Thank you, and have a good evening.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2023 Earnings Conference Call.

Philipp Schindler:

Thanks, Sundar, and hello, everyone. Happy to be here with you all today. Let's jump right into our performance for the quarter.

Ruth Porat:

Thank you, Philipp. Before I go into the results, first, Sundar, thank you very much for the opportunity. I'm very excited about the new role, and I look forward to it.

Operator:

[Operator Instructions]

Brian Nowak:

I have 2. The first one for Sundar. Sundar, I'd be curious to learn about some of your early learnings and surprises around consumer behavior on how people are using Bard versus Search. And what new behaviors or consumer utility are you most excited about as you think about what Gemini could provide for people over the course of the next year or so?

Sundar Pichai:

Thanks, Brian. I'll take the first part. It's definitely early days, but both across Bard and Search Generative Experience, feedback has been very positive from our users. I think we are definitely now able to serve, I would say, deeper and broader information use cases, which is very exciting. I wouldn't say surprised. So for example, people really using it to -- for coding, something we understood, but it's definitely on the new side. There's a lot of excitement around, we integrated Google Lens into Bard. We have known how big Google Lens can be. We see that in the visual searches we get and how much it has grown over the last 2 years, and so we've been doing this for a while. But definitely, that, in Bard, has been super well received. So which gives me a sense that as -- given Gemini is being built from the ground up to be multimodal, I think that's an area that's going to excite users. When I go back many years ago when we did universal search, whenever, for users, we can abstract different content types and put them in a seamless way, they tend to receive it well. And so I'm definitely excited about what's ahead.

Operator:

The next question comes from Eric Sheridan of Goldman Sachs.

Ruth Porat:

Just to underscore, when you ask the point about impact, one of the places Sundar and I have discussed quite a bit is landing well the 2024 capital plan and the multiyear plan and completing all of the very important efforts we have underway. We're excited about what they mean, setting the company up well to be able to invest for long-term growth. And so we're continuing to execute against those. And then I think Sundar summarized it well. We see technology can make such a difference in the lives of so many and there's lives of economies. And to be able to focus on the impact on economic growth and the opportunity for people, for organizations for countries, I think, is a privilege. I'm really excited about it, in particular, with this amazing company. And so focusing there as well as the investments that we make across Alphabet to drive economic growth globally across numerous sectors.

Douglas Anmuth:

One for Sundar and one for Ruth. For Sundar, curious, how do you think about timing for more broadly integrating generative AI into Search? And more specifically, what are some of the things you'll need to see to do that?

Sundar Pichai:

Look, on the Search Generative Experience, we definitely wanted to make sure we're thinking deeply from first principles. While it's exciting new technology, we've constantly been bringing in AI innovations into Search for the past few years, and this is the next step in that journey. But it is a big change so we thought about from first principles. It really gives us a chance to now not always be constrained in the way Search was working before allowed us to think outside the box. And I see that play out in experience. So I would say we are ahead of where I thought we'd be at this point in time.

Ruth Porat:

In terms of CapEx, I tried to lay out sort of the cadence of CapEx, and the point was an important one that the sequential step-up in the second quarter was lower than anticipated for the 2 reasons I noted

Lloyd Walmsley:

I wanted to just follow up on the -- some of the SGE questions and just get a sense -- I know it's early, but what are you seeing in terms of monetization? And how do you guys think about that as you scale up the deployment of SGE? Is that -- I think there's a lot of concern out there that maybe in the short term, it's a bit of a headwind. But over the longer term, maybe query growth from a more useful product can kind of make up for that. But how do you guys see that playing out? And what can you share there?

Operator:

The next question comes from Justin Post of Bank of America.

Sundar Pichai:

Thanks, Justin. Okay. It is an exciting moment overall in Cloud because there is definitely a lot of interest from customers on AI, and they definitely are engaging in many more conversations with us. So I would say, without commenting on the short term, but when I think about it long term, I view the AI opportunity as expanding our total addressable market and allows us to win new customers. Scale of investments that we can directly bring to Cloud now. As I said earlier, we have over 80 models across Vertex, Enterprise, Search and Conversational AI, and we are taking all of them, translating it into deep industry solutions. So I'm excited about it.

Ruth Porat:

So we -- I don't think we commented on that. And yes, in the second quarter, GCP growth was above the growth rate for Cloud overall.

Michael Nathanson:

One for Philipp and one for Sundar. Philipp, can you talk about the ad market? If you step back, you're seeing real signs now of weakness in linear TV, ad agencies, small and digital companies were all slowing, and the macro backdrop is definitely cloudy, yet you guys have accelerated your growth this quarter. What factors are you looking at do you see that would identify why you are growing while others are really struggling and slowing down?

Sundar Pichai:

Maybe I can comment on the -- how we think about R&D. And look, if anything, I think 2 things. We are always committed to driving deep computer science research and innovation. That's the foundation on which the company is built. And taking that and applying it and building new products and services and generating value is the virtuous cycle. And so nothing changes in that fundamental thesis.

Philipp Schindler:

Yes. Look, I can't comment on others, but our focus continues obviously to be helping customers through whatever uncertainty or complexity they're facing, and a lot of companies are focused on profitability, driving efficiencies, and they're carefully evaluating the effectiveness of their budgets. And our goal is really to help them maximize efficiency and drive strong ROI.

Operator:

The next question comes from Ken Gawrelski of Wells Fargo.

Philipp Schindler:

Yes. Look, this is a great question. AI is a foundational component that really allows us to help users, advertisers, [ publishers ] and partners at scale. And we've been on a journey for years, right, to take the key components of advertising, whether it's bidding, targeting and creatives as well as innovation, frankly, in the core advertiser and publisher experiences and improve them dramatically through AI.

Mark Stephen Mahaney:

Okay. Actually, I'll follow up on that last question, Philipp. You pointed out AI has been used to improve the advertising mousetrap at Google for many years. Do you view generative AI as just a material accelerant of your ability to improve return on ad spend for the millions of marketers who use Google?

Philipp Schindler:

Look, as I said earlier, generative AI is supercharging new and existing ads products with really tons of potential ahead. And we're really helping advertisers here make better decisions, solve problems, enhance creativity. And I covered this earlier. For example, we launched a new conversational experience in Google Ads, the asset creation flow. In PMax, I mentioned the automatically created assets, the Product Studio and so on.

Mark Stephen Mahaney:

Congratulations, Ruth.

James Friedland:

Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2023 call. Thank you, and have a good evening.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet First Quarter 2023 Earnings Conference Call. [Operator Instructions]

James Friedland:

Thank you. Good afternoon, everyone, and welcome to Alphabet's First Quarter 2023 Earnings Conference Call. With us today are Sundar Pichai, Philipp Schindler and Ruth Porat. Now I'll quickly cover the safe harbor.

Sundar Pichai:

Thank you, Jim, and good afternoon, everyone. I'm pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation.

Today, I'll give an update on the 2 themes I spoke about last quarter:

one, our advancements in AI and how they are driving opportunities in Search and beyond; and two, our efforts to sharpen our focus as a company. Then I'll talk about our momentum in Cloud and close with our progress at YouTube.

In our last call, I outlined 3 areas of opportunity:

continuing to develop state-of-the-art large language models and make significant improvements across our products to be more helpful to our users; empowering developers, creators and partners with our tools; and enabling organizations of all sizes to utilize and benefit from our AI advances.

Moving on to retail where we had a solid quarter. Our focus is on 3 pillars:

number one, making Google a core part of shopping journeys for consumers and a valuable place for merchants to connect with users; number two, empowering more merchants to participate in our free listings and ads experiences; and number three, driving retail performance further with great ads products.

Ruth Porat:

Thank you, Philipp. Our financial results for the first quarter reflect continued healthy fundamental growth in Search and momentum in Cloud. As I go through the discussion today, I will reference some changes to our reporting and disclosures that are covered more fully in the 8-K we filed last week. I will conclude with our outlook.

In terms of expenses and profitability, year-on-year comparisons are impacted by 3 factors:

first, the $2.6 billion in charges we took in the first quarter related to workforce and office space reductions. We provided a table in our earnings release that shows the impact of those charges on cost of revenues and operating expenses.

Operator:

[Operator Instructions] Your first question comes from Brian Nowak of Morgan Stanley.

Ruth Porat:

And then in terms of the second part of your question, AI has been so much a part of what we've been doing for quite some time that there are a number of different ways to answer it. One is, as I noted, we have a number of efficiency efforts underway, and one of them is about using AI and automation to further improve productivity across Alphabet. That being said, we already have AI in a lot of what we do, for example, in the way we operate and run the finance organization. It's helpful in a lot of the analytics that we use. And one of the exciting things for us is the opportunity then to share that with Cloud customers.

Operator:

The next question comes from Doug Anmuth of JPMorgan.

Operator:

The next question comes from Eric Sheridan from Goldman Sachs.

Sundar Pichai:

I do think, I would add, that we are leaning into optimization. I mean that's an important moment to help our customers, and we take a long-term view. And so it's definitely an area we are leaning in and trying to help customers make progress in their efficiencies where we can. Philipp?

Ross Sandler:

I'll just ask a tough question. Sundar, you came up in a group that structured a lot of the Android partnerships from inception and I believe possibly the iOS agreement as well. So how do you feel about Alphabet's ability to maintain the unit economics with these partnerships in light of Microsoft's ambitions to increase its share of paid search? And Ruth, does this have any impact on your outlook for profitability of overall Alphabet over the long term?

Justin Post:

Maybe one for Sundar and one for Ruth. Sundar, you got the cost question on learning language models into Search. Can you talk about revenues? I think, on one hand, you'll see better relevancy and maybe better results with higher conversion. But on the other hand, there might be fewer areas for ads or fewer queries because people get answers more quickly. Are you optimistic on that transition? Maybe give us your thoughts there.

Sundar Pichai:

So first of all, throughout the years, as we have gone through many, many shifts in Search, and as we've evolved Search, I think we've always had a strong grounded approach in terms of how we evolve ads as well. And we do that in a way that makes sense and provide value to users. The fundamental drivers here are people are looking for relevant information. And in commercial categories, they find ads to be highly relevant and valuable. And so that's what drives this virtuous cycle.

Ruth Porat:

And in terms of our OpEx trajectory, yes, there was the elevated expense and OpEx from the $2.6 billion in severance and office space charges. There was also a $988 million benefit from lower depreciation due to the change in useful lives, but that obviously is an ongoing benefit. And there was also, as we noted in our earnings release, a benefit from the shift in timing of stock-based compensation from the first quarter to the second quarter, so a little bit of complexity there.

Operator:

The next question comes from Michael Nathanson of MoffettNathanson.

Philipp Schindler:

Yes. On the first part, again, it didn't come across quite clearly, but I hope I understood correctly. In Search, revenues grew modestly year-over-year, again, reflecting an increase in the retail and travel verticals, offset partially by a decline in finance and media and entertainment. So excluding the impact of FX performance, it was actually similar to last quarter. The ongoing performance of Search, notwithstanding the headwinds, reflects really Search's resilience with the, I'd say, ability of Search to surface demand and deliver a measurable ROI in an uncertain environment.

Operator:

The next question comes from Mark Mahaney of Evercore.

Colin Sebastian:

Two for me as well. I guess, first, Sundar, the consolidation of the AI teams, I think you talked about that helping to accelerate innovation. So I'm curious, specifically with that consolidation, what are the product milestones that we should look out for related to that?

Sundar Pichai:

Thanks. I'm quite excited by bringing the 2 world-class teams, I think, of both Brain and DeepMind. Their collective accomplishments in AI over the last decade have really set the stage for this moment, and so both getting access to pool talent so that they can work together in a coordinated way and definitely will help us pool our computational resources, too, which is going to be critical and will help us build.

Philipp Schindler:

So retail is an important vertical and driver for us, and I called out the year-over-year increase in retail and Search and other. I also talked earlier about the macro climate and how we've established we can really drive value for retailers, even in challenging times, whether it's online, off-line, both. We're helping them drive their business goals, meet customers wherever they choose to shop. Maybe a little more, some key trends here, retailers are increasingly focused on maintaining margins and driving ROI right now. PMax, Broad Match are key levers providing more incremental conversions, while insights on bids and budgets are really helping retailers identify opportunities for growth and efficiencies across our suite of products.

