Alphabet 2018 Q3 Earnings Call


woman: Good day, ladies and gentlemen,
and welcome to the Alphabet Third Quarter 2018 Earnings Call. At this time, all participants
are in a listen only mode. Later, we’ll open up a question
and answer session and instructions will be given
at that time. If anyone should require
operator assistance, please press star and then zero
on your touchtone telephone. And now I’d like to turn
the conference over to Ellen West, Head of Investor Relations.
Please go ahead. West: Thank you.
Good afternoon, everyone, and welcome to Alphabet’s
Third Quarter 2018 Earnings Conference Call. With us today are Ruth Porat
and Sundar Pichai. Now, I’ll quickly cover
the Safe Harbor. Some of the statements that we make
today may be considered forward looking, including statements regarding
our future investments, our long-term growth
and innovation, the expected performance
of our businesses, and our expected level
of capital expenditures. These statements involve
a number of risks and uncertainties that could cause actual results
to differ materially. For more information,
please refer to the risk factors discussed in our form 10-K for 2017
filed with the SEC. Undue reliance should not be placed
on any forward-looking statements and they are based
on assumptions as of today. We undertake no obligation
to update them. During this call,
we will present both gap and non-gap financial measures. A reconciliation of gap
to non-gap measures is included in
today’s earnings press release. As you know, we distribute
our earnings release through our investor relations website
located at abc.xyz/investor. This call is also being webcast
from our IR website where a replay of the call
will be available later today, and now, I’ll turn
the call over to Ruth. Porat: Thank you, Ellen.
Our revenues in the third quarter continue to benefit
from ongoing strength in Mobile Search with important contributions
from YouTube, Cloud, and Desktop Search, resulting in consolidated
revenues of $33.7 billion, up 21% year-in-year
and up 22% in constant currency. For today’s call, I will begin
with results for the quarter on a consolidated basis for Alphabet
focusing on year-over-year changes. I will then review results
for Google, followed by other bets
and will conclude with our outlook. Sundar will then discuss
business and product highlights, after which,
we will take your questions. Starting with a summary
of Alphabet’s consolidated financial performance
for the quarter, our total revenues
of $33.7 billion reflect a negative currency
impact year-over-year of $385 million, or $305 million after the impact
of our hedging program. Turning to Alphabet
revenues by geography, you can see that our performance
was strong again in all regions. U.S. revenues were $15.5 billion,
up 20% year-over-year. EMEA revenues were $11 billion,
up 20% year-over-year. In constant currency terms,
EMEA grew 19%. APAC revenues were $5.4 billion,
up 29% versus last year and up $30%
in constant currency. Other Americas revenues
were $1.8 billion, up 19% year-over-year and up 28%
in constant currency, reflecting weakening
of the Brazilian real and the Argentine peso. On consolidated basis,
total cost to revenues, including TAC, which I’ll discuss
in the Google segment results was $14.3 billion,
up 28% year-on-year. Other cost of revenues
on a consolidated basis was $7.7 billion,
up 36% year-over-year, primarily driven by Google
related expenses. The key drivers were costs
associated with our data centers and other operations,
including depreciation, which continued to be affected
by a reallocation of certain operating expenses
and content acquisition costs, primarily for YouTube. Operating expenses
were $11.1 billion, up 26% year-over-year. Once again, the biggest increase
was in R&D expenses reflecting our continued investment
in technical talent. The growth in sales
and marketing expenses reflects increases in sales
and marketing head count primarily for Cloud and Ads followed by
advertising investments in Cloud, Chromebooks for the
back-to-school season and the Google assistant. GNA expense trends
in the third quarter were affected
by a number of factors, in particular, the performance fees
accrued in connection with recognition
of equity security gains, which were, again, partially offset
by the reallocation of certain expenses from GNA,
primarily to other cost of revenues. Stock-based compensation
totaled $2.2 billion. Head count at the end
of the quarter was 94,372, up 5,314 from last quarter.
Consistent with prior quarters, the majority of new hires were
engineers and product managers. In terms of product areas,
the most sizable head count increases were in Cloud for both
technical and sales roles. Operating income
was $8.3 billion, up 7% versus last year
for an operating margin of 25%. As discussed in
the previous two quarters, both operating income
and OINE are affected by the new
accounting standard that changes the way companies account
for equity security investments. This new standard continues
to result in greater volatility. Once again, we’ve provided
a table in our earnings press release to highlight the impact
on particular line items. Other income and expense
was $1.8 billion, which includes $1.4 billion of gains
in equity security investments. We provide more detail
on the line items within OINE in our earnings press release. Our effective tax rate was 8.8%
for the third quarter reflecting discreet items,
notably, an adjustment associated
with the U.S. tax act. Net income was $9.2 billion in earnings
per diluted share, or $13.06. Turning now to CAPEX
and operating cash flow. Cash CAPEX for the quarter
was $5.3 billion, which I’ll discuss
in the Google segment results. operating cash flow was $13.2 billion,
with free cash flow of $7.9 billion. We ended the quarter with cash
and marketable securities of approximately $106 billion. Let me now turn to our segment,
Financial Results. Starting with the Google segment,
revenues were $33.6 billion, up 23% year-over-year.
