Introduction:

The transcript is from Alphabet’s first quarter 2019 earnings call. Key people in the call include Ruth Porat and Sundar Pichai. The session covered Alphabet’s financial performance and offered an outlook on the future of its various business sectors, including Google and other bets like Waymo, Loon, and Verily.

Financial Highlights:

Total revenues for Q1 2019 were $36.3 billion, a 17% YoY increase. Revenues were driven by mobile search, YouTube, and cloud services. Operating income was $6.6 billion, affected by a European Commission fine. Excluding the fine, operating income would be $8.3 billion, a 9% YoY increase. Net income was $6.7 billion, and cash and marketable securities were approximately $113 billion.

Revenue by Geography:

U.S. revenues were $16.5 billion (up 17% YoY), EMEA revenues were $11.8 billion (up 13% YoY), APAC revenues were $6.1 billion (up 27% YoY), and Other Americas revenues were $1.9 billion (up 10% YoY).

Cost and Expenses:

The total cost of revenues, including Traffic Acquisition Costs (TAC), was $16 billion (up 19% YoY). Operating expenses were $13.7 billion, which includes the European Commission fine. Stock-based compensation totaled $2.8 billion.

Google’s Revenue Breakdown:

Google’s segment had revenues of $36.2 billion, up 17% YoY. Google Sites revenues were $25.7 billion, driven by Mobile Search and YouTube. Network revenues were $5 billion, while other revenues for Google, which includes Cloud and Play, were $5.4 billion.

Google’s Cloud and Hardware:

Google Cloud Platform is one of Alphabet’s fastest-growing businesses. However, there was a noted decrease in sales for the Pixel phone due to competitive promotional activities in the premium smartphone market.

Other Bets:

Revenues from “Other Bets” (like Waymo, Fiber, and Verily) were $170 million, with an operating loss of $868 million. Waymo is expanding its autonomous vehicle production in Michigan, Loon has a $125 million investment from SoftBank’s HAPS Mobile, and Wing received air carrier certification from the FAA.

Future Outlook:

The company is optimistic about its growing cloud business and various “Other Bets”. Expenses are expected to increase, particularly in R&D and data center operations. The focus will also be on monetization dynamics of advertising businesses.

This summary provides an overview of Alphabet’s Q1 2019 performance, emphasizing revenue growth, operating costs, and future business endeavors.

Currency Impact:

The speaker emphasizes the influence of currency movements on quarterly results. He mentions that the company experienced a significant swing year-over-year, going from a tailwind in Q1 2018 to a headwind in 2019. Due to the strengthening U.S. dollar, he expects further headwinds affecting revenues and operating income in the upcoming quarter.

Revenue Drivers:

Regarding key revenue drivers, Son highlights the role of timing in product changes, especially in ads, which can impact year-on-year growth rates. He states that they will keep innovating, focusing on long-term benefits for both users and advertisers. He specifically talks about leveraging machine learning for improving the advertiser and user experience.

Google Cloud and Hardware:

He expresses satisfaction with the Google Cloud Platform, mentioning its balanced growth coming from new and existing customers. While admitting pressures in the premium smartphone industry, he notes positive momentum for assistant-enabled home devices like the Home Hub and Mini devices.

Investment in Long-term Growth:

Discussing profitability, Son elaborates on the company’s commitment to investing in long-term growth areas. This includes increased R&D spending for priority sectors like cloud, search, and machine learning. Sales and marketing expenses are also expected to rise in Q2.

CapEx and Future Investments:

In terms of capital expenditure, a decline year-on-year was noted, largely due to a building purchase in New York in Q1 2018. However, he expects full-year CapEx investments to exceed those of the prior year, albeit at a slower growth rate. Investments are targeted towards computing requirements and office facilities.

Conclusion:

Son concludes by expressing confidence in future opportunities and reiterates the company’s commitment to thoughtful, long-term investments. He then turns the call over to Sundar, signaling the end of his segment.

The presentation gives a comprehensive overview of the company’s financial health and strategic directions, emphasizing innovation, investment in long-term growth, and the challenges and opportunities ahead.