Operator:

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks.

Operator:

Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

The creator ecosystem and our multi-format strategy will continue to drive YouTube's long-term growth. And to support that growth, we're focused on:

number one, ramping Shorts; number two, accelerating engagement on large screen; number three, investing in our subscription offerings; and number four, a long-term effort to make YouTube more shoppable.

Other revenues were $8.8 billion, up 8%, reflecting several factors:

first, significant subscriber growth in YouTube Music Premium and YouTube TV; second, strong growth in hardware revenues, primarily from the Pixel family. Offsetting growth in these 2 areas was a year-on-year decline in Play revenues, reflecting a particularly large foreign exchange headwind in APAC as well as the impact of reductions of Play Store fees. TAC was $12.9 billion, down 4%. Google Services operating income was $21.1 billion, down 19%. And the operating margin was 31%.

Operator:

[Operator Instructions] And our first question comes from Brian Nowak with Morgan Stanley.

Operator:

And our next question comes from Michael Nathanson with Nathanson (sic) [ MoffettNathanson ].

Douglas Anmuth:

One for Sundar and one for Ruth. For Sundar, can you just talk more about how you can bring the AI products to market with the principles and integrity that you talked about, and how you can do that without kind of sacrificing quality or trust along the way?

Sundar Pichai:

Thanks, Doug. On the AI side, it is a really exciting time. I think we've been investing for a while, and it's clear that the market is ready. Consumers are interested in trying out new experiences. I think I feel comfortable with all the investments we have made in making sure we can develop AI responsibly. And we'll be careful. We'll be launching more as labs products in certain cases, beta features in certain cases and just slowly scaling up from there. Obviously, we need to make sure we are iterating in public, these models will keep getting better so the field is fast changing. The serving costs will need to be improved.

Ruth Porat:

And then on your second question, when we talk about being focused on delivering sustainable financial value, that obviously means that expense growth cannot be growing ahead of revenue growth. And we're focused on revenue upside as well as durable changes to the expense base to really ensure we have the capacity to invest in that growth. And clearly, the emphasis of revenue growth, there's a lot that's exciting ahead of us within Google Services, all of the AI advancements that are improving advertiser ROI and the search user experience and more broadly, as we've talked about across the key product areas.

Operator:

Our next question is from Eric Sheridan with Goldman Sachs.

Ruth Porat:

And then in terms of your question about Other Bets investment levels, so as we've talked about in prior calls, our goal for Other Bets is to use our deep technology investments to drive innovation with real potential for value creation. And at the same time, we are very focused on the overall pace of investment and the financial returns. And so what we're really looking at here are what are the opportunities for monetization and commercialization.

Justin Post:

Just digging into Search kind of low single-digit growth ex FX. Can you talk about the pressures there, volume versus pricing or CPCs? What's really driving the slowdown? It's kind of almost back to '09 recession levels. Just think about that. And then any signs that we're near a bottom? Any stabilization in growth rates you can talk about or how your outlook is for '23 on that?

Ross Sandler:

Just a question on the hardware business. Pixel's doing quite well, but it seems like there have been issues around other areas with this inventory write-down. So could maybe you guys just talk about, in your mind, the strategic importance of having the wide range of hardware products that you have in that segment as it relates to your overall AI initiatives?

Operator:

And our next question comes from Mark Mahaney with Evercore ISI.

Ruth Porat:

Thanks for the question. So as we've talked about on prior calls, with Google Cloud, we've really been investing ahead of our revenues, given the growth and the opportunity overall and the desire to ensure that we're equipped, able to support customers across segments around the globe. And so there's been meaningful investments to position ourselves to really have the momentum that the team has continued to deliver.

Brent Thill:

Ruth, can you give us a sense of what you're seeing in Q1? Is this year a little more seasonal than historic? Are you observing any different patterns just over 1 month into the year? Can you give us any color in terms of how you're framing this quarter?

Operator:

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Jim Friedland for any further remarks.

Operator:

Thank you, everyone. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome, everyone, and thank you for standing by for the Alphabet, Inc. Third Quarter 2022 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

For the third quarter, our consolidated revenues were $69.1 billion, up 6% or up 11% in constant currency. Our total cost of revenues was $31.2 billion, up 13%, primarily driven by other cost of revenues, which was $19.3 billion, up 20%. The biggest factor here was costs associated with data centers and other operations, followed by hardware costs. Operating expenses were $20.8 billion, up 26%, reflecting the following:

first, the increases in R&D and G&A expenses, which were driven primarily by headcount growth; and second, the growth in sales and marketing expenses, which was driven primarily by increased spending on ads and promotions, followed by headcount growth.

In terms of the revenue lines, Google Search and other advertising revenues of $39.5 billion in the quarter were up 4%. YouTube advertising revenues of $7.1 billion were down 2%. Network advertising revenues of $7.9 billion were down 2%. Other revenues were $6.9 billion, up 2%, reflecting several factors:

first, subscriber growth in YouTube Music Premium and YouTube TV continued to drive ongoing strong growth in YouTube non-advertising revenues; second, we delivered solid growth in hardware revenues, primarily from sales of the Pixel 6A. Finally, the growth in these 2 areas was offset by a year-on-year decline in Play revenues, reflecting a slowdown in buyer spend due to a number of factors, including lower engagement levels in gaming compared with earlier stages of the pandemic. In terms of costs within Google Services, TAC was $11.8 billion, up 3%. Google Services operating income was $19.8 billion, down 17% and the operating margin was 32%.

Operator:

[Operator Instructions]

Eric Sheridan:

Maybe 2 questions, if I can. Sundar, first, I think what investors are very curious about is how much this change in terms of aligning investment against your priorities is a reflection of what you expect to happen over the next 6 to 12 months in the broader macro environment versus a longer-term perspective of maybe maximizing for productivity and efficiency. Would love to get your philosophy on that.

Sundar Pichai:

Look, I would say it's a combination. Obviously, as a company, over time, we've had periods of extraordinary growth, and then there are periods where I viewed it as a moment where you take the time to optimize the company to make sure we are set up for the next decade of growth ahead. I view this as one of those moments. It gives us a chance to make sure we are, with clarity, identifying what are the most important areas and making sure we are directing our incremental investments towards those and as well as where we can realign. So I view this as an opportunity to do that and also being responsive to the current macro environment we are seeing.

Operator:

Our next question comes from Brian Nowak of Morgan Stanley.

Douglas Anmuth:

Ruth, you highlighted momentum in Cloud and growth accelerated in 3Q. Are you seeing any changes in Cloud demand as existing or potential customers perhaps rethink their priorities? And then how should we think about the pace of investments at Cloud going forward? Do you still believe that you're in more catch-up mode? Or should we expect a more stable rate of investment and greater profit improvement?

Michael Nathanson:

Sundar, I have one for you and then one for you, Ruth. I want to ask you about TikTok but not as it relates to YouTube, more about Search. It looks like younger consumers are spending more time on TikTok searching for product reviews, recommendations, advice. I'm interested in learning if you've seen any changes in your search behavior by demographics in Google. And then do you think search has become more visual and less text-based going forward in order to maintain more relevance for its younger users? So that's one.

Sundar Pichai:

Look, I think it's always important that we try and understand our user segments and their needs so that we can make sure the products are helpful and working for them. And we also conduct thousands of studies a year to understand how user needs are evolving. And as part of it, there are some studies which obviously show people, particularly younger users in certain categories, maybe fashion inspiration as an example, look for more visual ways to engage.

Ruth Porat:

And then in terms of your question regarding margins, 2 parts really. On other cost revenues, the biggest driver of the year-on-year increase in other cost of revenues does continue to be data centers and other operations. The change really here this quarter in Q3, the second largest driver was hardware. And then CAC moved from its usual #2 spot down to #3.

Ross Sandler:

Hate to beat the dead horse on the Google Services margin, but Ruth, you just mentioned mix shift. I think that's a lot of what's going on here. And given the trajectory that you're seeing in Search and in Play, which we estimate are where most of the profit's coming from in that segment versus some of those lower-margin items, YouTube subscription, hardware, et cetera, maybe you could help frame the next like couple of years. Is this going to land below pre pandemic, which I think was around where we are here at 32%? Could we see the 2Q '20 low of 27% for Google Services margin? Any help just framing where that might land would be helpful.

Operator:

Our next question comes from Brent Thill of Jefferies.

Ruth Porat:

Why don't I start and then I'll pass it to Philipp for a bit more color potentially? Because I want to make sure that one of the comments that we made in the opening comments was very clear, which was the year-on-year story in Ads was really lapping the very strong third quarter. And so to get to your question, you're really talking about sequential decline in our year-on-year growth.

Operator:

Our next question comes from Mark Mahaney of Evercore ISI. Apologies, we'll need to go to the next question that comes from Maria Ripps of Canaccord.

Ruth Porat:

We're holding to see if there are technical difficulties. Thank you, all. And if the operator could keep us posted here, maybe even trying to -- yes.

Mark Stephen Mahaney:

Just checking. Can you hear me?

Mark Stephen Mahaney:

Okay. Two questions, please. One, Sundar, you've been with the company for a long time. You've seen these cycles before. Can you put any context as to the -- as economic conditions wax and wane, the impact that has on Google? Like how does this environment look to you versus prior cycles that the company has managed through?

Sundar Pichai:

Thanks, Mark. Well, a couple of things. I think compared to the past, I think are going through this, I mean there is, as we have said before, there is more uncertainty as we go through. We definitely see indicators on both sides so that makes it a bit more unique. Number two, I would say the strength of Search both as a product for users as well as for advertisers in terms of delivering ROI through a tough time in the ad market, I think, is great to see.

Ruth Porat:

And then in terms of your second question, I think the core to Sundar's comment is with the rapid pace of growth that we've experienced, we see opportunities to focus more. And that drives opportunities to redeploy amazing talent we have into the highest priority efforts that we have and to be as effective and efficient as possible.

Maria Ripps:

First, you talked about strength in retail and travel. Can you maybe talk about automotive advertising and whether you're seeing any signs of recovery as supply has been normalizing? And if so, how might this rebound sort of compared to prior cycles? And then secondly, just on Performance Max, it seems like it continues to do pretty well here. So based on your conversations with advertisers, are there any specific features or functionality that you would call out as significant drivers of the product attractiveness? And is there any color you can add maybe around relative ROI of PMax?

Operator:

Our next question comes from Justin Post of Bank of America.

Sundar Pichai:

Thanks, Justin. Look, I mean, I think on the AI front, we are still in very early innings. We've been very good about, as our research teams are making progress, bringing it into Search so pretty much transformer-based models, including BERT and MUM and Search now. So it's driven a massive improvement in search quality and helped us extend the lead in quality over other products.

Ruth Porat:

The majority of CapEx does continue to be for our technical infrastructure. And as we've talked about on prior calls, servers really has been the largest driver of the investment dollars. The technical infrastructure team has consistently focused on levers to improve utilization and efficiency and they continue to do so.

Operator:

That concludes our Q&A session. I'd like to turn the conference back to Jim Friedland for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Welcome, everyone, and thank you for standing by for the Alphabet Inc. Second Quarter 2022 Earnings Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Philipp Schindler:

Thanks, Sundar, and hi, everyone. It's always great to be with you all. As Sundar indicated, we're as focused as ever on helping businesses navigate complexity and operate from a position of confidence.

Operator:

And our first question comes from the line of Douglas Anmuth from JPMorgan.

Brian Nowak:

Sundar, I just wanted to sort of follow up on the last question a little bit. I think your -- the tone around investment for the year changed somewhat over the course of the last few weeks, you've kind of gone through July and heard about slowing of hiring and now reported hiring pause.

Sundar Pichai:

I think Ruth gave color on what we are talking about as uncertainty. I think we see that as well. All of us are reacting to quite a varying set of dynamics, and it's tough to summarize it because the factors -- underlying factors are different and they vary by maybe geography and verticals.

Eric Sheridan:

Maybe I can ask a 2-parter on YouTube. You've called out the tougher comps over the last couple of quarters. Can you give us a better sense of how you move away from some of those tougher comps in the periods ahead of us, over the next 12 to 18 months and how maybe we should think about the digestion of the direct response growth and consumption growth that YouTube saw a year ago and how that might lead to better growth ahead for YouTube in the periods going forward.