In terms of the revenue detail, Google site’s revenues were
$24.1 billion in the quarter, up 22% year-over-year. In terms of dollar growth,
results were led, again by Mobile Search with
a strong contribution from YouTube, followed by Desktop Search. Network revenues were $4.9 billion,
up 13% year-on-year, reflecting the ongoing momentum
of Add, Mob and Programatic, other revenues for Google
were $4.6 billion, up 29% year-over-year
fueled by Cloud and Play. we continue to provide monetization
metrics in our earnings press release to give you a sense of the price
and volume dynamics of our
advertising businesses. Total traffic acquisition
costs were $6.6 billion or 23% of total advertising revenues
and up 20% year-over-year. Total TAC as a percentage
of total advertising revenues was relatively
flat year-over-year, primarily reflecting a favorable revenue
mix shift from network to sites, offset by an increase
in the site’s TAC rate. The increase in the site’s
TAC rate year-over-year was driven by changes
in partner agreements and the ongoing shift to Mobile,
which carries higher TAC. This quarter we experienced
a year-on-year decline in the network TAC rate
due to a combination of factors, none of which were
individually significant. Google stock base compensation
totaled $2.1 billion for the quarter, up 23% year-over-year.
Operating income was $9.5 billion, up 11% versus last year,
and the operating margin was 28.2%. Accrued CAPEX for the quarter
was $5.6 billion, reflecting investments
in production equipment, data center construction,
and facilities. Let me now turn to other bets.
Revenues were $146 million, primarily generated by Fiver and Verily.
Operating loss was $727 million. Other bets accrued CAPEX
was 55 million. In terms of other bet updates
for the quarter, with Waymo, in the third quarter,
we built on our early rider program, both expanding the group of participants
and beginning to test pricing models. At Verily, the team
continues to execute on its various partnerships
with leading pharmaceutical companies consistent with its mission to medicine
from reactive to proactive. Recently launched efforts
include a joint venture with ResMed to focus
on sleeping disorders and a research collaboration
with Gilead. Finally, you can see
in our results the benefit and quality
of our investment teams GV and Capital G,
which are also within other bets. Within the $1.4 billion of reported
gains in equity securities in OINE, approximately $400 million
was realized in Q3. There will be more details on these
investment activities in the 10 Q. Let me close with some
observations on the quarter and our longer-term outlook.
First, with respect to revenues, the third quarter results
reflect FX headwinds with U.S. dollars strengthening
in contrast to the tailwinds that enhanced reported results
in the first half of the year. We continue to be pleased
with the underlying momentum in our advertising businesses
as we apply our strengths in machine earning to improve the experience
for users and advertisers. As we noted, hardware was only
a modest contributor in the third quarter as we launched
a new Made-by-Google family of products for the fourth
quarter holiday season. Second, with respect
to profitability, within cost of revenues,
the biggest component is TAC. We indicated on the fourth
quarter 2017 call that the pace
of year-on-year growth incites TAC as a percentage of site’s
revenues would begin to slow
after the first quarter of 2018, and you can see that again, clearly,
in our results this quarter. As frequently discussed,
we do expect the site’s TAC rate to continue to increase
year-on-year reflecting ongoing strength
in Mobile Search. Looking ahead, we expect
seasonal impacts to our other cost of sales
from hardware sales, which are typically higher
in the fourth quarter of the year, as well as from increased content
acquisition costs for YouTube, which have also historically been
higher in the fourth quarter. Within OPEX, we continue
to prioritize our investments to support long-term growth.
In terms of head count, growth was seasonally higher
in the third quarter because we brought
on new graduates. We are continuing to invest in
adding talent to our priority areas, particularly for technical roles
in engineering and product management and to support our most sizable
growth areas, in particular, Cloud. As I’ve mentioned previously,
regarding sales and marketing, expenses are more heavily weighted
toward the back half of the year. As you have seen in prior years. These expenses are particularly
elevated in the fourth quarter to support the holiday season. Other bets remains a portfolio
of earlier stage businesses focused on addressing
sizable markets. We are moving toward
early stages of commercialization while continuing to calibrate
the pace of investment against achievement of key milestones.
And finally, with respect to CAPEX, you can see our continued investment
as we build the infrastructure needed to support the opportunities
we see across our businesses. This includes a number of data
center construction projects in flight as well as ongoing expansion
in our capacity. I will now turn the call
over to Sundar. Pichai: Thanks, Ruth.
We had a great quarter, and it was particularly special because last month we celebrated
Google’s 20th birthday and the 10th birthday of Chrome.
It’s exciting to think that 10 years in, we are still just at the beginning
of what’s possible. We get billions of questions
from users every day and about 15% of them are queries
we have never seen before. Our mission to make the world’s
information accessible and useful is as relevant today
as when we started. I want to begin by highlighting our
recently launched family of hardware. It’s a great example
of how we bring together Google’s strengths
to help people through their day, then I’ll touch on ways AI
is helping us approach our mission, I’ll give an update on our video
and advertising platforms, and, finally, I’ll talk about
our growing Cloud business. First, hardware. Every year we have a new opportunity
to push the boundaries of computing. Those experiences come to life in our
Made-by-Google hardware, which combines the latest advances
in software, hardware and AI. Our third generation
is our best yet. It includes the Pixel 3,
Google Home Hub, the Pixel Slate Tablet and more.