Upcoming Events:

The speaker highlights several upcoming events, including YouTube’s Upfronts event, Brandcast, the annual developer conference Google IO, and Google Marketing Live. These events will offer further updates and are indicative of the company’s ongoing engagements in multiple sectors.

Long-term Focus and Opportunities:

The speaker reiterates the company’s long-term focus and its willingness to make investments that help both their business and those of their customers. There is a particular emphasis on the shift from mobile computing to Artificial Intelligence (AI), and the speaker feels very positive about the opportunities this shift brings.

Core Mission and Utility:

The speaker discusses Google’s core mission of making information universally accessible and useful, underlining that this guides the development of products designed to help people in daily life. They mention Google Assistant’s duplex technology that can book restaurant tables and AR walking navigation in Google Maps as examples.

Advancements in Job Search and News:

The speaker talks about an improved job search experience in the U.S., focusing on the discovery of quality remote jobs. Additionally, as part of the Google News Initiative, they have launched the Local Experiments project, aimed at helping local publishers improve their business models.

AI and Computing:

AI is described as a technology spurring a new era in computing, becoming more predictive and assistive. The speaker states Google’s commitment to responsible development in this area and mentions that AI is deeply embedded in products from Search to Google Home.

TensorFlow 2.0 and Privacy:

Lastly, the speaker reveals the launch of TensorFlow 2.0 at its annual developer summit, emphasizing features like TensorFlow Privacy that allow for better data protection. This indicates Google’s ongoing efforts in expanding and securing machine learning capabilities.

The presentation provides an extensive overview of Google’s future directions and technological innovations, with emphasis on long-term goals, the application of AI, and ongoing efforts to improve user experience and utility.

Android Ecosystem:

The speaker discusses the momentum in the Android ecosystem, highlighting the release of Android Q’s beta, which offers enhanced privacy and new tools for developers. Android Go Edition is specially designed for entry-level smartphones with less than one gigabyte of memory. About 70% of such devices are activating with Android Go.

Android Auto:

Android Auto’s adoption is increasing rapidly, with Toyota’s announcement that its vehicles starting in 2020 will include Android Auto. This means all top 10 car makers now support the platform.

Google Play:

The number of first-time buyers on Google Play grew nearly 50% year over year, indicating strong growth and user engagement on the platform.

Stadia Gaming Platform:

Stadia is introduced as a revolutionary gaming platform that allows users to play advanced games on any screen without needing downloads or updates. The reception from the industry has been very positive.

YouTube Platform:

YouTube focuses on responsible content curation and has reduced recommendations for content close to violating guidelines or spreading misinformation. YouTube TV, Music, and Premium have expanded significantly, with YouTube Music seeing particularly fast growth in India.

Advertising Business:

The ad business, supporting both brand and direct response campaigns, continues to grow. New features are regularly introduced, with more than 100 enhancements every quarter. Automated bid strategies in Google Ads are being used by over 70% of advertisers, which are powered by machine learning.

Shopping and Merchants:

New shoppable ad units have been introduced in Google Images. The company also made shopping easier on Google Assistant and Search with a universal cart. The number of participating merchants has increased sevenfold since the launch.

Game Developer Advertising:

New advertising solutions for game developers were introduced, including app campaigns for engagement to re-engage players across Google’s properties.

The speaker emphasizes Google’s commitment to long-term investment rather than quarterly results, feeling positive about machine learning-powered innovations and the opportunities ahead. This segment offers an in-depth look into Google’s evolving platforms, innovative technologies, and growth strategies.

Hardware Growth:

The speaker expresses pride in Google’s hardware foundation, built in a few short years. Products like Google Home Mini and Home Hub are mentioned as examples of strong demand. Google is also actively developing its Pixel, Nest, and Home product lines. The company is scaling operations to optimize distribution and branding.

New Campus in Taiwan:

A new campus and engineering hub have been announced in Taiwan, primarily to support Google’s hardware efforts. This serves as an indicator of Google’s commitment to hardware development.

Consumer Satisfaction:

Features like Night Sight on the Pixel phones have won industry awards and Net Promoter scores suggest a high level of customer satisfaction with Google’s hardware products.