Ruth Porat:

Thanks, Eric. There was a lot in your question, so I'll start and then I'll pass it to Philipp. An obvious point as we're pointing out the lapping of what truly were extraordinary growth rates as time will get us through the lapping. So that's obvious math, but you asked the question.

Michael Nathanson:

Can I ask one to Ruth and Sundar and then one to Philipp. So Ruth and Sundar, given just how strong this company is in terms of balance sheet and profitability, I wonder what's your north star when you think about shopping your focus? What's driving your decision-making?

Ruth Porat:

I would just add, we talked about this last year. Some of the operating margin upside last year was due to timing issues with the search of revenues, and we indicated at the time there was a lag in part on some of the investments whether that's data centers or otherwise.

Operator:

And our next question comes from Justin Post from Bank of America Merrill Lynch.

Operator:

And our next question comes from the line of Brent Thill from Jefferies.

Ruth Porat:

Thank you. I mean at the heart of the capital allocation strategy is really what we've been talking about on this call, investing in long-term growth and driving cash flow. So we have the opportunity to continue to invest and return capital to shareholders.

Operator:

And our next question comes from Mark Mahaney from Evercore ISI.

Colin Sebastian:

Maybe 1 follow-up, Sundar, on the sharpening of the focus you talked about, of course, AI and Cloud as being key areas of long-term focus. Are there any areas worth calling out that may be a lower priority now given that focus?

Sundar Pichai:

Good question. And look, one way we can think about it is through moments like this. So for example, we are obviously investing deeply in AI. We do everything from pure research to applied research to research, which is now -- things -- AI work, which is actually happening very close or within the areas like Search and YouTube, et cetera.

Operator:

And our last question comes from the line of Ross Sandler from Barclays.

Operator:

And that concludes our question-and-answer session. I'd like to turn the conference back over to Jim Friedland for any closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.

Operator:

Welcome, everyone, and thank you for standing by for the Alphabet First Quarter 2022 Earnings Conference Call. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Ruth Porat:

Thank you, Philipp. We had a strong first quarter with revenue growth led again by Search and Cloud. My comments will be on year-over-year comparisons for the first quarter, unless I state otherwise. I will start with results at the Alphabet level, followed by segment results and conclude with our outlook.

Operating expenses were $18.3 billion, up 24%. Headcount growth was the primary driver of expense across all 3 categories:

research and development, sales and marketing and G&A. Growth in sales and marketing also reflects an increase in advertising and promo expense as we ramped back from the lower levels of spend last year.

Brian Nowak:

I have 2. The first one, Ruth, wondering, could you talk to us at all about sort of the shape of the ad business growth throughout the first quarter, understanding there's some uncertainty around Ukraine, et cetera? And then what have you seen sort of quarter-to-date in the overall Search business from a growth perspective?

Ruth Porat:

Thanks, Brian. So in terms of the ad business, I would say, as I did in the opening comments, we were very pleased with the year-on-year Search revenue growth in the first quarter, up 24%. And it really reflected the strength that we've seen in retail, as Philipp and I commented on.

Operator:

And our next question comes from Eric Sheridan from Goldman Sachs.

Ruth Porat:

Great. So I'll start on the first question and revenue impact. I think you are asking from the war and anything else that was relevant there. I would say the most important, as both Sundar and Philipp said, is what a tragic humanitarian crisis this is. And across Google, we're doing a lot to provide support.

Philipp Schindler:

So maybe to dig a little deeper into the part of your questions around Shorts. Shorts went global, rolled out to over 100 countries, and as Sundar mentioned, now has 30 billion daily views, which is 4x higher than a year ago. And if we take the creator view, we're taking a fresh look at what it means to monetize Shorts and reward creators for their short-term videos. The first step, I think, is our $100 million YouTube Shorts Fund, which is now available in over 100 countries globally. And over 40% of creators who will receive payment from the Shorts Funds in 2021 weren't in the YouTube Partner Program, just as an interesting number.

Operator:

And our next question comes from Doug Anmuth from JPMorgan.

Operator:

And our next question comes from Justin Post from Bank of America Merrill Lynch.

Operator:

And our next question comes from Mark Mahaney from Evercore ISI.

Ruth Porat:

So in terms of the first question, impact from the war, I think it's too early to comment. Tragically, it is still ongoing. So too early to comment there.

Michael Nathanson:

I have one on YouTube, of course, and then one for Ruth. On YouTube, I think what we're hearing is that there's emerging concern that TikTok is a competitor to YouTube's mobile position. And I know you called out the strength of Shorts, but can you talk big picture if you're seeing any meaningful shift in consumer demand to the mobile YouTube product? And any type of advertising maybe shift on mobile because of TikTok?

Philipp Schindler:

Look, maybe I'll start on the first part of your question. It's very similar to what Ruth said before. I mean we've seen significant investment in online video, and there's been a ton of innovation. But there are 2 billion plus logged-in viewers who visit YouTube every single month, and more people are creating content on YouTube than we've ever seen before. And the team remains very focused on trying to help creators grow, trying to innovate.

Ruth Porat:

Yes. In terms of geographic color, just to even broaden out your question a bit more and go through the various regions, so in the U.S., we were pleased with the 27% year-on-year growth. And I think nothing to call out there. In Europe, as you noted in your question, the slightly bigger impact from the war in Ukraine than in other regions, and then the sizable delta between fixed and floating really reflects the meaningful strengthening of the dollar versus the euro.

Operator:

And our next question comes from Brent Thill from Jefferies.

Sundar Pichai:

Thanks. Look, overall across the board, I'm excited because you saw in my earlier remarks there's a lot of product innovation across the key areas, be it data and analytics, cybersecurity, our open multicloud as well as Google Workspace. So when I look at the innovation in the product pipeline and the overall demand we are seeing and how early our journey is, there's definitely a lot to look forward to. Cybersecurity has been a particular focus. We obviously are excited about our acquisition of Mandiant, which I think will help us serve customers deeper as well.

Operator:

And our next question comes from Stephen Ju from Credit Suisse.

Sundar Pichai:

Thanks, Stephen. Obviously, we've been focused on making sure payments works well. One, maybe you can step back and think about it as that our payment strategy is very similar to the strategy we have for commerce overall. We want to make all of this work easier, both on the merchant and the financial institution side, and making sure they can connect with the customers well. And you mentioned the work in India that was certainly what really got everything started. We are now -- 150 million people across 40 countries are using Google Pay.

Daniel Salmon:

I have 2 questions. First, I'd like to ask about Google Analytics, where there's been a transition ongoing for a year or so now to a new version of the product and where you'll begin sunsetting the older version next year. That's always a really important tool for advertisers and publishers to measure the impact of your advertising. So could you tell us a little bit more about those changes, how they may or may not be related to the deprecation of cookies in Chrome and how you plan to ensure its smooth transition?

Philipp Schindler:

So I can take the one on the Google Analytics side. This is something we've been working on for a very long time. There is no specific relation to what you've mentioned. This is one of the normal upgrades to our products that we're doing on a quite regular basis. We're very excited about it. Advertisers are excited about it. Our partners are happy about it. So this is -- yes, this is a nice one. We like it.

Operator:

Thank you. And that concludes our question-and-answer session. I'd like to turn the conference back over to Jim Friedland for any closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for participating, and you may now disconnect.

Operator:

Welcome, everyone, and thank you for standing by for the Alphabet Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. I'd now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Sundar Pichai:

Thank you, Jim, and Happy New Year, everyone. The last few months have been challenging for communities everywhere because of Omicron. I'm grateful for the frontline healthcare workers who are helping us through it and glad to see signs that this wave is receding in many parts of the world. Whether it's helping people find a COVID testing center, learn a new skill or launch a new business, our mission to organize the world's information and make it universally accessible and useful is as relevant today as it's ever been. In 2022, we'll stay focused on evolving our knowledge and information products, including Search, Maps and YouTube, to be even more helpful. Investments in AI will be key, and we'll continue to make improvements to conversational interfaces like the Assistant. I'll begin by touching on a few highlights from Q4. Our new AI models are helping to create information experiences that are truly conversational, multimodal and personal. For example, Multitask Unified Model, or MUM for short, has improved searches for vaccine information. And soon, we'll introduce new ways to search with images and words simultaneously. In October, we introduced a new AI architecture called Pathways. AI models are typically trained to do only one thing. With Pathways, a single model can be trained to do thousands, even millions of things. From MUM to Pathways to BERT and more, these deep AI investments are helping us lead in Search quality. They're also powering innovations beyond Search. For example, DeepMind's protein folding system AlphaFold was recently recognized by Nature & Science Magazine as a defining breakthrough. To illustrate the scale of the team's achievement, it took scientists more than 50 years to figure out the structure of 150,000 proteins. The DeepMind team has now expanded that number to 1 million, and they think they will get to more than 100 million this year. Philipp will talk in great detail about our advertising business, which also benefits from our investments in AI. It's been a very strong quarter for us. Our teams have helped millions of businesses of all sizes and launched dozens of important features to help them get the most out of their online marketing spend. These businesses are the backbone of our global economy and the heart of our community. So helping them thrive is more important than ever. We are also seeing exciting momentum at YouTube. YouTube Shorts continues to drive significant engagement. We just hit 5 trillion all-time views and have over 15 billion views each day globally. This is helping our creator community reach newer and bigger audiences. In fact, more people are creating content on YouTube than ever before. Last year, the number of YouTube channels that made at least $10,000 in revenue was up more than 40% year-over-year, and we are continuing to improve support for artists and creators. More creatives than ever are earning money from our non-ads products like Super Chat and channel memberships and the Shorts Fund is now available in more than 100 countries. Another big area for investment is combining the best of AI software and hardware to deliver helpful experiences across our family of devices. In Q4, we set an all-time quarterly sales record for Pixel. This came in spite of an extremely challenging supply chain environment. The response to Pixel 6 from our customers and carrier partners was incredibly positive. And AI is making Pixel even more helpful. As one example, Live Translate detects whether a chat message is in a different language and automatically translates it in up to 48 languages. We are also focused on ensuring devices across the Android and Chrome ecosystems work well together. For example, at CES last month, we announced that we are working with Acer, HP and Intel to bring great experiences to their devices. Also announced at CES, the new Ripple open standard will broaden the capabilities of radar technology opening the door for new products and services. Another priority is ensuring our products and services are private, secure and safe. To that end, I'll note a new privacy sandbox proposal called Topics API. We think it will be a big improvement for protecting user privacy while also ensuring businesses are able to thrive online. We'll begin testing this year and look forward to feedback from the industry. Next, on to Cloud. It's been a big year, so let me go a bit deeper this quarter. In Q4, Cloud revenue grew 45% year-over-year to $5.5 billion. Alphabet's backlog increased more than 70% to $51 billion, most of which is attributed to Google Cloud. This growth comes from many leading businesses, including Albertsons and LVMH; digital natives, including Box and Spotify; and public sector agencies, including the Commonwealth of Massachusetts, the Defense Innovation Unit and the USDA. Our sales force, which we have more than tripled since 2019, delivered strong results across geographies, products and industries, and we continue to invest. For the full year 2021, compared with the full year 2020, we saw over 80% growth in total deal volume for Google Cloud Platform and over 65% growth in the number of deals over $1 billion. Our partner ecosystem is helping accelerate our growth. For the full year 2021 compared with the full year 2020, the number of customers spending more than $1 million through the marketplace increased by 6x. Customer spend through channel partners on GCP more than doubled, and the number of active certifications within our top global systems integrators more than doubled as well. Our product leadership continues with more than 2,000 new cloud products and feature releases in the last year. These were in four categories. First, our data cloud and our AI/ML platform is helping organizations like Cartier, Groupe Rocher and Mitsubishi Heavy Industries understand and use their data intelligently across multiple clouds. Our fast secure data sharing capability helps the National Cancer Institute advance breast cancer research. Our unified data lake and data warehouse, which brings together unstructured and structured data, helps TELUS and Tyson Foods improve their understanding of customers. And our AI/ML platform helps CN deliver better customer experience. Second, our open multi-cloud infrastructure enables customers like BBVA and Wells Fargo to run mission-critical systems on our cloud. We believe new auto scaling in our Kubernetes engine, which allows customers to run 15,000 node clusters, outscales the competition by up to 10 times. Our edge cloud helps us grow in telecommunications, driving partnerships in Q4 with Indosat Oridu Hutchison, Telenor and Verizon. They join existing customers and partners, including Ericsson, Reliance Jio and Nokia. Third, our cybersecurity products are helping product organizations like ANZ Bank, Meditech and Wayfair as a trusted cloud provider. VirusTotal helps product organizations from software supply chain vulnerabilities. Chronicle and Security Command Center help organizations detect and protect themselves from cyber threats. And our fraud prevention and identity verification solutions are protecting over 5 million websites. Finally, our secure communication and collaboration platform, Google Workspace is helping public sector organizations like USAID and the U.S. Air Force Research Laboratory as well as global brands, including Colgate and Roche, adopt secure hybrid work. Our new Work Safer program launched in Q4 provides the highest security for e-mail meetings and documents by bringing together Google Workspace, Titan security keys, zero trust and other security advances. Customers come to Google Cloud because of our expertise in bringing enterprises and consumer ecosystems closer together. One example is Shopify. From Black Friday through Cyber Monday, Shopify reported $6.3 billion in global sales by 47 million customers, all safely transacted on Google Cloud. Importantly, we have made progress operating 24/7 on carbon-free energy and continue to provide customers the cleanest cloud in the industry. On to our Other Bets. October marked the one-year anniversary of our Waymo One fully autonomous commercial ride-hailing service in Arizona. In San Francisco, hundreds of riders are using Waymo One as part of our trusted tester program, but many more on the waiting list. And Waymo Via continues delivering freight into the Southwest U.S. and developing partnerships with key industry players. Before I close, I want to say how proud I am of Google’s work to help economic recovery around the world. Nearly a third of small business owners say that without digital tools, they would have had to close their business during the pandemic. Digital skills have also been a lifeline to help people find jobs and grow their carriers. Since 2014, we have provided digital skill training to over 90 million people around the world. In the months and years ahead, technology will help unleash new opportunities globally, especially as hundreds of millions more people come online in places, including Southeast Asia and Africa. With that, let me thank Googlers everywhere for their contributions this quarter and throughout 2021. Over to you, Philipp.