We are getting great feedback, and I’m very excited for users
to try these devices, especially as the holiday
season approaches. Our new hardware lineup
showcases the best of Google, including the Google Assistant,
Android, and Chrome. With the Pixel 3, we’ve used AI
to create a best in class camera. New features like top shot make it
so you never miss a shot. If your timing wasn’t perfect,
the camera will suggest a better frame and give you the option
to save it, and Night Sight will help you take
really good pictures, even in bad light. Pixel 3 also has a custom
security chip called Titan M. It was built to secure
Google’s own data centers, and now we are
bringing it to our users. We also released Google Home Hub,
our first smart speaker with a screen. It shows your morning commute,
let’s you control your smart phone, and gives you hand
free help in the kitchen. And Pixel Slate Chrome OS
reimagined as a tablet with all the great tabs
from the Play Store. Our hardware efforts are
picking up real momentum. For example, daily active users
of our Google Home devices have grown by over 5X
in the last year alone. I’m incredibly proud
of our growing hardware team including the talented employees
who came over from HTC and Nest. Our investments are paying off as we bring the best of Google
to more users and in more countries
around the world. Even as we build up
our hardware business, we continue to advance a mission
across our core products and platforms. Last month, we kicked off
20 years of Google Search by introducing some of
the biggest updates in many years. They include a new AI
powered ranking approach that delivers more relevant results,
a redesigned Google feed called Discover to help you stay informed
on topics that matter to you, and a new Search experience
for Google Images. We also continue to tackle
the information problem of connecting people to relevant
jobs right from Search. This has already helped connect
over 100 million people in 92 countries to job listings
that meet their needs and skills. Now, U.S. service members
can Search for jobs for veterans and enter their military
occupational code to see relevant civilian jobs. The Google S System
continues to gain traction, drawing on our strengths
in machine learning and helpful Google services
like Search, YouTube, and Maps. We’ve expanded our system
to 20 languages and 76 countries, and it can now understand and speak
more than one language at a time. We launched our first set
of smart displays with Lenovo and JBL as well as our own
Google Home Hub. Pixel users in the U.S.
will be the first to try our new duplex technology
which helps you complete real world tasks over the phone like calling
a restaurant to book a table, and we introduced a new way
to easily book ride services with your Google Assistant. In Maps, we also made
several improvements including a commute tab with live
traffic and transit information, and support for mixed mode commutes.
Earlier this month, we announced an exciting test
called Product Stream. We are working with
video game publisher Ubisoft to stream the latest game, Assassin’s Creed Odyssey to Chrome
browsers on laptops and desktops. Streaming graphically
rich content for video games represents a great
technical advance, and we look forward
to seeing what’s possible here. I’m particularly proud
of our strengths in AI are creating life changing
contributions in other fields. For example, our recent
flood prediction efforts which use AI to better predict
when floods will occur has the potential to help millions of people
get out of harm’s way. We are starting in India where 20%
of flood related fatalities occur today and we’re looking to expand
to more countries soon. Earlier this month, our researchers
showed how they’ve applied deep learning models to improve
accuracy of diagnosis for metastatic breast cancer. Our research found
that pathologists and AI can work together
more effectively than either alone. Moving to our video
and advertising platforms, which are creating
economic opportunities for partners
around the world. First, YouTube. One particular area of focus
is educational content. Every day, people from all over
the world turn to YouTube to learn something new, from carrier skills
to coding to cooking. Just this week, we announced
a $20 million investment to expand our YouTube
learning initiative which will help fund established and emerging
educational creators. We are also partnering
with organizations like Goodwill in Europe to create curated playlists
that teach career skills directly in our new
learning channel. YouTube’s ads business
continues to provide great results
for marketers and creators. At Advertising Week,
we announced that we would be expanding our popular TrueView
for actions format. This helps users take action
directly from video ads. They can now do things
like sign up for a newsletter and soon they’ll be able
to find movie showtimes, download apps, or even book a trip
right from the ad. For creators, YouTube is continuing
to build alternative revenue products like Super Chat,
Channel Memberships and the ability to sell merchandise
directly to friends. YouTube gaming creator,
market player, increased its revenue by 20%
using channel memberships. We continue to see
positive traction for our newest subscription
experiences too. YouTube Premium, YouTube TV,
and YouTube Music Premium are continuing to expand
to many new countries. The team is also investing
and growing and improving the news
experience on YouTube. More prominently surfacing
incredible news sources on the platform
is a big priority for us. Next,
our advertising platforms. Advertisers love that we are
bringing our machine learning strengths to offerings
like Responsive Search Ads and Universal Ad Campaigns
to create more effective ads. One new example
is smart shopping campaigns which use signals
like seasonality and price to optimize
where ads are shown. Tens of thousands of advertisers
are using this and seeing an average of 20%
more sales for the same budget. Just last week,
we announced that Nike, Best Buy and Sephora are joining
our Shopping Actions program. This allows people
to move seamlessly from browsing to buying
with a universal cart that works across Google Search
and our system. In apps, we announced a partnership
with Unity Technologies, which gives
their advertisers access to one of the largest
global networks of mobile gaming titles
across 1.5 billion devices. Unity’s developers can monetize
their apps with Google ads without any additional
development work. And lastly,
our growing Cloud business. At Google Cloud Next,
we made over 100 announcements including the Titan Security Key, which features Google
designed firmware to help verify that nothing on a customer’s key
has been tampered with, and we expanded our breakthrough Cloud
auto ML portfolio which now includes, vision, natural language,
and translation, and all over the world, we are seeing great customer adoption
of our Cloud platform. With the help of SAP Metro, one of the largest B
to B wholesalers globally, is centralizing the finance system
on Google Cloud Platform. They’re using Big Query
to generate data driven insights to help create more personalized
marketing campaigns. In the U.S., we partnered with
the National Institutes of Health to provide access to Cloud services
that help researchers access large data sets to accelerate
biomedical advances. We also added
new customers like ING and Broadcom joining
existing customers like PayPal, ANZ Bank, and Kroger. Out G Suite business continues
to fuel transformation in companies large
and small, and we crossed two important
milestones in the quarter. Google Drive became
the eighth Google product with one billion
monthly active users, and Gmail, now, has more than 1.5
billion monthly active users. One of our big wins in the quarter
was fast retailing. The Japanese retailer best known
for its popular brand Uniqlo, which is migrating
its employees globally to G Suite while also pursuing
AI solutions like on demand forecasting
on Google Cloud Platform. Our Cloud business