Cloud Business Overview:

In the cloud sector, the speaker mentions that Thomas, presumably Thomas Kurian, Google Cloud’s CEO, has had a significant impact. A recent Cloud Next event attracted over 30,000 attendees, emphasizing the momentum in this business vertical.

Anthos and Multi-Cloud:

The new product Anthos is highlighted as a single technology stack solution for both hybrid cloud and multi-cloud environments. Early feedback has been positive, supporting Google’s aim to be customer-centric.

Clientele and Expansion:

Google Cloud serves nine of the world’s top ten media companies and over half of the top ten companies in various industries. New cloud regions in Seoul and Salt Lake City are planned for 2020 to further support customer growth.

Social and Environmental Responsibility:

A collaboration with Goodwill has trained a quarter of a million Americans in new digital skills, with 27,000 finding jobs. Google is also committed to environmental sustainability, with its data centers using 50% less energy than typical data centers.

Renewable Energy Commitment:

Since 2017, Google has matched 100% of its electricity consumption with purchases of renewable energy, making it the world’s largest corporate buyer of renewable energy.

The speaker concludes by expressing excitement for Google’s future and thanks the employees for their contributions.

Revenue and Business Performance:

The speaker responded to questions about Alphabet’s Q1 revenue performance. The speaker highlighted that Q1 revenue was affected by FX headwinds compared to last year. To provide insight into CITES revenue, The speaker suggested looking at the delta between fixed and floating growth rates at the Alphabet level. He emphasized that they make changes in their products focusing on long-term interests rather than managing on a quarterly basis.

Desktop vs. Mobile:

When asked about desktop vs mobile, The speaker clarified that desktop is a modest contributor to revenue but remains crucial for complex tasks. Despite the growth in mobile utility, desktop continues to be relevant, showing its ongoing importance.

Revenue Growth Factors:

In response to questions about paid click growth, the speaker mentioned that YouTube clicks, which comprise the majority of total clicks, had decelerated year-on-year due to changes made in early 2018. These changes were considered beneficial for both users and advertisers.

Investment and Spending:

The speaker also spoke about the company’s investment strategy, including headcount and capital expenditure. Cloud remains the primary area of headcount growth, with a focus on priority areas like cloud, search, and machine learning. The full-year 2019 growth rate for CapEx is expected to moderate considerably compared to 2018.

Cloud Business:

In answering questions about their cloud services, the speaker pointed out that their focus areas are security, reliability, and open-source, among others. Go-to-market strategies have been accelerated, with a commitment to growing the business across various verticals.

Waymo and Other Ventures:

Finally, Waymo was mentioned as primarily focusing on ride-sharing, but with potential licensing opportunities and applications in various sectors such as long-haul trucking and deliveries.

Note: The speaker attribution to The speaker might be an error, as the context suggests that the discussion is about Alphabet’s financials, typically handled by Alphabet’s executives.

Stadia and Publisher Relations:

The conversation opened with a question about Stadia, Google’s cloud-based gaming platform. The question aimed to gauge the nature of ongoing talks between Google and major PC and console publishers. Sundar Pichai (referred to as SPEAKER_07) expressed genuine excitement from publishers about the technology. While acknowledging the technical challenges involved, he emphasized that hands-on experience with Stadia generally converted skeptics. The publishers are interested but want to see Google’s commitment to the platform.

Technical Commitments:

Sundar mentioned that both Google and the publishers are investing significantly in the technology. There isn’t necessarily any pushback from the publishers, but they do want to see Google’s commitment, which Sundar reassures has been demonstrated.

YouTube Content Responsibility:

Another significant part of the conversation centered on YouTube’s content responsibility. Sundar noted that Google is focused on improving the content that is recommended to users. They aim to increase the visibility of high-quality content while reducing the spread of low-quality or harmful content. Several new updates aimed at achieving this are expected to be rolled out soon.

Long-term Product Changes:

When asked about changes to products or advertising experiences, Sundar emphasized Google’s long-term thinking. While there might be quarter-to-quarter variations, the overarching strategy is to evolve products with a disciplined framework. The company remains confident about future opportunities.