Ruth Porat:

Thank you, Philipp. We are very pleased with our performance in the fourth quarter and for the full year, which reflected broad-based strength in advertiser spend and strong consumer online activity as well as substantial ongoing revenue growth from Google Cloud. My comments will be on year-over-year comparisons for the fourth quarter, unless I state otherwise. We will start with results at the Alphabet level followed by segment results and conclude with our outlook. For the fourth quarter, our consolidated revenues were $75.3 billion, up 32% or up 33% in constant currency, rounding out a strong year. Our total cost of revenues was $33 billion, up 26%, primarily driven by other cost of revenues, which was $19.6 billion, up 25%. The biggest factors here were

Douglas Anmuth:

Thanks for taking the questions. One for Sundar and one for Ruth. Sundar, first was just curious to get your view on Web3 and just how you’re thinking about Alphabet’s approach and where your primary efforts here may lie going forward? And then, Ruth, you mentioned the 6,500 increase in head count. I think it was the biggest that we’ve seen in any quarter ever. I know you’re catching up on hiring from the last several quarters. But can you just help us understand little bit more on where these investments are going in tech and how to think about the cost structure in ’22? Thanks.

Ruth Porat:

And in terms of headcount, we do continue to be a magnet for great talent. The number of applications is up year-on-year. And as I said, as you noted, we added almost 6,500 people in the fourth quarter. We do expect the strong pace to continue. And it really goes to comments from Sundar, from Philipp and from me. We’re excited about the opportunities ahead of us in particular, Google Services, Google Cloud, we’re adding. We intend to ensure we have the scale that we need to execute well. And so we’re continuing to hire, as I said. The majority were again in technical roles and really pleased with the opportunities we see ahead.

Operator:

Thank you. And our next question comes from Eric Sheridan from Goldman Sachs. Your line is now open.

Sundar Pichai:

On YouTube, look, one of the -- YouTube from day one, it’s been very focused on making sure we can support creators while it’s been a big part. And even recently, I mentioned in my remarks earlier about the growth we are seeing not just in ads, but beyond ads, with Super Chat, channel memberships and so on. Susan mentioned in her creator letter that -- while early, they’ll be taking a look at NFT and so on, with the view towards making sure the user experience works and -- but there is value, we are constantly thinking about how we can support and do more for creators. So that’s going to be an integral part. I think all the commerce experiences we are thinking about in YouTube is a whole additional layer of opportunity. And again, it’s another area where it all feels very early to me. We are seeing tremendous traction in YouTube across newer areas, be it podcast, gaming, learning, sports. And so across all these areas, we’ll kind of take a vertical-specific look and see how we can support creators better.

Eric Sheridan:

Thanks so much.

Brian Nowak:

Great. Thanks for taking my questions. I have two. Maybe the first one for Philipp. You’ve made so much progress over the last 12 to 24 months about improving the retail and e-commerce Search product for advertisers. As you look across the other verticals of Search, where are you most excited or see the most opportunity for innovation to really drive more value for advertisers in nonretail verticals as we go into 2022? Then the second question, either Philipp or Sundar, you both talked about the commerce shopping opportunity on YouTube. Can you just sort of talk to us a little bit about what aspects are already built out versus what areas of innovation or hurdles you still have to clear to really realize that commerce opportunity on YouTube? Thanks.

Sundar Pichai:

Maybe quickly on YouTube and commerce. Look, one thing I would say is across both Search, YouTube and other areas, there’s a lot of common infrastructure that’s getting done, right? So this is focused on merchants, onboarding merchants and all the back end so that we can have the broadest and the most comprehensive inventory available. And there, our partnership with other e-commerce platforms is a basic foundational layer we are putting in. And specifically on YouTube, while pretty early, there’s a lot of pilots underway, just we have introduced a creative tagging pilot program so that we were had a choice to browse, learn and shop products featured in the favorite videos, piloted shopping live streams with brands like Walmart and Target and more broadly, including product feeds more globally in video action campaigns. So there’s a lot more to do. Super early also on testing how shopping can be integrated with Shorts. And so again, early, but I find the opportunity space here pretty broad, and it’s exciting.

Justin Post:

Great. Thanks. Maybe one for Sundar and one for Ruth. First, on Search, very strong growth. Just maybe you could help us understand where you are in kind of the AI cycle of improvements there. There’s still a lot of room to go there, you have highlighted in several earnings reports. And second, is there any fundamental reason why Search could be higher growth today than it was pre-pandemic? And then over to Ruth, Cloud had impressive growth. I’m assuming the infrastructure layer is highest in the sector. And it grew 500 million plus quarter-over-quarter, but margins did come down. And so just kind of understanding what drove that? And then what it’s going to take to really show a good leverage there? Thank you.

Ruth Porat:

And in terms of Cloud, if we step back at the comments that both Sundar and I made, overall, we’re very pleased with the ongoing progress in the business, and that’s reflected in the revenue growth, as you noted, our backlog, the breadth of customer wins, the industry verticals. Our view is that we’re in an extraordinary time to help customers digitally transform their businesses. And the key thing is we believe it remains very early innings. So as a result, our focus remains on revenue growth and investing as needed as we’re looking over the long term. We’re continuing to invest aggressively. And it’s in our go-to-market capabilities. It’s our products. It’s our infrastructure. We do remain focused on the longer-term path to profitability, but we are continuing to invest here as we’re seeing early innings and pleased with the ongoing progress.

Mark Mahaney:

Okay. I’ll try two questions. I just want to follow-up on Justin’s question about Search growing faster than pre-pandemic. I think, Philipp you talked about a couple of areas within search and retail is at the front of the list. I think you mentioned in a few other categories. Travel was always a big category. Do you feel like travel has come back full or is it -- travel is still sort of underperforming for macro reasons versus where it was pre-COVID? And then, Ruth, just on the share repurchases, I think that was a record level in the quarter. How should we think about the share repurchases going forward? To what extent is it opportunistic versus, I don’t know, systematic or systemic way you think about returning cash to shareholders as every year, your free cash flow rises? Thank you.

Ruth Porat:

In terms of the share repurchase, as we’ve talked about on prior calls, we do view the share repurchase program as valuable and are pleased that we were able to increase the authorization to $50 billion last year. You’ve seen that we’ve increased the pace quite a bit over the last several years from $18 billion back in 2019 to $50 billion, as I said, for the full year 2021 and are just continuing to execute against it. We do have additional capacity under the existing authorization and just are continuing to execute against it, do view it as incrementally valuable.

Michael Nathanson:

Thanks. I have a couple, Sundar and Philipp. Sundar, I’m just interested in the decision you announced last week to move away from Federated Learning and go to Topics. So you could talk a bit about the reason and the rationale why you’re making that change. When FLoC was first announced, it was patterned to be very effective relative to cookies as a signal for advertisers. What do you think is going to be the impact as you go away from cookies to topics on ROAs and budgets? And then Philipp, I think during the pandemic, one of the big growth spurts has definitely been connected TV. Can you talk a bit about what YouTube is seeing with Connected TV and how important of a driver is that? And then as hopefully we get back to normal, what are you doing on the product side to make YouTube on CTV even more engaging as time goes on? Thanks.

Operator:

Thank you. And our next question comes from Brent Thill from Jefferies. Your line is now open.

Ruth Porat:

So overall, we did see strength as we’re going through the year. As I indicated, there was a broad-based advertiser strength. There was strong consumer online activity, and those were really the primary drivers. I think the one place that that comment might be more relevant is really in understanding the year-on-year within YouTube relative to last year, where there was strength. This year relative to -- there was real strength this year, but what we saw last year was more in line with, I think, your question, which was after a week beginning of the year, a very strong fourth quarter. Last year, we were lapping that very strong quarter last year. And so that explains some of the year-on-year growth comparisons. But overall, the key driver was the backdrop of broad-based advertisers support and spending?

Daniel Salmon:

Great. Good afternoon, everyone. I have two questions for Sundar. First, Sundar, you mentioned that investment in artificial intelligence has helped the ads business significantly. What are the two to three ways that you think AI has helped your advertisers invest your ad revenue growth the most? And then second, we’ve seen a variety of new bills introduced in the U.S. Congress recently that seemed to take in squarely at large technology companies like Alphabet. What do you think that these bills have right? And what do you think that they have wrong? Thank you.

Philipp Schindler:

So back to the first question you asked on AI and the impact on our ads product. We cover -- Performance Max, we talked about it. We talked about Insights page. In Search, I would say we see an emergence of a real, let’s call it, a better together story fueled by machine learning and automation. Advertisers are leaning more into automation using responsive search ads to create and select the best performing creatives, matching with more relevant search queries using broad match keywords, setting optimized bids with auction-time signals. We have smart bidding. So those are a few examples. We’re using more AI to help advertisers measure their results and bid intelligently with data-driven attribution, for example, which uses very advanced ML to more accurately understand how each marketing touch point actually contributed to a conversion obviously, while respecting user privacies, broad matched keywords are a big part of this. We have responsive ads on display and discovery. They use text image and video assets from advertisers and predict the best combination of assets to show in any size or format on Google properties or the display network. Yes, so I think AI and ML will only get better and so will our tools, and we’re helping advertisers lean into automation and identify new opportunities as a central part really of the recovery and growth strategies.

Operator:

Thank you. And our final question comes from the line of Stephen Ju from Credit Suisse. Your line is now open.

Sundar Pichai:

Thanks, Stephen. Great question. And I think that trend is going to continue. You mentioned, obviously, payments. And definitely, it’s informed our payment strategy globally. In general, we are trying to think deeper about these newer markets, both -- it really lines up with our mission of building a more equitable Internet for everyone. A couple of the things we have done recently. A year ago, we announced a $10 billion Google for India Digitization Fund. And it’s a reflection of our confidence in the future of India, its digital economy, our desire to build products there, which we think will help us globally. And last year in October 2021, we announced a plan to invest $1 billion in Africa, again, with the goal of supporting entrepreneurs, helping businesses with their digital transformation and beginning to build products in Africa for African users, which I think will help us take learnings outside. I already see it. When I look at YouTube in India, some of the commerce ideas we talked about earlier, you may see us first stride in India first because we can get quicker feedback, very dynamic youthful population. And so we’ll do it there and then roll it out globally. So we are constantly looking for opportunities like that.