is benefitting from our investments in technical infrastructure,
including a U.S. – Europe cable that will improve
speeds for millions of people. Before I wrap up, I want to quickly
call out our continued momentum in Asia as well as the investments
that we are making in the U.S. As you can see from our results,
revenue growth in APAC remains strong. This is a reflection
of our very focused efforts to build great experiences for the
billions of people across the region. We’ve adapted many of our
core products like Search, Maps and YouTube to work well for the
next generation of users coming online. We’re also building products
to meet the specific needs of users in the region like Tez,
a digital payments app for India to help people easily pay
their electrician or split it in a bill
with just a few tabs. Just one year since it launched, over 30 million people
and businesses across India now use the app every month, and they’ve collectively made
more than one billion transactions. We recently rebranded the app
to Google Pay as we look to bring many of the app’s
features to others around the world. We’re also investing
closer to home. In Q3, more than 80%
of Alphabet’s total capital expenditures was within the U.S. Not only do these investments
in data centers, machines, and offices allow us to provide
great services to users, they have a strong positive
impact on the communities around them supporting thousands of jobs
and countless local businesses. This year to date we have added over
9,000 new employees in the U.S. and we continue to grow faster
outside the Bay Area than in it. As you can see, there’s exciting
momentum across many different areas. I’m constantly struck by the number
of incredible opportunities ahead of us as a company and how far
we have come over the last 20 years. I want to say a big thank you
to all of the Googlers around the world who help us deliver
on that mission every day. With that, I’ll hand it back to Ruth. Porat: Thank you, Sundar,
and we will now take your questions. woman: Thank you. Ladies and gentlemen,
on the phone lines, if you’d like to ask a question
at this time, please press star and the number one key
on your touchtone telephone. If your question has been answered or you wish to remove yourself
from the queue, you may press the pound key. And our first question
comes from Eric Sheridan of UBS. Your line is now open. Sheridan: Thanks
for taking the question, maybe two for Sundar, if I can.
Referencing the blog post and some of the changes
about how you see the future of Search, I wanted to know what some of the key
investments you think the company needs to make
so that Search becomes more visual,
more relevant, and what that might mean
tying it back to the business for engagement with your product,
relevancy of ads of medium to long-term, and then would you, with respect
to your comments on YouTube, we’re starting to hear from advertisers that there’s some blurring
between brand and direct response ad budgets as they look at products
maybe more across blended lines. It sounds like the YouTube announcements
coming out of Ad Week were about making YouTube
more responsive or more direct response. How are you thinking about
the blurring of those lines and what it means
for product development long-term? Thank you so much. Pichai: Thanks, Eric, I’ll take the two. The first on Search, you’re right that,
you know, with Search, we are always trying to anticipate
what the user experience expectations are and trying to meet them there,
and getting increasingly mobile, you know, people do one immerse
of engaging experiences, they want experiences
to be more visual, and that’s partly what you saw us
announce in our 20th birthday event, and, you know, we’re excited
to move in that direction, and I do think we have a lot
of important answers to bring here. YouTube is a big part of what we do.
We are investing in image Search, and we do have products
like Google Maps and Photos which all add to that visual experience,
and as part of doing that, you know, we are investing in our
advertising offerings as well, so over time, you know, we’ll adopt
that so they go hand in hand, but I think it’s
an important evolution for us. In terms of YouTube, I think it is …
a part of what makes YouTube great is, I think, we can offer
different opportunities for advertisers. We always felt that it responds
to something that can work well on YouTube
and our instinct is bearing out and, you know, I look
at my personal use cases. There are many times now,
sometimes instead of Search, I actually find something
that I want to do in YouTube. Maybe you’re thinking
about going to a place and I research it on YouTube, so I think it offers
the same opportunity over time and, from that standpoint, we want to make sure
we are evolving the product to bring those opportunities
to advertisers. I’m very excited about it. Sheridan: Thank you. woman: Thank you.
And our next question comes from Dan Sammon
from VML Capital Markets. Your line is now open. Sammon: Good afternoon, everyone.
Sundar, two questions for you. First, earlier this month
or it might have been late last month, Sridhar Ramaswamy, your head of Ads
and Commerce left to go to a VC firm. Betting that wasn’t
a surprise to you, but I’m just hoping
you could shed a little light on sort of succession planning
for that important role and whether or not you expect
any sort of broad changes to ad product strategy
and then second, just amongst those announcements
on the anniversary were the evolution
of Feed to Discover and I recognize that’s
an evolution of a product, but it does look like
you’re taking advantage of that long-unused
white space on Google.com, and so I’d just love to hear
just a little bit more, sort a follow-up on Eric’s question
on the evolution of Search, but ow you see that surface
in particular evolving and particularly as a potential
for ad monetization over time. Thanks. Pichai: Good, you know,
on the first one, you know, a lot coming. One of the things
I’m really proud about Google is we have a deep bench of talent
and, you know, and, you know, for example
in the Ads Team almost all of our senior ads’ leadership
has been here for, you know, well over a decade,
and so for us, we are fortunate
to be able to tap into it. Our ads leadership comes,
you know, Prabhakar, who has taken over
our ads product and engineering efforts is someone I worked with
for many, many years and, you know, most recently
has led our G Suite business but has done
many roles before. He’s a deep computer scientist
and, you know, I expect for him to continue our tradition
of technical excellence with which he approaches
our advertising work. I also want to mention,
you know, Phillip and his team, his extraordinary team, you know, who definitely lead
many of our initiatives here and Phillip and Prabhaker,
with them I think it’s in great hands, and I expect a lot
of continuity there. On your question
on Search and Discover, you know, in addition
to making Search more visual, one of the things we are
very, very focused on is, you know, not always
do users turn to us and actually ask a question, so we feel our job is to be there
when users need us, anticipate what they want,
and sometimes, proactively meet them. That’s where services
like Proactive really play a role. All right, I think…
and we’re thinking hard about how we can surface
relevant information for our users, stuff they are
really looking for, can act on in a way in which
it’s delightful for them, and is showing up for them
when they need it, so I see that as an important
evolution of Search as well, and so you’re gonna
see us investing more. Mobile offers us
a great opportunity, and if you use it in Pixel 3,
you know, that’s the latest product in which we bring our version of how to
bring all these products together, and then we’ll give you
a good sense of how we plan
to do that over time. Sammon: Great, Thank you. woman: Thank you, and our
next question comes from Anthony DiClemente
of Evercore ISI. Your line is now open. DiClemente: Great. Thank you
for taking my question. First, for Sundar.