These points reveal Google’s ongoing efforts to innovate and collaborate with external partners while emphasizing responsible content management.

Team Collaboration and OKRs:

The speaker emphasized the importance of the Objective and Key Results (OKR) process in promoting cross-team collaboration within the company. Leaders are held accountable for both their individual business goals and broader company objectives. This method ensures that while teams focus on their respective products or services, they also recognize the necessity of working together.

Privacy as a Priority:

Privacy is one of the most important areas for the company. The speaker mentioned that they always aim to be ahead in meeting evolving user expectations concerning privacy. They are committed to making privacy controls easy to use and are planning more changes in this regard throughout the year.

Role of Advertising:

The speaker acknowledged that while they aim to prioritize user experience and privacy, they also have to consider the role of advertising in value creation for publishers. Thus, the approach to work is highly thoughtful, ensuring that advertising continues to be valuable for the content and publisher ecosystem.

Regulatory Engagement:

The speaker expressed support for having a clear federal framework for privacy regulation in the United States. The company has engaged proactively with GDPR and calls for similar privacy regulation at the federal level in the U.S.

Artificial Intelligence & Machine Learning:

On the technological front, the speaker stated that they are still in the early days of AI and machine learning integration across products. However, they see a lot of headroom for growth and believe that the pace of advancement in AI for products and services is expected to accelerate.

Seasonality and Revenue Growth:

The speaker also touched on the topic of seasonality affecting revenue growth. While acknowledging the inherent seasonality in certain business areas like hardware, they pointed out that one-off events also play a role in variations in revenue growth.

Mobile Search Strategy:

The speaker (Speaker_01) addresses the questions about Google’s mobile search performance and its key drivers. He emphasizes that advertising opportunities, particularly those enhanced by machine learning, are significant. He notes that despite half of the ad budgets in the U.S. still being offline, Google aims to make digital platforms more attractive to marketers. Enhanced user experiences and better ad delivery systems are the key drivers for growth in this sector.

YouTube’s Role:

In the context of mobile search, YouTube’s performance is mentioned as well. YouTube is experiencing significant growth in direct response advertising, which is seen as having upside potential. While brand advertising remains the most significant part of YouTube’s business, direct response advertising is growing at a fast pace.

Hardware Business Commitment:

Sundar Pichai (Speaker_07) responds to concerns about Google’s hardware business, affirming Google’s strong commitment to it. He points out that products like Google Home and assistant are already doing well. Google’s hardware is seen as vital for ensuring that Google’s services are presented to users in the intended manner.

Future of Computing:

Sundar also addresses the evolution of computing beyond phones. He mentions the challenges the phone industry faces but expresses optimism for innovations like 5G and foldable phones. Google plans to play a significant part in these advancements.

Overall Outlook:

Both speakers exude a sense of commitment and optimism about the directions in which Google is headed, both in mobile search advertising and hardware. They see these sectors as having large growth opportunities that are aligned with future technological trends.

Regional Growth Rates:

The speaker (Speaker_01) addresses a question about why growth has decelerated more in Western markets. He states that year-on-year growth rates for the U.S. and Europe had roughly the same delta. The more pronounced difference came in the “Other Americas” region, largely due to the impact of hardware. The Asia-Pacific (APAC) region, however, continues to perform strongly, with a 31% growth on a fixed FX basis. This strength is attributed to a focus on attracting the next billion users.

No Demand Issues:

In response to a question on whether the deceleration is due to demand issues or changes on Google’s end, Sundar Pichai (Speaker_07) clarifies that there were no demand issues. Google continues to work on product development in a disciplined way, prioritizing user experience.

Go-to-Market Strategies:

When questioned about any changes in go-to-market strategies affecting performance, The speaker reassures that their long-term investment thesis remains unchanged. He emphasizes that they continue to invest to ensure long-term positioning across businesses. He also notes that marketing expenses are expected to increase in the second quarter.

Overall Business Outlook:

Both speakers reiterate Google’s ongoing commitment to investing in long-term growth opportunities across all regions and sectors. They indicate that the fundamental investment and go-to-market strategies remain stable, aiming for long-term revenue and earnings growth.