James Friedland:

Thanks, everyone, for joining us today. We look forward to speaking with you again on our first quarter 2022 call. Thank you and have a good evening.

Operator:

Welcome everyone, and thank you for standing by for the Alphabet Q3 2021 Earnings C conference Call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. I'd now like to turn the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Sundar Pichai:

Thank you, Jim. And good afternoon, everyone. In 2016, I laid out our vision to become an AI first Company. Five years later, this quarter's results show how our investments in AI are building more healthful products for people and for our partners in local communities. Today, I'll begin with new product highlights. Then I'll cover our cloud business, followed by YouTube. First product highlights. Search remains the heart of what we do. We have made remarkable advances over the past 23 years that benefit search and related products like Google Assistant. We have just celebrated five years. Earlier this year, we announced that we reached a significant milestone with Multitask Unified Model, or MUM for short. MUM is a thousand times more powerful than BERT and can understand information across many contexts, like text and images. On our search event in September, we shared how we are using MUM theme through Google Lens, so people can search using both images and words. We also shared that we are bringing a more visual shopping experience to search, powered by Google Shopping graph. It linked shoppers with over 24 billion product listings from merchants across the graph. Google Maps now offers eco -friendly routing. It lets drivers in the U.S. to some more fuel-efficient route, saving money and reducing emissions. Maps now has a wildfire layer so that people can get up today details and make quick, informed decisions during emergencies. Finally, in search and us discover feed, we're continuing to support the news eco system and make quality journalism more accessible. Philipp will give a bit more detail about our new showcase partnerships. Turning next to hardware, I hope you saw our fall P pixel event last week. I am very excited about the range of Pixel phones available this holiday season. The new Pixel 6 and 6 Pro brings together the best of Google AI, software and hardware at the most advanced and inclusive cameras we've ever. They are beautiful, fast, and powered by Google Tensor, a first-ever system-on-a-chip. It's specifically built to support Google AI and machine learning on device, and provide s a long-term foundation for our Pixel devices. We also introduced our new Nest for a program, which uses Nest Thermostats to support clean energy use in the home. On to Android, Android 12 is getting great reviews. It's the biggest design change in Android's history with new widgets to personalize your phone. We also introduced accessibility features that use gestures to control your phone and communicate. Android 12 is secured by default and private by design. New dashboards and the indicators make it easier to view and adjust privacy permissions and disable access to device sensors and location information. We've also made progress with the made for India affordable smartphone co-developed with Reliance. The Geophone next device features premium localized capabilities and is on track to launch in-market by Diwali. Onto cloud, where we see continued momentum with Q3 revenue growing 45% year-over-year with GCP's revenue growth rate about Cloud overall. At Cloud next two weeks ago, we unveiled 100s of new capabilities, services, and solutions. We also announced 20 new and expanded partnerships to support the growth and scale of our customers around the world. More than any other top cloud provider. Google Cloud has unique capabilities to meet the needs of enterprises, digital natives, and SMB around the world. I'll highlight three. First, our leadership in real time data, analytics in AI, is winning customers like Carrefour Belgium, Post, DHL, and Wendy's, who are unlocking data to deliver unique business outcomes. Big Query, our leading data warehouse solution is reducing costs and driving productivity at Cardinal Health and ATB Financial. Our differentiated AI in mall-based industry solutions are helping leading global companies. GE Appliances, a higher Company is integrating Vision AI into their next-generation smart home appliances. And Ikea Retail is using recommendation AI to drive a 30% increase in customer click-through rate. Second, customers see value in our open scalable infrastructure that enables them to run workloads anywhere on our cloud, at the edge, or in their datacenters. Rodan + Fields scale, it's says SAP environment, Siemens Energy migrating its global network of datacenters and Company-wide SAP systems. And Indonesia's largest technology, digital native, go-to group is supporting over a 100 million monthly active users with Google Cloud. General Mills, Bell Canada, and Wells Fargo are harnessing our leadership in multi-cloud and our open development environment. And to meet the unique digital sovereignty needs of customers around the world, we announced industry first partnerships with T-Systems in Germany and Palace in France. Third, as consumers, businesses, and schools continue to shift towards hybrid work, the threats of cyber security continue to increase. Customers are turning to Google Workspace and our cyber security platform to provide the ease of use, collaboration, and security they need. These include organizations like Discovery, Common Spirit Health, and the state of Maryland who want to foster creativity while securely protecting their users. We're also seeing strong growth in our broad portfolio of cyber security products. This includes Chronicle, one of our zero-trust offerings, with JetBlue users to detect cyber security threats, helping to protect its customers and enterprise. We're bringing our team's deep expertise to customers through the Google Cyber Security action team and a new Work Safer program, which provides best-in-class security for emails, meetings, messaging, and more. Earlier, I mentioned a few of the sustainability-related product features we announced. Our Cloud customers already benefit from operating on the world's cleanest cloud and last year we set an ambitious goal to run our data centers and campuses on 24/7 carbon-free energy by 2030. Two - thirds of the electricity consumed by Google data centers in 2020 was matched with local carbon-free sources on an hourly basis. And our new carbon footprint tool gives customers carbon emissions insights associated with their Google Cloud Platform usage. Now over to YouTube for a few highlights. We recently surpassed 50 million music and premium subscribers, including those in trial. And YouTube shots continues to see higher option rates. In the past year, the average number of daily first-time creators more than doubled. Next week as global leaders gather in Glasgow to address climate change, YouTube is partnering with COP26 to livestream conference activities, making the event more accessible for everyone. As we grow, we are maintaining our open global platform responsibly by removing harmful content and reducing bottom-line content. Both our AI investments and the promotion of Clustered sources have helped us significantly lower the violated view rate, which is the percentage of views on YouTube from content that violates our policies. Onto our other bets. Waymo began welcoming riders to its trusted tester program in San Francisco in addition to its fully autonomous ride-hailing service currently in Phoenix. Next year, Waymo will open a dedicated trucking hub in the Dallas Fort Worth area, helping support commercial freight droughts across the Southwest. And we announced last week the first commercial expansion of things on demand, air delivery service to Walgreens customers in select locations. To close, the world is slowly starting to travel and meet up in-person. In this quarter, I joined events virtually to celebrate some big milestones in regions around the world. Earlier this month, we announced a $1 billion investment in Africa over five-years to support the continent's digital transformation. And September mark 20 years since we opened our first office outside of the U.S. in Tokyo. We now have thousands of employees in 28 offices across the Asia Pacific region. And we are investing in cloud regions and digital skills programs to help expand economic opportunity there. As you can see, our business in APAC is growing really well. in Africa, Asia Pacific and beyond it's been a successful quarter and we have lots more innovation and product development on the way. Thanks to our employees around the world for their contributions. As we continue our to hybrid work, I hope to see more of you in person soon. Thank you and over to Philipp.

Jim Friedland:

And advertisers like to augment paid campaigns with free listings. So last month we launched free for things to do, and a new ad format that makes it easier to promote local experiences. Now, when you search zip lining, aquariums, or the Tokyo Tower, you can buy tickets directly on Google. And then there are companies like Alaska Airlines that are harnessing first-party data and automation across search to navigate market fluidity and better understand the lifetime value of their customers. They have increased return on ad spend by 30% plus versus the same period pre COVID, beyond travel. Business of all kinds are increasingly adopting tools like AI driven automation and insights to connect with customers. No matter what stage of the recovery there in. 150-year-old luxury retailer

Ruth Porat:

Thank you, Philipp. Our revenue performance in the third quarter reflects continued broad-based strength in advertisers spend and elevated consumer online activity, as well as a strong contribution from Google Cloud. My comments will be on a year-over-year comparison for the third quarter unless I state otherwise. We will start with results at the Alphabet level, followed by segment results, and conclude with our outlook. For the third quarter, our consolidated revenues were 65.1 billion, up 41% or up 39% in constant currency. Our total cost of revenues was 27.6 billion, up 31% primarily driven by growth in TAC, which was 11.5 billion up 41%. Other cost of revenues was 16.1 billion, up 24%, reflecting in part the benefit from the change in useful lives meet earlier this year. The largest driver of the growth in other cost of revenues was content acquisition costs. Operating expenses were 16.5 billion, up 19%, in terms of the 3 component parts of opex. First, the increase in R&D expenses was driven primarily by headcount growth. Second, the growth in sales and marketing expenses was driven by headcount growth, followed by the continued ramp up of spending on ads and promo, in contrast to the pullback in the third quarter last year. Finally, the increase in G&A reflects the impact of charges relating to legal matters, followed by headcount growth. Operating income was 21 billion, up 88%, and our operating margin was 32%. Other income and expense were 2 billion, which primarily reflects unrealized gains in the value of investments in equity securities. Net income was 18.9 billion. We continue to generate strong free cash flow of 18.7 billion in the quarter and 65.7 billion for the trailing 12 months. We ended the third quarter with 142 billion in cash and marketable securities. Let me now turn to our segment financial results, starting with our Google Services segment. Total Google Services revenues were 59.9 billion, up 41%. Google Search and other advertising revenues of 37.9 billion in the quarter were up 44% with broad-based strength across our business, led again by strong growth in retail. YouTube advertising revenues of 7.2 billion, were up 43% due to strength in both direct response and brand advertising. The deceleration in the growth rate versus the second quarter was driven by lapping a strong recovery in brand in the third quarter of last year. Network advertising revenues of 8 billion were up 40%. Other revenues were 6.8 billion up 23% driven by growth in YouTube non-advertising revenues and hardware which benefited from the addition of Fitbit revenues. Google Services operating income was 24 billion, up 66%, and the operating margin was 40%. Turning to the Google Cloud segment, revenues were 5 billion for the third quarter, up 45%. GCP's revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services. Strong revenue growth in Google Workspace was driven by robust growth in both seats and average revenue per seat. Google Cloud had an operating loss of 644 million. As to our other bets in the third quarter, revenues were 182 million, the operating loss was 1.3 billion. Let me close with some comments on our outlook. With respect to foreign exchange impact on reported revenues, based on current spot rates, we expect virtually no impact in Q4, in contrast to 1.5% tailwind in Q3 and 4% in Q2. In terms of outlook by segment. For Google Services, as I noted, the strength of our revenues in Q3 reflected both underlying strength in advertiser and user activity, as well as the impact from lapping weaker performance in the comparable period last year. Given the gradual recovery in results through the back half of 2020, the benefit from lapping prior year performance diminished in Q3 versus Q2 and will diminish further in Q4. Within other revenues in the fourth quarter, we expect the ongoing drivers of revenue growth to the Hardware due to the benefit from the holiday selling season and inclusion of Fitbit, as well as YouTube subscriptions. Google Play's contribution to revenue growth will remain more muted given the ongoing impact of both lapping the increased level of user engagement that started in the first quarter of 2020 due to the pandemic, as well as the fee change that took effect on July 1. Within Google Services, we expect sales and marketing expenses to be elevated in the fourth quarter to support the holiday season. Turning to Google Cloud, we remain focused on revenue growth and are pleased with the trends we're seeing. In GCP, our customer wins, as Sundar noted, reflect our multi-year investments in products and solutions that are purpose-built to solve for the biggest opportunities within our targeted 8 industries. The benefit of these solutions to our customers is clear, and they are choosing to work with us as their long-term transformation partner. With respect to workspace, we are pleased with the ongoing momentum in both seat growth and average revenue per seat, which underscores the value of collaborative solutions, in particular, as people increasingly are embracing a hybrid work model. Across cloud, we continue to invest aggressively, both in growing our go-to-market and product teams, as well as building out our cloud regions. At the Alphabet level, headcount grew by nearly 6,000 in the third quarter, including our seasonal campus hires. And we expect robust headcount growth in Q4 for both Google Services and Google Cloud. Turning to CAPEX, the results in the third quarter primarily reflect ongoing investment in our technical infrastructure, most notably in servers to support ongoing growth in Google Services and Google Cloud. We also continue to increase the pace of investment in fit-outs and ground-up construction of office facilities to accommodate our ongoing headcount growth globally. We will continue to pursue real estate acquisition opportunities where it makes sense, as you saw in our New York City announcement in Q3. Thank you. And now, Sundar, Philipp, and I will take your questions.