You spent some time on hardware, spent time discussing your suite
of hardware devices, the Google Assistant,
the Pixel, how are you measuring
the returns on those investments in hardware both in the products
and on the marketing side here in a pretty
competitive market place? What are the milestones
for success that we should be
looking for on hardware? And then for Ruth,
as we start to look ahead to 2019, as you plan for ’19, how are you thinking
about the relationship between revenue growth and dollars of
operating income growth for next year, particularly if the macro-economic
environment were to become, let’s say, less of a tail wind
to the broader ads environment as it was this year
and in prior years? Thank you. Pichai: On hardware, you know, we always want to be at the forefront
of computing and, you know, and so, and a lot of times that was thinking
across the whole stack, bringing together the entire experience
in an integrated way for our users, and we have, you know, genuinely see
a very differentiated way to do this. You know, we think of our approach
to bringing together AI software and hardware is unique, and we think we can deliver
the best in class experience and we are committed to doing it.
At the same time, you know, we want to build
a great business here as well, so we are investing
in the long run because we see it clearly as an
important business opportunity for us as well,
so both go hand in hand. We closely look at metrics
and the metrics we’ve been very focused on
for the last couple of years, this is our third generation
of hardware. It’s the first time we actually
are doing our products end-to-end, and we’ve expanded
to newer categories. We look at user feedback
and reception. We measure, you know, NPS codes,
and you know, our scores are now reflecting best
in class in the category, and beyond that, we are looking at
how the marketed option is, and we are thoughtfully
building a business but we are committed
and investing for the long run. Porat: And in terms of how
we’re thinking about planning, we’re in the middle of it now, and many of the questions that have been
already asked sort of point to the direction that we feel really
good about the underlying strength in the ads business as we’ve talked
about on numerous calls. We continue to invest here because we see ongoing
opportunities in particular as we leverage machine
learning to provide better experience for users
and for advertisers, and some of the comments
the Sundar made about the opportunities that open up
with visual Search, again, continue to point in the direction
of direct response, continue to point to some of the
underlying areas in which we’re focused, but as we’ve talked
about on prior calls, that’s one element of it, and we continue to invest
for opportunities that are sizable
over the long term. Sundar’s already commented
on both hardware and Cloud as really important examples, and we think the steps
that we’re taking, the investments
we’re making are, you know, provide kind of
the foundational support for ongoing,
long-term sustained growth and so then we marry that
with the second part of your question which is in how do we think
about the pace of investment. As we’ve said repeatedly,
we’re very focused on investing
for the long-term. We’re trying to make sure
that we prioritize crisply across the opportunity
set that we have and we make the right
types of tradeoffs, but we do remain focused
on long-term investing given the scale of
the opportunities that we see. DiClemente: Got it. Thank you. woman: Thank you.
And the next question comes from Mark Mahaney
of RBC Capital Markets. Your line is now open. Mahaney: Thanks,
two questions please. One, Sundar, could you just update us
with your thinking on China and the China market
and the extent… I know Google is already
in that market, but the extent to which
you want to expand, re-expand, your presence
there with Search, and then, in terms of Waymo,
just a quick question. Commercialization of Waymo,
do you know when… do you have a sense of
when you’ll have pricing established and, you know, you’ll have
a roughly well-defined and acted on go to
market strategy with Waymo? Is that the end of this year,
beginning of next year, whatever? Thank you. Pichai: Mark, on China, you know,
we obviously, you know, you know, we deeply care
about serving Chinese users. We’ve been investing for many years
and especially from developing android, but more recently
we’re launched mobile apps such as Google Translate
and five Skill, and, you know, improved
double up for tools there, so, you know, we are constantly
looking for ways by which we can better
serve Chinese users, and that’s where
we are today. Porat: And then in terms of Waymo, in the third quarter,
as I think you know, we extended our early rider program
to a larger group and we moved into very early
days of commercialization, so we do now have people
paying for rides, and we’re also
testing pricing models. I think the main point,
we said this repeatedly is that we are intently
focused on safety first and ensuring a great user experience,
and so what that means, we’re really expanding
the program methodically. We’re taking
an iterative approach as we continue to broaden
the geographic footprints, and then, on top of that,
as we’ve talked about on prior calls, we’ve been developing the B
to B opportunities, so in Phoenix,
as an example, we’ve been piloting
with several partners who are sponsoring a service on behalf
of their employees and customers. And again, it’s early days
so small revenues, but we’re pleased to be
testing this out as well and then on top of that
continuing to explore applying our technology
for logistics and deliveries, and for personal use vehicles
and for last mile solutions for cities, so you can see a move
in the third quarter, but as we’ve said repeatedly,
it’s very early days, and we are taking a very deliberate,
iterative approach to broadening it out. Mahaney: Thank you, Ruth.
Thank you, Sundar. woman: Thank you.
And our next question comes from Brian Nowak of Morgan Stanley.
Your line is now open. Nowak: Thanks for taking
my questions, I have two. The first one on Maps monetization
and putting some more ads in the Map. Can you just talk about
sort of early, early learnings there? I know you talked about
local Mobile Searches growing quite rapidly
in the past, but any early learnings
on the monetization and the return, that advertisers
are getting on that front? And the second one on video
games and project stream. Can you just talk a little about
how you think about the gaming opportunity
for Alphabet and what you think are
the key factors you need to tackle to really build
and scale direct to consumer facing Cloud
gaming product? Pichai: Look, on the ad stuff,
we’ve had ad formats in Maps for some time and, you know, and we are constantly working
to make it more useful and relevant, but I won’t underestimate
the focus we have on local, you know? Just to give you a sense,
local Mobile Searches are growing faster than just
Mobile Searches are overall, and they’ve increased
by almost 50% in the last year. So for us, that’s
an important focus area and Maps plays
a big role there, so we recently announced
local campaigns, which is a new campaign
type specifically designed to drive
foot traffic to local businesses, right, and it’s going to roll out
in the coming months. And so that is a big focus. As you pointed out,
we are definitely launching and experimenting with newer ad formats
on Maps itself. We have promoted places
which appears on the map itself. We have play space ads
which appear on Google listings and Maps and Search, but we are definitely
in the face of putting those, testing it out, making sure
their user experience works, and making sure we can
deliver value for advertisers. We are being patient here because
the opportunity in Local Search, you know, it’s a big opportunity,
and we are focused there. On your second question,
you know, we today serve our users
on gaming across Google Alphabet in many ways, right?
Obviously, Google Play does this a lot. It’s a big, important vertical
on YouTube, and so we are, we touch,
you know, we touch with gaming developers
across many areas already, and so we are thoughtfully thinking
about what more we can do there, and Project Stream, you know,
having spent my life on computing ,was blown away
by seeing our ability to stream a game which needs
real-time interactions and to be able to do that
from the Cloud, and it’s one of the most
important technological advances I’ve seen in a while,
and so we are going to focus on that and make sure we are
making progress there and bring our newer
experiences for gamers. Nowak: Great, thanks. woman: Thank you.
And the next question comes from Douglas
Anmuth of J.P. Morgan. Your line is now open. Anmuth: Thanks for taking the questions,
one for Sundar, one for Ruth. Sundar, can you help us
better understand how the remedy in Europe
will work in terms of licenses and TAC going forward and what impact you see
that having on financials? And then Ruth,
can you just talk about where you are in the hardware
replacement cycle in your data centers, pretty major step up this year
just given that large ramp? How are you thinking about
the trajectory into ’19? Thank you. Sundar: Thanks, Doug. On Europe, you know,
it’s early to say we’ll begin on the implementing
the remedy in the next few weeks, but in all these cases,
you know, we always, you know, we focus on complying with
the commission’s directive, and we want to make sure
that the transition for both our users and our OEM partners
as smooth as possible. In this case, you’re dealing
with life cycles for mobile phones, so changes is going to take
some time to reach users, and it’s difficult to predict how
the licensing model will be adopted but, you know,
our products are very popular with users across platforms
and so, it’s early to say, but we are focused on doing
the right thing there. Porat: And then, in terms
of technical infrastructure and our CAPEX, you know, as we
talked about last quarter, CAPEX reflects our view
of the growing opportunity set in our core ads and Search businesses as well as
the longer term opportunities and newer businesses, in particular
just support Cloud, and then, very importantly,
as we’ve talked about, machine learning
across Alphabet, and we’re particularly excited about
the opportunity with machine learning because it opens up more services
and products for users, and for advertisers,
and for enterprise customers, and so given our view
about the long term potential with these opportunities,
we’re very focused on insuring that we have the needed
compute capacity to support growth, and that’s what
you’re really seeing with the uptick in investment.