Eric Sheridan:

Thank you very much for taking the questions. Maybe first one for Sundar, a big picture. Coming back to how you started the call, when you look out over the next three to five years, what do you see are some of the big investments that Google needs to make to marry your ambitions on AI, machine learning against aligning Google's broader product and services against the rising digitalization of the global economy. Would love to have that as a framing over the next three to five years. And then maybe -- I am not sure if directed better at Philipp or Ruth, but on a shorter duration basis, it seems to be an element of headwinds and tailwinds in the broader, can you talk a little bit about the business elements of Google's products and what elements of reopening dynamic you're seeing on a sector basis versus potential headwinds as we move into Q4 and next year from things like supply chain shortages, or labor shortages, or things like that. Thanks so much in advance for the color.

Philipp Schindler:

So, to the second part of your question, we continue to watch countries as vaccination rates climb and local regulations ease. We expect some amount of heterogeneity in recovery depending obviously on location and vaccination rates. But because every region is different, it's hard to make a generalization from the data right now. That said, the consumer shift to digital is real and will continue even as we start seeing people return to stores. Shopping habits have ebbed and flowed over the last 20 months. But the underlying takeaway is that people want more choice. They want more information, more flexibility, and we don't see this reversing. Omni -channel, I talked about it, is definitely in full force. I said this earlier. We've been really focused on building features and solutions to help retailers, large and small, succeed here. And we think this will continue as the world reopens, and shoppers fluctuate between online and in-store based on whatever is really more convenient. YouTube is exciting for many reasons. It's incredible to see lot of content that's valuable for people across so many topics, and we're helping advertisers tap into this. And whether it's browsing for inspiration, product research or actually making the purchase a billion shopping sessions happen across Google every day, and they are happening on search, in YouTube, in image search, in the shopping tab, on Lens, and so on. So frankly, we are really encouraged by the long-term opportunity in commerce, and we are laser focused on helping business of all sizes connect with their customers

Operator:

Thank you. And our next question comes from Brian Nowak from Morgan Stanley. Your line is now open.

Sundar Pichai:

I'll take the second one first. On augmented reality, we've -- for a while, we've deeply focused on thinking through computing for the long-term. We've talked about ambient computing, and it's just a matter of time before beyond phones, you will see other successful form factors and AI is an exciting part of that future. We are looking at all deep investments, we need to make. I think it's going to take some time. And so, for example, when you look at something like Google Lens or when you look at the fact that we are making search work in a multimodal way, or when you think about YouTube and making sure it works well. We are AI world so we are, obviously, investing in all our services. And beyond that from a computing standpoint, both our hardware teams as well as our platform teams are thinking through definitely, and it's going to be a major area of investment for us. On the first question, I think Philipp spoke about Shopping via, obviously, searches -- part of what makes S search so successful is people use it for a wide variety of use cases. And so, we really invest comprehensively across all experiences, be it Local and Maps, be it images, be it videos. And so, we're definitely investing a lot. People do come to search for education as well, so making sure we're comprehensive. Health has been a major area of focus, particularly through the pandemic. And so, the strength of searches both in its depth and breadth and so, and then getting it tried with high focus on quality and will continue to do that.

Doug Anmuth:

Thanks for taking the questions. I've two. First, was just curious if you're seeing any impact at all from the Apple iOS changes in your business and perhaps particularly in YouTube. And then second, given Retail, the biggest driver of services growth, and of course, you are really just touching all parts of the economy, any more commentary on how you're thinking about supply and labor shortage dynamics in the fourth quarter, and if you're perhaps seeing anything thus far there? Thank you.

Philipp Schindler:

So, from our standpoint, we see ATT (ph.) is one aspect of the many broader ecosystem changes that are on the way, and we've been investing in privacy preserving technology for many years. Our focus is on supporting developers, small and large advertisers, creators’ publishers, so that they're able to mitigate impact to their businesses. And we really see the future of digital advertising being built on advances and privacy preserving on device technologies which support the free and open Internet. And obviously, a robust ads ecosystem on your supply chain questions. I would say performance in Q3 was strong across revenue lines, regions, and nearly all verticals. In line with the widespread reporting of supply chain weakness in the audit industry, we've seen some impact on vehicles within the auto vertical which started earlier in the year, although the impact has really been offset somewhat by increased demand in related areas like parts, accessories, repairs, and maintenance.

Operator:

Our next question comes from Q - Justin Post from Bank of America. Your line is now open.

Sundar Pichai:

Now, at a high level -- look, i mean, I have taken a long-term view, and we're obviously investing both in foundational technologies, like AI and just deeper computer science. So, we're all in in applying it across the prioritize set of areas. And so, no change in the framework, if anything. I do feel with the digital transformation underway, if anything, we feel a sense of urgency to execute against opportunities we see. So still working within the long-term framework, maybe. Ruth and Philipp?

Justin Post:

Thank you.

Mark Mahaney:

Thanks. Two questions. Is there anything that suggest that some of these ATT headwinds for other people in the industry actually cost shifts in budget over to your platforms, your different platforms? And then, as for Philipp and Ruth, just on the margins. Is there anything other than revenue overage that really strong revenue performance flowing against fixed costs and the extended depreciation schedules that's causing those margins to rise or have you been able to work out, eke out, tweak out new efficiencies in the model itself? Thank you very much.

Sundar Pichai:

On the first question around ad budgets and shift and stuff, I don't think there's anything notable that we have observed to comment on.

Operator:

Thank you. And our next question comes from Brent Thill from Jefferies. Your line is now open.

Sundar Pichai:

Thanks. Look, overall, we continue to see strong momentum. The team is executing well. You mentioned Big Query, Data and Analytics, and AI, continues to be a foundational shift for what companies are trying to completion, and Big Query does stand out there and we're definitely seeing continued momentum, there is a source of strength. To other areas, I would highlight our Security continues to be an increasing area of focus and a differentiator for us, given over two decades of investment we've had. We've pioneered "zero trust" and so on. So as cybersecurity elevates and consent across companies I talk to and the CEOs, it's definitely been an area. Multi-cloud continues to be a differentiator, I do think customers are increasingly looking for it and we've embraced it from early on so that is an area as well. But above all, I think we're very, very focused on industry value propositions, so really sharpening our solutions by vertical and that's really helped us get some of the bigger deals you mentioned as well. And we'll continue doing that. Thank you.

Michael Nathanson:

Thanks. I've had one for Sundar and one for Porat. Sundar, you talked earlier about the Geo-phone next in the launch, next week, in India. I wonder if you can talk about the Walmart turned opportunity for Alphabet India, where you're from opening up that product in any type of time frame when do you think you will see maybe the benefits of what you're doing on the low price on there. And then it just seems longer-term as more we're targeting becomes more difficult to all these privacy changes. There has to be a mix shift in budgets. I wonder, how do you think the value proposition of search will change going forward and what can you do even more than you've done before to take advantage of what looks like real challenges and the ability to target and measure becomes the mobile search. I mean when it comes to mobile advertising. Thanks. , thanks for the question. Look, I think, obviously, the pandemic has been hard. But a through it all, people are looking for access, and this definitely being available for people who have adopted smartphones. There is still -- we see the demand for people looking to shift from feature phones to

Operator:

Thank you. Our next question comes from Ross Sandler from Barclays. Your line is now open.

Sundar Pichai:

Obviously, YouTube is unique in the sense that it's a true video -- native video-first product from day one. And so, you are dealing with new form and obviously as a Company, I think we have taken a long-term view, which is why you see the engagement on the product. It's working at scale. Content responsibility has been our most important focus for the past many years. And beyond that, I think we worked hard to make sure both creators can do well. It's a great platform for advertisers. We've had strengthened brand. We built on it. We drove this momentum in direct response. There's obviously in a newer opportunity for just shopping which we are investing in. And represents an additional early but important area for us from an investment and growth standpoint. So, I feel the fundamentals of the platform are strong. And with the long-term view, I see this is an area where we have more upside and so we will continue our investments with that in mind.

Colin Sebastian:

A couple of big picture questions. Sundar, first off looking at GCP and some of the innovations you've talked about, like distributed cloud, I just wonder what you think the long-term future is for hybrid cloud environments? Are they really -- or is this really just a part of the process or stepping stones to bring more companies, or most companies over to full cloud adoption? And then secondly, we're seeing a clear blurring of the lines among e-commerce, digital payments, and social platform. So, I was hoping you could share the vision for Google and YouTube and the other Google apps in this context, how those pieces fit together, the closed loop, shopping platform, if that's the right way to think about it. Thank you.

Operator:

Welcome, everyone. Thank you for standing by for the Alphabet Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I would now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Sundar Pichai:

Thank you, Jim. And good afternoon, everyone. It’s good to be with you. Today, I'll give an overview of the quarter, going through some of our product momentum, then touching on Cloud and YouTube. First, I want to acknowledge that the new COVID-19 variants have been challenging for so many communities across the world. As the pandemic evolves, we want to help people get the information they need to keep themselves and their families safe. I really encourage everyone to get the vaccine when it's available to you. Turning to the quarter, we saw a rising tide of online consumer and business activity. We are proud that our services helped so many businesses and partners. In fact, we set a number of records this quarter. This quarter, publisher partners earned more than they ever have from our network. We also paid more to YouTube creators and partners than in any quarter in our history. And on top of that, over the past year, we have sent more traffic to third-party websites than any year prior, in addition to generating billions of direct connections like phone calls, directions, ordering food and making reservations that drove customers and revenue to businesses around the world that are working to get back on their feet. A few years ago, we placed a bet on AI believing that it would be a fundamental technology that would underpin and dramatically improve all our products. That vision was on full display at our I/O event in May where we announced new advancements that will be helpful to people and businesses everywhere. As one example, we introduced Multitask Unified Models or MUM. MUM is a big advancement in Search, a thousand times more powerful than our current systems. It has the ability to learn and transfer knowledge across 75 languages, which means that it can learn from sources in one language and help bring that information to you in another.

Ruth Porat:

Thank you, Philipp. Our strong revenue performance in the second quarter reflects lapping the impact of COVID on our business, elevated consumer online activity, broad-based strength in advertiser spend, as well as the benefit of excellent ongoing execution by our teams. My comments will be on year-over-year comparisons for the second quarter, unless I state otherwise. We'll start with results at the Alphabet level, followed by segment results, and conclude with our outlook. For the second quarter, our consolidated revenues were $61.9 billion, up 62%, or up 57% in constant currency. Our total cost of revenue was $26.2 billion, up 41%, primarily driven by growth in TAC, which was $10.9 billion, up 63%, followed by growth in other cost of revenues, which was $15.3 billion, up 29%, the largest driver of which was content acquisition costs. Operating expenses were $16.3 billion, up 22%. In terms of the three component parts of OpEx, first, the increase in R&D expenses was driven primarily by headcount growth. Second, the growth in sales and marketing expenses was due primarily to the ramp-up of spending on ads and promo in contrast to the pullback in the second quarter last year. Finally, the increase in G&A reflects the impact of charges relating to legal matters. Headcount was up 4,061 from the first quarter. Operating income was $19.4 billion, up 203%, and our operating margin in the quarter was 31%. Other income and expense was $2.6 billion, which primarily reflects unrealized gains in the value of investments in equity securities. Net income was $18.5 billion. Let me now turn to our segment financial results, starting with our Google Services segment. Total Google Services revenues were $57.1 billion, up 63%. Google Search and other advertising revenues of $35.8 billion in the quarter were up 68%, with broad-based strength across our business, led again by strong growth in retail. YouTube advertising revenues of $7 billion were up 84%, driven by brand, followed by direct response. Network advertising revenues of $7.6 billion were up 60%, driven by Ad Manager and AdMob. Other revenues were $6.6 billion, up 29%, primarily driven by growth in YouTube non-advertising revenues, followed by hardware, which benefited from the addition of Fitbit revenues. And finally, Google Play, which lapped the increased level of user engagement that started in Q1 last year due to the pandemic. Google Services operating income was $22.3 billion, up 134%, and the operating margin was 39%. Turning to the Google Cloud segment. Revenues were $4.6 billion for the second quarter, up 54%. GCP's revenue growth was again above Cloud overall, reflecting significant growth in both infrastructure and platform services. Once again, strong growth in Google Workspace revenues was driven by robust growth in both seats and average revenue per seat. Google Cloud had an operating loss of $591 million. As to our Other Bets in the first quarter, revenues were $192 million, the operating loss was $1.4 billion. Let me close with some comments on our outlook. In the second quarter, revenues benefited from an FX tailwind of more than 4% at the consolidated level. Based on FX spot rates against the dollar relative to the third quarter of last year, we expect a more muted tailwind to revenues in the third quarter. In terms of outlook by segment, for Google Services, the benefit to revenue growth in Q2 from lapping the effect of COVID last year will diminish through the balance of the year as we begin to lap stronger performance in the second half of 2020. In the second quarter, we continued to benefit from elevated consumer online activity and broad-based strength in advertiser spend. We believe it is still too early to forecast the longer term trends as markets reopen, especially given the recent increase in COVID cases globally. Within other revenues, Play revenue growth for the balance of the year will face headwinds due to the impact of lapping elevated engagement in the pandemic, as well as the change in fee structure, which was implemented as of July 1. We continue to invest across Google services to support the extraordinary opportunities we see. A couple of reminders consistent with prior years, we expect that headcount additions will be seasonally higher in Q3 as we bring on new graduates. In addition, we expect sales and marketing expenses to be more heavily weighted to the back half of the year, in part, to support product launches in the holiday season. As for Google Cloud, we remain focused on revenue growth and are pleased with the trends we are seeing. Across Cloud, we will continue to invest aggressively, given the opportunity we see. Turning to CapEx. The results in the second quarter primarily reflect ongoing investment in our technical infrastructure, most notably in servers, to support ongoing growth across Google. We also began to increase the pace of investment in ground up construction and fit outs of office facilities, which were slowed due to COVID and are focused now on advances Turning to cash and capital allocation. We continue to generate strong free cash flow of $16.4 billion in the quarter and $58.5 billion for the trailing 12 months. We ended the second quarter with $136 billion in cash and marketable securities. As we indicated in our press release today, our Board has approved an amendment to the existing $50 billion stock repurchase program permitting us to repurchase both Class A and Class C shares in a manner that's in the best interest of the company and its stockholders. Thank you. And now, Sundar, Philipp and I will take your questions.

Brian Nowak:

Thanks for taking my question. I have two. One for Sundar and one for Philipp. Sundar, the first one is you've had so much innovation over the years using AI to improve Search and improve the overall business. Can you just give us some examples of where you still see low hanging fruit or areas for further improvement in the company's overall products using AI, et cetera, over the next couple of years? And then, Philipp, your comments on omnichannel were pretty loud and clear. Give us some examples of where you're most focus to continue to enable more retailers to move in the omnichannel sort of drive that side of the business? Thanks.

Philipp Schindler:

Yes. And to my part of the question, look, we want to make sure that when people come to Google, they are able to basically find the best products and prices available from, frankly, the widest possible range of merchants. And we're making strong progress under Bill's leadership. And as I said earlier, 2020 was about removing financial barriers. We made listings free, removed commission fees. And it's worth pointing out the upside of combining free listings with shopping ads actually. Merchants that used both in Q1 saw a 50% lift in clicks once they started, I think that's pretty impressive. 2021, as I said, has been about removing integration barriers. We have the partnerships with Shopify, Square, BigCommerce, GoDaddy, WooCommerce and so on. And they're making it easier for businesses to get started with us, whether it's across Search and Shopping and image search and YouTube. And then once merchants are onboarded, I mean, there's so much more value we can offer them. We launched a new measurement tools to help retailers better understand performance and pricing. You asked specifically a question about focus areas. And then we're making the product and user experience better, not only with our UI/UX research feedback with our tech and AI capabilities. And maybe a cool example is how we're using AR to bring in-store experiences online, like with auto dealerships, and then letting users really try before they buy. And we do this in cosmetics and in apparel categories. And we have the shopping graph, which I mentioned earlier. We think it will open up completely new product experiences across Google. Shopping with Lens is one example. You can shop your screen shots or use your phone camera to find the dress or pair of sneakers that caught your eye or whatever. And we're working hard to build an open retail ecosystem, and that really levels the playing field for all merchants, and we think there is a lot of opportunity ahead. And I think those are our biggest areas of focus.

Operator:

Thank you. Our next question comes from Doug Anmuth with JPMorgan. Your line is open.

Sundar Pichai:

Yeah. Thanks, Doug. I would say, overall, as you realize, it's a broad digital shift, customers are looking for digital transformation. And depending on the sector they are in, they look to Alphabet as a digital partner, and we try to bring the broader solution set that's possible across our capabilities, and that's been working well. You mentioned Cloud, most of our Cloud customers are either in conversations with us. It could be because they're concerned about security on their supply chain or they're trying to understand the shift to digital and invest more in data analytics. Or the shift to hybrid workforce is what's probably getting them to think about Workspace and so on. And if they are retailers, we can bring in our expertise across ads, the work we are doing on commerce to be - with the partnerships we have, and so we can bring those additional expertise to bear. And so that's a trend we are seeing across. Philipp gave examples of our telco partnerships. And so across our priority verticals, we are able to engage in a broad way. And maybe the recent Google-wide partnership with Univision was another example of a multiyear, multi-product partnership with companies.

Doug Anmuth:

Great. Thank you, Sundar and Ruth.

Justin Post:

Great. Thanks for taking my questions. A couple, when you look at Search in the quarter, it really accelerated beyond the comp. And if you look at it quarter-over-quarter, it was really good. So wondering if there's any products or verticals that really surprised you, or things to call out. And how do you think about the sustainability here, specifically in Search and the product pipeline from here? And then secondly, on Cloud, really saw a nice margin improvement there. How do you feel about where you are on the infrastructure side and ability to really continue to show kind of that improvement in margins over time? Thank you.

Ruth Porat:

Yeah. I would just build on Sundar's comment. There's really no change in our approach to building the Cloud business. We do intend to continue to invest meaningfully. We are very pleased with the business, as we both said. As an example, we're continuing to build out the global footprint, continuing to invest in our compute capacity globally. As an example, we most recently announced a second cloud region in India. This is our 26th cloud data center region globally. And so continuing to invest across the board, given the opportunity that we see. And as I said last quarter, I would not extrapolate from quarter-to-quarter, given we still are in the early stages of building the business, and we do intend to continue to invest aggressively, including expanding our go to market organization, our channel expansion, our product offerings and our compute capacity. Excited about what we're seeing the team executing upon here.

Philipp Schindler:

Yeah, can you hear me?

Philipp Schindler:

Yeah. And to the first part of the question, similar to what I said in my remarks at the beginning, retail was again, by far the largest contributor to the year-on-year growth of our ads business. Travel, financial services, media entertainment were also very, very strong contributors.

Operator:

Thank you. Our next question comes from Colin Sebastian with Baird. Your line is open.

Sundar Pichai:

On security and cloud, we definitely see it as a strong differentiation. Obviously, Google for a long time. We are cloud native. We pioneered approaches like Zero Trust, built the architecture out from a security first perspective. And so particularly over the course of the last couple of years, as companies have really - with the recent attacks, they really started thinking deeply about the vulnerabilities, supply chain security has been a major source of consensus, particularly over the past few quarters. Cyber threats, increasingly, is in the mind of not just CIOs, but CEOs across our partners. And so it's definitely an area where we are seeing a lot of conversations, a lot of interest. It's our strongest product portfolio, and we are continuing to enhance our solutions, be it integrating Chronicle, BeyondCorp and all the product components we have there. So a definite source of strength and you'll continue to see us invest here.

Operator:

Thank you. Our next question comes from Brent Thill with Jefferies. Your line is open.

Sundar Pichai:

On YouTube, look, I mean, if you look at the engagement across the platform, we definitely see a lot of headroom for e-commerce. Over the past year, you've seen us really focus on ads rating a shift to - in terms of onboarding merchants across Google. So we have definitely invested both in terms of bringing merchants on board, removing barriers there, providing better integrations by partnering with players, platform providers across the industry. And now we are investing in our consumer experiences, be it on Google Search or on YouTube. And so you will see us roll out features over time. Philipp, do you want to add more here?

Brent Thill:

Great. Thank you.

Mark Mahaney:

Thanks. We've had record new business formation in the US, and I think globally in the wake of COVID. And my guess is that, that's also been a major driver of growth for you. Could you just talk about that a little bit to the extent to which you think some of these, especially the advertising trends, come from these new businesses that are formed, whether they're digital hybrid or whatever? And then secondly, how do you go from tens of thousands of Waymo rides to millions of rides? Like what are the biggest obstacles to that? Any clue at all as to how long that takes, are the issues more regulatory, more technical? Thank you.

Sundar Pichai:

On Waymo, as you mentioned, in our - in Phoenix, we've had very good experience by scaling up rides. These are driverless rides and no one else in the car other than the passengers, and people have had a very positive experience overall. We are obviously with a strong focus on safety. We're looking to scale it up. Through it all, we are building newer capabilities as well investing in next-generation of hardware and software. So it's an iterative process, and at each step, it's very clear to us that we are ahead, and we are making progress, and you'll see us continue to invest here, with a focus on safety first, and I expect this to scale up more through the course of 2022.

Operator:

Thank you. Our next question comes from Michael Nathanson with MoffettNathanson. Your line is open.

Sundar Pichai:

You know, on the first question on the smart TV ecosystem. Look, I mean, there is a shift to these becoming computing devices over time. They are going to be connected computing experiences. People who both consume content passively, actively, including gaming, over the top video and so on. So we view this as part of our platform shift. Android TV has made tremendous strides. It's a very customizable platform. We are working not only with TV providers globally, we are doing it with cable box manufacturers, as well as we supplement it with Google TV, with Chromecast as well. So it's a significant investment from our side, making sure we can drive that shift. And obviously, it has a lot of synergies for us in terms of being able to bring our services to our users, as well as give more opportunities for our Play developers to reach more users as well. But definite strong integration points with YouTube and YouTube TV as well.

Michael Nathanson:

Okay. Thank you, both.

Jason Bazinet:

Thanks. I just had one question, maybe it dovetails off of what you just said. But if I take your ad dollars this quarter, $50 billion in annualized, it's like $200 billion a year. Are you or the Board focused at all on trying to diversify away from the ad market? Or do you just feel like there's so much runway that there is no real reason to stay focused on non ad-based growth?

Jason Bazinet:

Thank you.

Jim Friedland:

Thanks, everyone, for joining us today. We look forward to speaking with you again on our third quarter 2021 call. Thank you, and have a good evening.

Operator:

Welcome, everyone, and thank you for standing by for the Alphabet First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. I’d now like to hand the conference over to your speaker today, Jim Friedland, Director of Investor Relations. Please go ahead.

Sundar Pichai:

Thank you, Jim, and good afternoon, everyone. After hard year, people in some parts of the world are beginning to rebuild their lives, businesses and communities. But recovery is far from uniform across the globe as the tragic scenes in countries like India and Brazil remind us. We are continuing to help support public health officials in their vital and urgent work. Our focus is on providing authoritative information. We are helping over 100 government agencies and non-profits worldwide, distribute critical information and billions of PSAs about COVID-19 and vaccines, and Google Cloud technologies powering a virtual agent to help make vaccination appointments over the phone, supporting 28 languages and dialects for those with limited internet access. We are focused on doing our part to help. In some parts of the world, the economy began to rebound, which created a rising tide in the first quarter that benefited a number of sectors, including existing and emerging companies and partners. For example, data suggests that investment in startups is at an all-time high. Our product releases are returning to a regular cadence. I am particularly excited that our developer event Google IO is back this year, all virtual and free for everyone on May 18th through 20th. We will have significant product updates and announcements and I invite you all to tune in. Today, I will briefly mention a few highlights from the past quarter and go a bit deeper on Cloud. Then Philip will discuss advertising and partnership developments. Finally, Ruth will cover the quarterly results. Quickly turning to product highlights of the quarter. Our knowledge and information services like Search and Maps remain at the heart of our mission to provide helpful and accurate information during important moments.