To give you a bit of a breakdown, the largest component
continues to be machines, but relative to last year, it’s important to note
that data center construction is an increasing percentage
of our CAPEX investment, and so we’re now
in various stages of developing more than
20 data center sites globally. We’re also investing
in network infrastructure such as undersea cables
so we can deliver speed and quality. So, again, this really goes to our
view of the opportunity set. That being said,
we do remain very focused on optimizing the use of CAPEX
and also on compute efficiency. We’re very mindful of the fact
that our decisions here on CAPEX don’t just result
in CAPEX spend but also translate
into higher depreciation expenses and that goes both
to cost of sales and OPEX, so very careful about
how we’re using it, but want to make sure that we’ve built
for the requirements that we have. And as much as you asked
about technical infrastructure, just a quick note
that our facilities spend, namely real estate
was more muted this quarter and it was primarily just the ongoing
work on our ground-up development, so you’re primarily seeing what’s going
on technical infrastructure here. Anmuth: Great. Thank you both. woman: Thank you. And our next question
comes from Ross Chandler of Barclays. Your line is now open. Chandler: Great. Two questions, Ruth. So you guys posted
pretty solid growth all around, but if we look at some
of the international markets, each geography had a tougher comp and decelerated a little bit
on a currency neutral basis, so I guess, stepping that high level,
the growth rates are solid, but can you give us any color
on the overall macro picture here? I think we’re
getting mixed feedback from different companies
across different sectors, so any high-level comments
would be helpful on just the ad market given that you’re close to 20%
of global advertising ex-China. And then, Sundar,
a question on, I guess, Pixel and just
the overall advance that you’re seeing
in smartphone devices, so if you guys rollout
more products like Lens and G Board and some of these
other utilities on top of, you now, your billion plus apps
like Search and YouTube, is there any way to parse out
what the overall engagement looks like in markets
like the U.S. and Western Europe when the phones are improving
their functionality and you keep adding
these additional utilities? Is query volume going up
on a per user basis? Any color there
would be helpful. Porat: So in terms of your
first question, we actually feel pretty good
about the strength globally, which, you know, which I noted
in opening comments, you know, across the board 20% growth
in the U.S. on a $15 billion base. Sundar noted what’s going on
in APAC, 30% year-on-year growth. It’s now over a $5 billion
revenue business, and we’ve had sustained quarter
after quarter growth of this kind
of $30-ish percent area. Feel really good about that. You know, by country, it really
does reflect broad based strength, ads he said,
we’re very focused on the region, and I think we’re delivering
terrific products and experiences in rapidly growing markets. He sees the same thing
in other Americas, neutralizing for currency movements,
28% year-on-year growth, so we’re really proud of what the teams
are doing around the globe. Pichai: And, you know,
on your second question, you know, one of the things
we clearly see when we make a hardware
product like Pixel in which all the tools
and the [inaudible], you know, are conveniently there,
integrated, and the experience is great. We definitely see users
and engaging more and, you know,
and so we see an opportunity, and that’s one of the bigger reasons
why we do hardware as well to show that
in-tune experience, both for our ecosystem
as well as for us. It helps us, you know,
give users a much deeper, engaged experience as well, and, you know, when you look
at all our products, you know, we see that, and we do see
that as an opportunity. woman: Thank you.
And our next question comes from Michael Nathanson
of MoffittNathanson. Your line is now open. Nathanson: Thanks, I have two
for Sundar, kind of the same theme. One, on the Pixel 3,
the marketing message is clear, the product looks great, but I wonder,
when you look at to date the success for ramping the product,
what’s been the gaming factor? Has it been the carriers?
Has it been the pricing? When you just look at the fact
why it hasn’t scaled as much as the product should have
scaled, what are the factors? And then, on Verily,
you called out some deals with big pharmaceutical companies
this quarter. But, again, there I wonder who’s
your most natural partnership? Is it hostels, insurance,
governments? When you think about
the big opportunity, where’s the most
natural fit to drive Verily going forward? Pichai: You know, on Pixel,
first of all, you know, part of the big thing is this is
our third generation of hardware. Each generation, first of all,
we’ve been scaling up the product in terms of even the number of units
we can make and so on, so, you know, we, you know, if you remember,
the first couple generations we were struggling to meet
the early demand we saw. That is the first year
we’ve done it end to end, and we are ramping up
off of there. So each year when I look
at all the metrics be it NPS or be it our sales
albeit our revenues, et cetera,
everything is progressing well, but there are, you are right,
the gaining factors to ramp this up, first of all is to be able
to build a supply we need, and second is, you know,
go to market, getting our… so it’s in as many locations
in retail as possible, and as many countries
as possible, with as many carrier
certifications as possible. So each of those dimensions
we are making progress as well. Porat: In terms of verily,
you know, what we’ve talked about there is they have partnered with a would host
of leading pharmaceutical companies focusing on specific diseases
whether it’s diabetic retinopathy, whether it’s… or across the board
for neurological diseases. I announced a couple
of new partnerships, the ResMed arrangement
as well as Gilead, and that’s what they tent to do.
They partner with best in class to focus on specific areas where working
with the pharmaceutical companies, they can, in the end the technology
we have and benefiting from machine learning we can really move
from reactive to proactive care. That’s the Verily focus. Nathanson: Thanks, Ruth. Thanks Sundar. woman: Thank you.
The next question comes from
Heather Bellini of Goldman Sachs. Your line is now open. Bellini: Great, thank you. I just wanted to focus on Cloud
a little bit more. Sundar, you gave some good color
in your prepared remarks, but I’m wondering if you could share
with us an update, maybe on the partner momentum
and the direct sales momentum you’re seeing on the market,
how you’ve seen that change, and also, if you could highlight,
you know, if you’ve noticed, if there’s been noticeable changes
in win rates over the last year as the product continues to mature
and, you know, you also, in the beginning of the year
and I was exiting Q4, you would give us some high level
growth commentary about GCP, and I’m just wondering if you
have anything else you could share? Thank you. Pichai: Thanks, Heather. Look, overall, it’s now
we’ve been doing this seriously at the next level
for three years and, you know, we’re definitely
seeing strong indicators that the investment in product,
you know, is clearly beginning to work. You know, our value proposition
does come through in many comparative
situations. I’ve seen, you know,
many important events and what seemed like very,
very comparative situations. You know, I also don’t,
you know, from the way we see it, you know, it doesn’t look like
a zero-sum game, as you know. We are addressing
a large market opportunity here. It seems like
very early days, and, more importantly
the gentle sense I get is we’re very aligned with where the market
is headed in the long run, you know, and this notion
of supporting open architecture so that enterprises
don’t feel locked in and allowing for a multi-Cloud
environment to double up, that’s the direction
we’re betting on and our indications say that the market is headed
in that direction as well, so that gives us
a lot of comfort as well. And on the go-to-market side,
you know we have really ramped up both in terms of our… our investments,
our direct investments, but also, our partnership strategy
is beginning to work, and when I look
at the pipeline ahead, you know, we are clearly
seeing momentum there as well. You know, in this business,
you know, obviously, the enterprise business plays in a way
in which you do have vents, but those accounts turn
into larger revenue deals over time, and so it’s very clear to us
that we are laying the foundation and we are getting
the strong early momentum and that’s the big reason
why we are investing in a strong way
in the area, and, over time, we’ll, obviously,
share more here as well. Bellini: And could I just ask
one follow-up if possible? I was just wondering,
if you look at Microsoft, they have an on-premise
and Cloud strategy. If you look at Amazon,
what they’re doing with AWS and VM wear, they’re kind of
doing a similar strategy. Do you think there’s
a requirement for you to also have
an on-premise strategy to try to solve this hybrid world
as long as its’s hybrid for? Thank you. Pichai: you know, we are thoughtfully
looking at it, you know? We are increasingly
working with partners, like, for example, our partnership
from SAP or Pivotal VMware. These are also on hybrid
Cloud solutions and so, we are thinking about, you know,
how to do that better and our overall approach
to Cloud hybrid modernization, I think, is the right
long-term direction, and so we are doing that, and, you know,
there are many, many situations we are in where on prem
is a big, big requirement for customers but with our
partnership approach, we’ve been able to-
address the needs well, so I don’t see that
as a gating issue for us. Bellini: Thank you. woman: Thank you.
And our next question comes from Brent Thill of Jefferies.
Your line is now open. Thill: Thanks.
Ruth, I just wanted to see if you could quantify
the FX headwind. I think it was
a negative 1% for Q3 and in Q 4 do you anticipate
it will be similar or a little worse? Porat: I will let you
forecast the dollar, you know, as you noted it was a point here it went
from a tailwind in the second quarter to a one point drag here
going forward, but we called out,
and we’ll have more in the queue, but noted the impact,
for example of a pretty big delta between our reported and fixed
and other Americas 19 to 28% growth, and that was what was
really going on with the Brazilian real
and the Argentine peso. We saw some movements in other
currencies around the globe, but you can see that,
which is why we broke out the geography the way we’ve done it a number of
quarters ago to try and give you, help give a better sense
of the types of headwinds, and I’ll let you
forecast the dollar. Thill: Okay, we look forward to that. Real quick, just on EMEA, you were flat
on your constant currency growth, 19% – 19% the last two quarters
despite with GOPR, so I would believe that would suggest
that you’re probably not seeing as big a headwind perhaps,
as maybe some expected. Can you just talk to the European
business and what you’re seeing there? Pichai: Welcome, and, specifically
I think if your question is around GDPR and so on, you know, first of all, I mean, we’ve always been as a company
very, very focused on user privacy and security, and so, in some ways,
you know, we were very early on engaged in, you know, GDPR,
and we worked very hard to make sure that, you know, our products are ready
and in compliance. We’ve generally always approached
our products with a strong privacy
lens for our users so I think that helps us work
through these changes because I don’t think they are at odds
with what we are trying to accomplish. I think GDPR is a very good
and comprehensive set of regulations and, you know,
and so I think it’s been good to see a small transition
on our products and for our users. Porat: And we’re continuing to invest
significantly in Europe because we see
the opportunity across Europe and are investing in the communities
in which we’re working. Thill: Thank you. woman: Thank you. And our final question
comes from Justin Post, Bank of America Merrill Lynch. Your line is now open. Post: Great, Thank you.
One quick one for Ruth. People are really…
I was asking about amazon. I was just wondering
if your e-commerce vertical was any difference versus
your other verticals in the quarter? Anything to call out there?
and then, secondly, Sundar, a lot of interesting things going on with YouTube
and Waymo and Cloud and other areas. As you look out two or three years,
do you think any of these businesses could really make a financial
positive difference on the bottom line for overall Google?
Thank you. Pichai: Welcome, and I think
the first thing on e-commerce may be really in a people, you know,
we do see a lot of activity in the vertical on our products,
and we see strong growth there as well. We see it as an important use case,
and there’s why we are investing a lot. You know, if you look at our recent
work with Shopping Actions, that’s an example
of the kind of work we are doing there, and when we do those things, we clearly, you know,
see users respond. Like, for example,
on Shopping Action’s site we just recently had partnerships
with Best Buy and Nike and Sephora, I mentioned earlier, so we are
continuing to invest there, you know, and we are also
driving strong partnerships in the retail sector both in terms
of our shopping experiences also through Cloud, and I think that continues
to be a big opportunity, and on your broader question, look,
the reason we are investing across
Google and Alphabet, in a set of areas because, as a company,
over the past 20 years, you know, we’ve developed
deep capabilities in technology and computer science and especially with machine
learning and AI, and we see an opportunity to apply
that across a set of important areas. There are a lot of opportunities
ahead of us. We are pretty disciplined
on where we’re focused on, and we’re focused on real
live opportunities, and when you mention areas like YouTube
and Waymo and Cloud and hardware, they all fit the category,
but we take a very long-term view and we want to investigate
theU.S.er experience right, and we are pretty confident that
when we do that, the rally will follow. Post: Thank you, Sundar. woman: Thank you. And that concludes our question
and answer session for today. I’d like to turn the conference
over to Ellen West for closing remarks. West: Thanks, everyone,
for joining us today. we look forward
to speaking with you again on our fourth quarter call. woman: Ladies and gentlemen,
thank you for participating in today’s conference. This does conclude the program,
and I’ll disconnect. Everyone, have a great day.

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