Ruth Porat:

Thank you, Philipp. Our very strong financial results in the first quarter reflect both lapping the impact of COVID on our business beginning in March 2020, as well as the benefit of excellent underlying operating performance. My focus will be on year-over-year comparisons for the first quarter unless I state otherwise. I will start with results at the Alphabet level, followed by segment results and conclude with our outlook. For the first quarter, our consolidated revenues were $55.3 billion, up 34% or up 32% in constant currency, reflecting elevated consumer activity online and broad-based increases in advertiser spending within Google Services, as well as ongoing strength in Google Cloud. Our total cost of revenues was $24.1 billion up 27%, primarily driven by other cost of revenues, which was $14.4 billion up 25%, followed by TAC, which was $9.7 billion, up 30%. Within Other cost of revenues, the biggest factors are, first, content acquisition costs, primarily driven by costs for YouTube’s advertising supported content, followed by costs for subscription content. And second, costs associated with data centers and other operations, offset partially by a reduction in depreciation expense due to changes to estimated useful lives of servers in certain network equipment. Operating expenses were $14.8 billion, up 4%. In terms of the three component parts of OpEx. First, the increase in R&D expenses was driven primarily by headcount growth. Second, sales and marketing expenses were essentially flat, reflecting headcount growth, which was offset by lower spend on ads and promo, as well as on travel and entertainment. Finally, the decline in G&A reflects the benefit of lapping the unusually high allowances for credit losses recorded in the first quarter of 2020 due to the impact of COVID offset by charges relating to certain legal matters. Headcount was up 4,694 from the fourth quarter, including more than 1,800 Fitbit employees who joined us in Q1. Again, the majority of new hires were engineers and product managers. Operating income was $16.4 billion, up 106% and our operating margin in the quarter was 30%. Other income and expense was $4.8 billion, which primarily reflects unrealized gains in the value of investments in equity securities. Net income was $17.9 billion. Operating cash flow was $19.3 billion, with free cash flow of $13.3 billion in the quarter and $50.7 billion for the trailing 12 months. We ended the first quarter with $135 billion in cash and marketable securities. Let me now turn to our segment financial results, starting with our Google Services segment. Total Google Services revenues were $51.2 billion up 34%, consisting of Google Search and other advertising revenues of $31.9 billion in the quarter up 30%, with strength across most categories led by retail. YouTube advertising revenues of $6 billion up 49%, driven by exceptional performance in Direct Response and ongoing strength in brand advertising. Network advertising revenues of $6.8 billion up 30%, driven by AdMob and Ad Manager. Other revenues were $6.5 billion up 46%, primarily driven by growth in Play and YouTube non-advertising revenues followed by hardware, which benefited from the addition of Fitbit revenues. Google Services operating income was $19.5 billion, up 69% and the operating margin was 38%. Turning to the Google Cloud segment, including GCP and Google Workspace, revenues were $4 billion for the first quarter up 46%. GCP’s revenue growth was again meaningfully above Cloud overall. Strong growth in Google Workspace revenues was driven by growth in both seats and average revenue per seat. Google Cloud had an operating loss of $1 billion. As to our Other Bets, in the first quarter, revenues were $198 million. The operating loss was $1.1 billion. Let me end with our outlook for each segment and our investments more broadly. For Google Services, for the remainder of 2021, year-over-year comparisons will be affected meaningfully by the impact of COVID last year, with a greater benefit in Q2 from an easier comp relative to what you saw in Q1 and then beginning to lap stronger performance in the second half of the year. In the first quarter, we continue to benefit from elevated consumer online activity and broad-based strength in advertiser spend. It is too early to say how durable this consumer behavior will be as economies recover and restrictions on mobility are lifted. Within Other revenues, Play benefited from an increased level of user engagement starting in Q1 last year due to the pandemic, which we are now beginning to lap. In terms of investment levels within Google Services, we still intend to invest aggressively to support the extraordinary opportunities we see. That being said, in some areas, like, travel and entertainment and marketing events, the pace of investment through the balance of the year may be affected by the pace of COVID recovery globally. As for Google Cloud, our approach to building the business has not changed. We remain focused on revenue growth and we will continue to invest aggressively in products and our go-to-market organization, given the opportunity we see. The operating results in Q1, in part reflects some notable items in the quarter. First, the lapping of the unusually high allowances for credit losses recorded in the first quarter of 2020, as I already mentioned. And second, lower depreciation expense due to the change in the estimated useful lives. Although, the dollar benefit will diminish throughout the course of the year across segments. As we have noted previously, operating results should benefit from increased scale over time. However, at this point, we do remain focused on continuing to invest to build the cloud organization for long-term performance. In terms of Other Bets, we continue to invest with a focus on the long-term value creation opportunity. Turning to CapEx, at a consolidated level, the results reflect ongoing investment in our technical infrastructure, offset by a slower pace of investment in office facilities, given the ongoing impact of COVID. Within technical infrastructure, servers continue to be the largest driver of investment, as we continue to invest to support Cloud, Search, Ads and machine learning. Finally, with respect to capital allocation, our primary use of capital continues to be to support organic growth in our businesses, followed by retaining flexibility for acquisitions and investments. We complement these growth drivers with a return of capital. As we indicated in our press release today, our Board has authorized the repurchase of up to an additional $50 billion of our Class C stock. Thank you. And now, Sundar, Philipp and I will take your questions.

Brian Nowak:

Thanks for taking my questions. I have two. First one for Sundar. I appreciate the color on the four key priorities. I wanted to dig a little more into the build and provide the most helpful products and services. Maybe if you can sort of talk to us about Search, how do you think about the key investment priorities and innovation areas to continue to make Search more and more helpful for your users and your advertisers? And the second one for Philipp, maybe similar question on YouTube. You’ve done such a great job in innovation around YouTube. Where do you see the largest incremental opportunities for further innovation at YouTube to deliver more outsized value for your advertisers? Thanks.

Philipp Schindler:

Yes. On the YouTube side, let me start with our Direct Response business, growth was truly exceptional this quarter. DR was practically non-existent on YouTube a few years ago and it’s now a large and fast-growing business and we are just getting started in my view. People already, as you know, go to YouTube to decide what they want to buy, and we want to make it easier for them to buy and make the discovery process overall a lot easier. And for creators, we launched new shoppable capabilities. So viewers can actually make purchases from their favorite creators directly on YouTube. Just as an example, as part of our Brand Connect program, Calvin Klein tested these and drove over. I think it was, 200% lift in brand search and sold out multiple products actually. For merchants, they can now bring their product feeds directly into their video campaigns and I think we are still scratching the surface on what’s possible really with commercial intent on YouTube. And then there is, of course, the opportunity to be a major platform for brands. Historical approaches to reaching audiences through, let’s just say, call it, linear TV don’t really work anymore. Advertisers are using YouTube now to reach the audience they can’t find anywhere else. And remember, more 18- to 49-year-olds are actually watching YouTube than all linear TV combined and brands are also seeing more incremental reach on YouTube compared to TV. So we are starting to see advertisers by a mix actually of awareness and more action-oriented formats. They are driving reach and results across the funnel from awareness to consideration to action. So we see a lot of really interesting opportunities here.

Operator:

Thank you. And our next question comes from Doug Anmuth from JPMorgan. Your line is now open.

Ruth Porat:

Thanks for the question. So in terms of Cloud and overall performance, I think, the main point I would say is, I wouldn’t extrapolate generally from quarter-to-quarter, given we are still in the early stages of building the business. We do intend to continue to invest meaningfully in Cloud given the opportunity. And so, as you said, there were a couple of things that benefited margins in the quarter, both the depreciation expense item, but also lapping the unusually high allowance for credit losses that were recorded back in the first quarter. So, the main takeaway is we are continuing to invest. We will invest aggressively in products and go-to-market where we have talked about quite consistently over time. And it’s much as operating losses and operating margin will benefit from increased scale over time. At this point, we do remain focused on investing to build the organization for long-term performance.

Doug Anmuth:

Okay. Thank you both.

Brent Thill:

Thanks. As it relates to some of the harder hit industries, I am curious if you could just characterize the shape of the recovery what you are seeing across travel and in some of the other sectors? And have there been any verticals that you have yet to see recover that may pullout in the second-half of the year? Thank you.

Brent Thill:

In travel, specifically, have you -- can you just give us any color in terms of what you are seeing on that front?

Brent Thill:

Great. Thank you.

Justin Post:

Maybe one for Philipp and one for Ruth. First, Philipp, you mentioned a couple of times the durability of the improvement is tough to gauge. Maybe you can help us understand what the key drivers of Search that you are thinking about over the next couple of years? Is it queries, product improvements, certain changes in verticals like shopping? How are you thinking about driving Search growth? And then maybe for Ruth, model showed great efficiency last year on the cost side and margins. Anything you are learning or experiences during the pandemic that we can think about post-pandemic on cost efficiencies or things like that? Thank you.

Ruth Porat:

In terms of your question on efficiency, appreciate the question. I think, at the highest level, the approach is unchanged. Our approach on investing capital allocation is first and foremost to support long-term growth with financially sustainable businesses. It’s about being sharper within product areas and then making sure we are investing. And what I keep referring to is operational excellence, things like our technical infrastructure, systems to improve productivity, to improve velocity of our product teams and then the very important efforts around privacy and security and content moderation. And I think, to your question, the experiences of this past year underscored really the value of having made those investments to protect and support operational excellence. It really served us well and customers in our ability to deliver throughout this period of time. So that framework is unaltered. I think that part of what you are seeing in the first quarter, I have said it a couple of times now, but are some notable items in the quarter. The lapping of the allowance for credit losses, the benefit from depreciation life and then there were certain things that were due to COVID just the lower impact for things like T&E and marketing. And so the main point is we will continue to invest for long-term growth, so that in both areas, Google Services and Cloud, and we will continue to maintain that framework that you referenced about looking for efficiencies where they are, but ensuring that we can deliver for users and customers.

Operator:

Thank you. And our next question comes from Colin Sebastian from Baird. Your line is now open.

Sundar Pichai:

Colin, on -- thanks. Obviously, as we are thinking about AI, it all starts with foundational R&D we do. I think we are one of the largest R&D investors in AI in the world. And so thinking ahead and doing that and we are doing it across all the foundational areas and we are taking many diverse approaches. So as we make breakthroughs, I earlier spoke about transformers and how that translated as BERT to improve search quality. And similarly we are very committed to taking the AI improvements and bringing it through our GCP offerings to our enterprise customers as well. So it’s an approach we are deeply committed to and we are thinking as it -- at all layers of the stack. So this is why you see us work hard on TPUs and we think about the tool chain for developers on top of all that. And so -- and I think if I look at the progress ahead, I think, there’s a lot more progress coming down the pipe and so I am pretty excited and that’s why I feel Google -- GCP will be differentiated over time as our competitive advantage. Philipp, over to you.

Colin Sebastian:

Thanks, guys.

Mark Mahaney:

Thanks. I wanted to ask about your attempts to retain advertisers, and I ask it this way, I think, we have had record numbers of new business formations in the country and around the world on the unfortunate impact of COVID. But I think that’s my guess is, it’s been a huge tailwind for your business? At the same time we have had this real tip over I think of linear TV ad budgets in the back half of the year onto online channels like YouTube. So talk about these new advertisers that you have brought on to the Google platform? What you have been able to do? How confident you are in your ability to retain them, you are advertiser retention strategy? Thanks a lot.

Mark Mahaney:

Okay. Thank you, Philipp.

Michael Nathanson:

Thank you. I have two, one, Philipp, one for Ruth. So on -- the question is on Search. I wonder if we step back, which categories, which geographies, do you think you are still underrepresented as a percentage of marketing spending, where we could see potentially even more lift to come? And then to Ruth, we always asked in the past that CapEx spending in order to change useful life. But I wonder has this pandemic change maybe your approach to the office space that you bought and thinking about how the company is going to deploy capital in terms of space going forward and how we think about the future of CapEx next couple of years based on post-pandemic?